MKTG411- Amazon.com pricing expert

For Alex: Summary of Assignment Components

2005-06-22T12:37:00.000-04:00

Intro Post #1
Intro Post #2
Topic Post #1 (Price)
Topic Post #2 (Price)
Topic Post #3 (Price)
Team Post #1 (Amazon.com)
Team Post #2 (Amazon.com)
RSS-Feed Post #1
RSS-Feed Post #2
Extra-Credit #1 (blog a classmate's blog)
Extra-Credit #2 (search results)

Comments on other blogs (6 listed here):
Junko (Coke Zero)
Winita (logistics)
Clare (diamonds)
Junko (China)
Andre (Commerce Bank)
Clare (website redesign)

Subscribed Feed Reference #2: Who Knew Grover Had a Fondness for Legumes?

2005-06-22T11:42:00.000-04:00

A recent post on Adfreak alerted me to a new Sesame Street/PBS KIDS effort to promote healthier lifestyles to children. We've all heard about Cookie Monster's decision to cut back on the sweets, and apparently now Grover has been named as the new "spokespuppet" for the "Happy Healthy Summer" campaign. The campaign will consist of a weekly television program on the PBS KIDS channel, with related games and activities (such as helping Grover pick out healthy foods at the grocery store) featured on the pbskids.org website.

The "Happy Healthy Summer" inititiative is a great example of social marketing, which involves "programs seeking to increase the acceptability of a social idea, cause, or practice among a target group" (Kotler & Armstrong p. 282). In this case, the cause is encouraging exercise and healthy eating, and the target audience is younger children. The PBS campaign also demonstrates PBS' integrated marketing communications approach, by coordinating various communications channels (i.e. the television program and the related website) "to deliver a clear, consistent and compelling message" (K&A p. 469).

Because my household is still spurning Comcast's increasingly-aggresive attempts at getting us to switch over to their more expensive digital cable system (but I digress...), I have never seen the PBS KIDS channel myself. If its programming is similar to the daytime kids programming on regular PBS, however, I suspect that the "H.H.S." show will be successful in reaching the target audience of young children in terms they can understand. Back when I watched Sesame Street there was no Internet, but the PBS KIDS website seems to be loaded with lots of neat content for children to explore. I'm sure parents appreciate such carefully-planned efforts which allow kids to venture out into cyberspace in a safe and educational environment.

Team Post #2: Amazon.com Offers "Earth's Biggest Selection"

2005-06-21T19:25:00.000-04:00

In exactly ten years, Amazon has gone from fledgling Internet retailer to online platform for commerce. Amazon’s competitive pricing, careful promotional efforts, innovative channel partnerships, expanding product lines and efforts at marketing consistency as it expands globally have combined to give the company a strong competitive advantage among online retailers and online “marketplaces.” Its marketing strategy has successfully employed product, price, place, and promotion in the service always of customers in a now global market.

To illustrate how central “customer-centricity” is to Amazon, take note of the following statement that currently appears in the “About Amazon.com” section of company press releases: Amazon seeks to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices.

The statement above is critical because it marks a difference between Amazon’s own marketing strategy and what scholars and analysts are beginning to recommend, which is that Amazon identify its target market(s) and redefine its marketing strategy accordingly. The goal of any retailer is to balance customer care with company profits, yet Amazon’s revenue growth has been outpacing its earnings. How does a company like Amazon offer everything (see entries about loose diamonds and the Badonkadonk) to everybody at competitive prices, while still generating sufficient sales volume to earn healthy profits?

Here is where analysts’ insights are at their most compelling. Analysis of the most profitable areas of the business—with repositioning of the Amazon brand to capture a greater share of those markets—would make sense in restoring some balance to the growth/profits equation. Amazon may have spread itself thin by honing in on the customer-centric mission of the company while simultaneously offering the “Earth’s biggest selection.” Our assumption is that Amazon has already dedicated considerable human and financial resources to evaluating the addition of particular product lines, partnerships, and services. We recommend that the company continually re-evaluate these questions, to remain customer-centric without being customer-obsessed. It might be time for Amazon to identify and cull the “bottom-feeders” in order to focus on its truly profitable customers and products.

Extra Credit #2: Search Engine Listings

2005-06-21T16:04:00.000-04:00

I found my blog on Technorati, Feedster, and Google (although I cheated a bit with Google and actually searched my name rather than my topic/company).

For those of you who wish to remove or deactivate your blog once the class has ended, see Alex's response to Clare's question about this.

Topic Post # 3 (Price): Hard Times and Low Prices

2005-06-18T19:39:00.000-04:00

An article in HBS’s online newsletter Working Knowledge (“Your Best Downturn Strategy? Think Twice About Price Cuts”) explores the ways that poor pricing strategies during times of economic recession can damage customer relationships and brands. When wallets are tight and consumers are demanding better deals, many companies’ first instinct is to cut prices in an effort to boost short-term sales. However, this strategy may be harmful in the long run by creating expectations of discounted prices, and possibly damaging brands.

