Amazon: Pricing Strategies and Metrics

Amazon: A Multinational Corporation

Amazon is a multinational corporation headquartered in Seattle, Washington, in the United States of America. The company was founded in 1994 and is now the largest internet retailer in terms of market capitalization and overall sales volume. Apart from its role as an internet retailer, Amazon also manufactures consumer gadgets such as the Fire TV, Kindle e-readers, and Fire tablets. It also operates in cloud computing, and the corporation is regarded as the largest provider of cloud infrastructure services. The company also works globally, with separate retail websites available for various nations. The successes realized by Amazon are reinforced by the fact that they managed to oust Walmart as the biggest retailer in the United States of America, in terms of market capitalization. Amazons success has catapulted them to being in the fourth position of the world most valuable public companies, and the world largest internet company when considering revenue. The company has 341,400 employees making them the eighth largest employer in the United States. The company successes can be attributed to their guiding principles. The company is more focused on their customers as opposed to focusing their energy and resources on facing competitors. The company is also committed to long-term thinking and operational excellence as well as having a huge passion for invention. The company also employs a pricing strategy that allows them to garner more customers while disadvantaging their competitors. This paper will focus on the pricing strategies employed by the company and how they aid in their success.

Pricing Strategies and Metrics

One of the factors behind any company or business success is having a good pricing strategy. A good pricing strategy allows one to attract more customers and in the long run maximize on the profits realized from their sales. A good pricing strategy does not necessarily mean that a business should charge the lowest price on their product and services, since this might expose the business to loses if the price cost does not meet all the costs that were used in coming up with product and distributing it to the customers. There are a number of pricing strategies that are available for use by different companies, but mostly a mix of these strategies is more effective than strictly sticking to one strategy. Amazon employs a number of pricing strategies in continuing their success.

Before coming up with a pricing strategy it is essential that one first considers the price metrics.

Generally consumers will judge a products image depending on its price. Products that are highly priced are considered to be of a higher quality when compared to those that are lowly priced (Nagle, Hogan & Zale, 2016). Any price that a company sets is usually based on their need to recover the resources involved in production and selling the product. As much as high prices are associated with high quality products, most companies cannot survive with highly priced products since customers will tend to prefer substitute goods that come at a lower price. Additionally, different companies possess different financial needs and as such these unique factors go a long way in determining the pricing strategy that they will adopt. A price that a company comes up with must fit with their strategic positioning objectives and how they want to be perceived in the market they operate in (Nagle, Hogan & Zale, 2016). A company’s objective might be based on profit maximization, rapid sales growth or even securing a large number of customers.

Four general pricing can be determined according to the objectives of the company.

The first is economy pricing, where the pricing involves charging a small markup that is exceedingly above the cost (Nagle, Hogan & Zale, 2016). The second one is penetration pricing and this is usually employed when a company is planning to enter and gain shares in a given market. The company will charge the lowest price that will still allow them to earn the least profit or allow for breaking even. This strategy however is hard to sustain in the long run, since cost efficiencies can be compromised (Nagle, Hogan & Zale, 2016). The third one is the premium pricing. This is usually used by companies that produce very high quality products that are very unique from what other competitors have to offer. Such a company also commands a dominant position in the market, and as such they can afford to use premium pricing which involves setting the highest possible price for their products (Nagle, Hogan & Zale, 2016). Most consumers who buy their products do so because of the company’s brand name, and the image that corresponds with owning such products. The last strategy is skimming. This pricing is usually used in a market that is in its early stage of development and the quality of products is still low (Nagle, Hogan & Zale, 2016). A company that employs this pricing will set the cost of their goods at the highest possible price that consumers will be willing to buy, when compared to what the competitors are offering. Skimming usually sets the stage for premium pricing for those companies that manage to possess a quality edge over new entrants and competitors.

Amazon’s pricing Strategy

One of the pricing strategies that Amazon applies is a market oriented pricing strategy. In this approach Amazon ensures that it collects all data on the prices offered by their competitors so that they can come up with prices based on this (Nagle, Hogan & Zale, 2016). The main intended results of such an approach is to ensure that Amazon’s products become more competitive and attractive in the market, due to affordability when compared to products being sold by their competitor. One of the major goals of Amazon is increasing their sales volume, will in turn increase the market share their command. As a result of this the company needs to come up with prices that are considered low by the customers, thereby rapidly increasing their market share. Considering this, the best pricing strategy that Amazon employs to achieve this is the penetration pricing. Their prices are seemingly lower when compared to identical products from their competitors.

However, contrary to most people beliefs Amazon does not always offer the lowest prices when compared to their competitors, but instead they have mustered the use of psychological pricing.

They focus on manipulating customers to think from an emotional perspective as opposed to a logical perspective. For products that are on high demand in Amazon, the company offers very pleasing discounts that ensures quick sale of these products, while creating the perception that the company is cheaper than its competitors. However, for products that are not very popular hence not on very high demand, the company charges prices that are higher than the prices of their competitors, hence realizing more profits from these unpopular products that make up the bulk of their products (Reimers, & Waldfogel, 2017). Therefore, the company uses it most popular products to create a low price perception among customers, while the non popular products are sold at a higher price when compared to the price of competitors. Amazon also uses psychological pricing in other way rather than the one discussed above. This is through charm pricing, this involves coming up with prices that end with a 9 rather than a 0 (Nagle, Hogan & Zale, 2016). This is because people usually judge the price of a product mostly by the first digit of the price, for example, people will most likely prefer a product that cost $19.99 as opposed to a product that sells at $20.00.

