The Internet stock-price free fall late last year has been explained by theories ranging from the bursting of the "new-economy bubble" to an oversupply of electronic-commerce offerings. But the essential cause of the slide may be something more fundamental: most Internet companies lack a pricing model that provides a solid platform for revenue growth, not to mention earnings that could justify their lofty price-to-earnings multiples.

Many e-business practitioners accept a number of discouraging assumptions about the nature of pricing on the Internet. They believe, for example, that all Internet shoppers are motivated chiefly by price and that the Internet makes it possible to make price comparisons quickly and easily. As a result, they think they have no choice but to use low prices to acquire and retain customers, even though doing so risks stirring up vicious price wars.

These beliefs have driven Internet companies to take a host of limiting, and potentially irreversible, pricing actions, including:

• Setting unsustainably low prices at launch to enlarge the customer base, which then resists price increases because it quickly comes to accept low prices as fair and reasonable
• Setting identical price levels for all customers
• Failing to adjust prices in response to changing...