The world of online shopping has become ubiquitous. Have you ever wondered, however, how the pricing mechanism for goods is determined for online stores? A study conducted by Fiskara Indawan, Aryo Sasongko, and Dian Rahmawati reveals the inside secrets of online merchants, specifically micro, small and medium enterprises (MSME), before and during the Covid-19 pandemic, involving a survey sample of 297 online and offline businesses.
The study uncovered various interesting findings. Apparently, pricing for online markets in Indonesia is not arbitrary, with merchants employing a number of smart strategies as follows:
1. State-Dependent Pricing
Online merchants are not rigid when setting prices. The state-dependent pricing model implies prices can change based on specific conditions. Prices can rise during periods of high demand, for example, such as ahead of Eid-ul-Fitr and National Online Shopping Day (Harbolnas). On the other hand, prices can fall when stock increases or new competitors emerge offering lower prices.
2. Price Discrimination
While perhaps sounding unfair, price discrimination can actually benefit buyers. Online merchants may offer different prices to different groups of buyers. Special discounts, for example, may be offered to loyal customers or incentives for new buyers. This strategy aims to increase the attractiveness of online stores.
3. Periodic Price Evaluation
Unlike offline stores, which rarely adjust prices, online markets are more dynamic. Online merchants are accustomed to evaluating their prices numerous times each year based on the latest information, such as fluctuations in raw material prices, market trends and competitive prices. By adjusting prices quickly, online merchants can maintain competitiveness and profitability.
4. Agility in Uncertainty (Shocks)
The Covid-19 pandemic provides a good example of uncertainty (shock) that affected the market. The study found how online markets are more agile and can react more quickly to such shocks. Online merchants can adjust prices quickly based on changes in production costs or fluctuating demand. Such agility allows online markets to adapt amid uncertainty.
5. Price Changes Triggered by Production Costs
Which factors influence price changes most in online markets? The study found that changes in production costs are the main factor. As raw material costs rise, online merchants must adjust selling prices to maintain profits. On the other hand, when production costs fall, online merchants may lower selling prices to attract buyers.
6. Implicit Contracts and Price Rigidity
Despite the dynamism of online markets, prices can experience deadlock. This phenomenon is influenced by the implicit contract between sellers and buyers. When the implicit contract is strong, merchants may be reluctant to raise prices suddenly, even if production costs increase. This can change, however, if customers become unsatisfied or merchants have difficulty maintaining a profit.
7. Highly Competitive Market
This study also refutes the myth that online merchants gouge prices. In fact, online markets operate in a very competitive environment, where merchants must monitor competitors' prices continuously and adjust their strategies to maintain market visibility. Excessively high prices could see buyers flee to other online merchants.
8. Rule of Thumb Pricing
Rule of thumb pricing is not common in the online market. Online merchants are required to calculate production costs carefully, analyse market trends and understand consumer behaviour. Through careful calculation, prices can be competitive and still remain profitable.
Conclusion: Smart Online Shopping
This study provides a comprehensive description of pricing in the online market in Indonesia, where online MSME merchants employ smart and dynamic strategies. As buyers, this knowledge can help us shop online more wisely. Do not be duped by momentarily cheap prices but compare prices with other merchants and remain mindful of the merchant's reputation. Take advantage of reasonable promotions and discounts but never forget to check the quality of goods before purchasing. With a good understanding of online pricing strategies, we can become smarter buyers and maximise our profit as consumers.