The other pricing strategy used by Amazon is the price discrimination strategy.

This is a pricing strategy that allows a company to charge totally different price for the same product in different markets or to different customers. This is usually used by businesses that are large and already well-established such as Amazon. The strategy is meant to capitalize on the fact that different consumers face different dynamics in supply and demand, and use this difference to realize the highest profits by charging a higher amount to those in a position to pay. So as to apply this strategy efficiently, a company first need to have a thorough understanding of their different customers or market. Amazon is able to apply this strategy due to the fact that they have different websites serving different countries or regions. For example, the United States and the United Kingdom are served under different websites. This approach allows Amazon to set their price based on consumer preference in these different regions, market conditions and the perceived value of different products in different markets (Reimers, & Waldfogel, 2017). Where the perceived value and customer preference of a product is high, the company can set a higher price compared to where these qualities are low. Where market conditions are favorable, Amazon can also charge higher prices on their products.

Amazon also employs bundle pricing as one of the strategy.

Amazon has set aside specific rules on bundling for sellers who employ the use of Amazon In selling their products. Bundle pricing is a good strategy that Amazon employs when there is a need to dispose of items that have remained in their facilities for a long time without being sold. This type of pricing achieves its objective by increasing the customers’ value perception of the items under sell. Amazon implements this pricing strategy by selling a number of products that are closely related or that are complementary together at a price that is lower, than what one would have paid if he had decided to buy all this products individually (Reimers, & Waldfogel, 2017). While this is not a very solid pricing strategy, Amazon still uses it when there is a need to sell slow moving products, or when they want to reduce unsold stock.

The other strategy that Amazon uses in pricing their products is the value-based pricing.

Amazon is in a position to apply this strategy due to their technological advancement that allows them huge access to big data and also the capability of real-time analytics that allows them to analyze this data in understanding customers purchasing behaviors and their preferences (Franco, 2017). This allows them to be able to attach some value on their products. In value-based pricing a company sets the price of their products based on the estimated perceived value of the products to the customers. Therefore the price does not consider the cost involved in coming up with the product but rather what the company believes customers are willing to pay for the product. Amazon applies this strategy with products that target niche market, products whose sale is based on emotions or products that act as complementary products to fast selling products (Reimers, & Waldfogel, 2017). However, this type of pricing has some complication that can end up hindering the profitability of a business. When one sets a price based on the perceived value of the product, he may overestimate the product’s price leading to a very high price for the product. While this may be beneficial especially if the products are unique, over time this becomes detrimental as new entrants enter the market with similar products at cheaper prices (Sawhney, Owens & Goodman, 2017).

The last pricing applied by Amazon is the dynamic pricing strategy.

The pricing of Amazon’s product is never fixed and the price keeps fluctuating or rising over time. It is not uncommon for the price of particular products to change a number of times within a single day. These prices are usually adjusted to match those of their competitors. Demand is also a major factor to consider while using the dynamic pricing (Franco, 2017). When the demand of a given product is too high, Amazon may choose to hike its price, and the price drops when demand declines. The ideology behind this type of pricing is to ensure that the right customers receive the right products at the right time and at the right price, and in this way the company is able to maximize their sales which in turn lead to the realization of a higher profit margin (Reimers, & Waldfogel, 2017). Given the capability of Amazon to collect big data and carry out big data analytics, they are able to apply this pricing strategy with much ease. Changing of the prices does not have to be done manually, but the company can employ the use of bots which are software with the ability to gather a lot of data, and adjust the prices based on business rules and certain algorithms (Yeoman, Wheatley & McMahon-Beattie, 2017).

In conclusion

Amazon’s success in managing to conquer other retailers and be the largest online retailer in the world can be pegged on their ability to utilize an impressive mix of pricing strategies. The company possesses a number of factors that allow them to apply these strategies with ease. The first factor is the low-cost structure of their operations. The company does not cater for any costs involved in running physical outlets, which exposes the company to a position where they can afford to offer very cheap prices compared to their competitors (Sawhney, Owens & Goodman, 2017). The company also enjoys a large portfolio of products, with over 350 million different products being sold by the company. No other company can match their product portfolio, and the diversity of products also allows them to implement different pricing strategies for different products. Lastly, the diversity in their pricing strategy can be attributed to the fact that the company operates in association with third parties who are allowed to sell their own products through Amazon’s websites, hence the dynamics in pricing strategies.

References

Franco, P. P. (January 01, 2017). Digital Retail and How Customer-Centric Technology is Reshaping the Industry. InfoSci-Books.

Nagle, T. T., Hogan, J. E., & Zale, J. (2016). The strategy and tactics of pricing: A guide to growing more profitable. New York: Routledge.

Reimers, I., & Waldfogel, J. (April 01, 2017). Throwing the Books at Them: Amazon’s Puzzling Long Run Pricing Strategy. Southern Economic Journal, 83, 4, 869-885.

Sawhney, M. S., Owens, J. R., & Goodman, P. (2017). Kindle Fire: Amazon’s heated battle for the tablet market. Evanston, Kingston: Kellong School of Management.

Yeoman, I., Wheatley, C., & McMahon-Beattie, U. (April 01, 2017). Trends in retail pricing: A consumer perspective. Journal of Revenue and Pricing Management, 16, 2, 174-200.