Kotler & Armstrong’s discussion of psychological pricing strategies includes the concept of reference price (p. 377), which is the price consumers carry in their minds and refer to when they shop for a given product. Once consumers adjust to being offered a lowered price for a product or service they previously paid more for, a future return to earlier pricing levels might then strike customers as being too expensive. The HBS article states that “a common mistake is to use price as a competitive advantage for high-value products…reduc[ing] the potential for profitability when the downturn ends.”

A company’s brand equity is the positive effect that the brand name has on consumers’ response to its products (p. 292). The author stresses that brands become even more valuable during a recession, because brand-name products are less price elastic (p. 356), meaning that customers will be less sensitive to the price when making the decision to buy. Companies should take advantage of this condition by protecting their brand name and trying to maintain their long-term pricing power.

Undertaking major price cuts may help achieve short-term sales goals, but can do at the expense of long-term profitability. Before resorting to lowering prices, companies would be wise to first focus on things like trimming costs, reducing production volume, and delaying unnecessary projects. It is also important to make an investment in keeping existing customers happy so that the company will not face the even higher costs of acquiring new customers.

Team Post #1: Amazon.com's Pricing Strategy

2005-06-15T14:16:00.000-04:00

Besides offering a mindboggling assortment of products, Amazon.com has attracted its 48 million active customer accounts largely through a strategy of offering always discounted prices (such as 30% off any book over $15) coupled with a very popular free shipping option on nearly all orders over $25. Amazon uses a form of value pricing strategy known as every day low pricing, which Kotler and Armstrong describe as charging a constant low price with few or no temporary price discounts (p. 361). In fact, Amazon CFO Tom Szkutak states outright that “our objective remains offering low prices every day and applying them broadly across our entire product range rather than discounting a small number of products for a limited time.”

Because online shoppers have now become accustomed to searching around for the best prices on items which are not unique to one seller, Amazon also offers value-added services (p. 361) to differentiate themselves as a retailer. This includes offering free shipping, as well as services such as personalized product recommendations and bridal and other gift registries.

Amazon.com has managed to maintain its standing as one of the Web’s most popular sites due to its strategy of low product and shipping prices combined with a superior customer experience, however this has taken its toll on the company’s bottom line. Although the company’s sales have steadily increased since the site began operation in 1995, it took until 2003 for Amazon to finally see a profit. While revenues continue to rise quarter after quarter, operating earnings growth has slowed, concerning some analysts and investors. (For instance, revenues in the first quarter of 2005 were up 24% over Q1 2004, yet earnings were 30% lower, which Amazon attributes to recent increased investment in new technology).

While one analyst calls the free shipping policy a burden on the company’s profit margins, those running the company take a more long-range view of such strategies. In a Fast Company profile, CEO and Founder Jeff Bezos expands on his belief that what’s good for the customer will ultimately turn out to be in the company’s best interest… “Every time the math tells you that you shouldn’t lower prices ‘cause you’re gonna make less money. That’s undoubtedly true in the current quarter, in the current year. But it’s probably not true over a 10-year period, when the benefit is going to increase the frequency with which your customers shop with you, the fraction of their purchases they do with you as opposed to other places. Their overall satisfaction is going to go up.”

Amazon is hoping to follow in the footsteps of companies like Wal-Mart by making profits based on a large sales volume of low-priced items rather than a lower volume of marked-up inventory. So far these profits have been unsteady, but many happy Amazon customers are hoping that Jeff Bezos' philosohy of putting the customer's interests first will sucessfully sustain the company long into the future.

Sources for further reading:
Netimperative: Discounts Take Toll on Amazon
Seattle Times: Amazon’s Discount Strategy Worries Analysts
Fast Company: Inside the Mind of Jeff Bezos

Topic Post #2 (Price): When a Higher Price Leads to Greater Demand

2005-06-11T18:51:00.000-04:00

In the Knowledge @ Wharton archives, I found an article describing an interesting controlled pricing experiment done by Wharton prof Marshall Fisher at the now-defunct Zany Brainy toy chain. Fisher and a colleague carefully chose store locations with similar profiles, which were located far enough apart that customers would be unlikely to visit both stores and compare prices. The researchers selected three products to test--a family board game, an educational traveling Phonics game, and a headset walkie-talkie--and tested each at three price points (in $5 increments). They found that while the family game and the Phonics traveler sold the most units at the lowest price, the walkie-talkie actually sold best at the middle price.

These results can be explained through several concepts from Kotler & Armstrong. Price elasticity (p. 355) is how sensitive demand for a product/service is to changes in price; a highly price elastic product would see reduced demand with any increase in price, whereas demand for a price inelastic product is largely unrelated to price. This relationship can be graphed on a demand curve (p. 354), which shows the number of units which will sell at different price points. Zany Brainy's family game and Phonics traveler would have a downward sloping curve, meaning that as the price went up, the demand went down. The walkie-talkie, on the other hand, actually had an upward sloping demand curve, indictating consumers' increased willingness to make the purchase as the price went up.

