In the rush to capture first-mover advantage, many start-ups have offered untenably low prices. Because the Internet, the reasoning goes, is the most transparent and efficient of markets, low prices—for both consumers and businesses—outweigh such factors as product benefits, quality, and service.

Many incumbents, by contrast, have largely neglected on-line pricing and simply transferred their off-line prices to the Internet. They may have done so in the belief that their brand strength inoculates them against the threat posed by their new competitors. More likely, they felt pressure to establish an on-line presence before they had a chance to weigh the complexities of multichannel pricing.

But on-line customers are neither slaves to prices nor clones of traditional shoppers. Instead, they base their buying decisions on a wide range of factors. Far from being a price destroyer, the Internet can bring new detail to pricing strategy, creating enormous value. But companies must act quickly and rethink their on-line policies before habit and customer expectations make change difficult if not disastrous.

The reality of e-pricing

Low-price strategies aren’t without foundation. Indeed, of the various reasons to shop on-line, consumers cite price most frequently.1 But an analysis of consumer click-through behavior reveals...