The internet promises to revolutionize how people shop and how prices are set. Usually this will mean smaller margins for sellers as consumers comparison shop in highly efficient marketplaces. But sometimes sellers will find ways to charge more—at least to certain customers and for certain products.

I use the term “friction-free capitalism“ to describe a marketplace where buyers and sellers have almost perfect knowledge of the true supply and demand for a particular product. The Internet is moving us in this direction. Since friction-free capitalism will cause more products to become commodities, use flexible pricing and marketing strategies.

Commodity Markets

Most products are commodities on one level or another, and consumers have abundant choices. To the extent that a product is a commodity, consumers get better buys as the marketplace becomes more efficient.

The Internet is accelerating the trend toward efficient markets. People can readily browse from retailer to retailer. Over time, software will automate the process of comparison shopping, and “haggling“ over prices will become electronic and effortless.

Will people who don’t shop for low prices get them anyway? Sometimes they won’t. Sellers will use technology to extract the highest price they can from a shopper, especially if the goods or services aren’t commodities. Flexible prices are a fixture of the marketplace. Many electronic and appliance stores advertise price guarantees in which they promise to match the lowest price a consumer has identified. This lets them say they won’t be undersold, even if their marked prices are relatively high.

Some department stores run so many sales that there are really two prices for most items—the regular price for the typical shopper and the sale price for the patient shopper. Airlines and hotels extract as much as they can for seats or rooms booked at the last minute.

When auto dealers show a sticker price but entertain lower offers from price-sensitive consumers, they are setting different prices for different consumers. Direct-mail marketers often publish different prices in different catalogs. When you call to order, the sales representative first asks for your customer number or catalog number—often so that the company knows what to charge you.

The goal of these pricing strategies is to capture the low-margin business of price-sensitive shoppers, while harvesting higher margins from sales to other shoppers. These techniques are fairly crude, however, next to what the Internet will make possible.

Interactive technology allows sellers to know the people they are selling to. A Web site can recognize you when you log in with a member password or if the site reads a number it has recorded to your hard disk. These numbers, called “cookies,“ also enable Web sites to provide you with personalized information and services.

If a Web site you visit comes to know what prices you have paid in the past, it may reduce a price to spur you to buy—or raise one if your pattern suggests that you’re not price-sensitive.

Pricing strategies for distinctive products will become interesting, as computers and the Internet make new, profitable schemes practical. Sellers who have something unique will discover that the efficiency of the Internet works in their favor.

The potential of the Internet to create nearly friction-free markets will lead to innovation in how products are priced. Consumers will be winners most-but not all-of the time. SME

Bill Gates is CEO of Microsoft Corporation © Microsoft Corporation. All rights reserved.

ACTION: Review your pricing strategies.