What might cause demand for the walkie-talkie to be greater at a higher price? The psychological pricing (p. 377) approach holds that consumers usually perceive higher-priced products as being of higher quality. This is especially true when the consumer cannot easily judge the quality on thier own, such as if they lack information or experience. In the case of the Zany Brainy experiment, the researchers theorized that shoppers were less dependent on price in their decisions about buying the family game (which is a straightforward item that customers were likely to know something about) and the Phonics game (which carried a name brand that consumers already had an impression of). The unknown-brand walkie-talkie, however, is a fairly complex electronic item which consumers were less likely to know how to judge on its own merits. Because of this, they depended on seeing the higher price as an indication that the product was of high quality.

Subscribed Feed Reference #1: The War of the Razors Wages On

2005-06-10T12:24:00.000-04:00

A recent post on Adfreak highlights the latest battle in the neverending war of the razors... apparently Schick has won a court injunction ordering Gillette to stop running print and TV ads which claim that its vibrating M3Power razor provides a closer shave than other premium razors (read: Schick Quattro). While we’ve all seen the commercials showing images of hairs being magically lifted away from & then cut perfectly flush with the skin, Gillette now conveniently says the image “was never meant to be taken literally.” Hmmmmm… sounds like their attempt at positioning their product (the way customers see the M3Power in comparison to the Quattro on the basis of perceived attributes) was based on an imaginary competitive advantage over Schick’s offering (see Kotler & Armstrong pp. 259-265 for more information about product positioning strategies).

One wonders if the damages to Gillette—from the cost of redesigning all promotional materials for the M3Power to any potential sales dropoff from the loss of a perceived competitive advantage—will affect P&G shareholders’ July 12 vote re: acquiring Gillette Co. I’m guessing not. While P&G may be buying a headache in the form of cleaning up the M3Power razor fallout, other Gillette brands such as Oral-B toothbrushes and Duracell batteries will fit very well into P&G’s portfolio of leading consumer product brands.

Extra Credit #1: My favorite Amazon.com item EVER

2005-06-08T13:17:00.000-04:00

Clare's recent post about Amazon's latest bizarre public offering of loose diamonds reminded me of a personal favorite item from their site that is equally perplexing. It doesn't have anything to do with pricing strategy per se, other than the fact that it is listed at $19,999.95. (Now there's a price that could use that mental rounding down from the 5-cent savings- does that count as a strategy?;) No Super Saver shipping on this baby...

Check out the Badonkadonk- everything about this listing including the "customer reviews" smells of a hoax, but I can't figure out how it would have a legitimate listing on Amazon if there wasn't some basis in reality. The website of the manufacturer NAO Design is worth a browse. Check out the Nellophone and the PneumatiPak "backpack-mounted pneumatic cannon," both near the end of the "Product Catalog" thumbnails (there's no way to link directly to each product- I hate frames!).

I think I'll make it my mission as the "expert" on Amazon pricing to find out if they offer anything more expensive than the Badonkadonk... Alex, if I ever decide to purchase any crazy newfangled modes of transportation from Amazon, I promise to let your website refer me to the link!

Topic Post #1 (Price): Online Shoppers Not as Sophisticated as Believed

2005-06-04T18:19:00.000-04:00

The Associated Press recently reported on a study done here at Penn's Annenberg Public Policy Center concerning shoppers' understanding of online pricing practices (read the AP article or the original APPC report). The study --titled "Open Exploitation"-- found that close to two-thirds of adult Internet users are unaware that it is perfectly legal for retailers to charge different customers different prices for the same product or service (unless race/gender discrimination or antitrust/price-fixing laws are violated). 87% of respondents further say that they strongly object to this practice of "price customization."

In Kotler and Armstrong's chapter on Pricing Strategies, they discuss the strategy of segmented pricing, or selling a product or service at two or more prices where the difference in price charged is not based on actual differences in the cost of providing the product/service (p. 376). The types of practices explored in the Annenberg study fall into the category of "customer-segment pricing," or charging different customers different prices for the same product. The primary motivation companies have for pricing based on customer segment is to try to retain customers who generate the highest sales, and discourage less profitable shoppers who show little brand or merchant loyalty in their search for the lowest price (which is why they are often referred to as "bottom feeders"). For example, some websites offer lower prices to those who have previously shopped at that site in order to reward merchant loyalty. Conversely, other sites may actually charge higher prices to their regular customers on the assumption those consumers are likely to make the purchase anyway. Amazon.com created something of an uproar a few years ago when a story got out about a shopper who deleted the electronic tag on his computer which identified him as a regular Amazon customer, and was immediately offered a lower price for a DVD he had recently purchased at a considerably higher price.

The Annenberg study shows that for how accustomed online shoppers have gotten to the idea of online comparison shopping, they may still have a way to go when it comes to truly understanding the relatively new world of Internet buying. As the AP article puts it, the study "casts doubt on the notion of sophisticated consumers in the digital age." Much effort has been put into creating software, etc which simplifies the process of getting ever more people online, but the societal cost of this may be the creation of a nation of cybercitizens who are naive about the true impact of this new technology. Internet users clearly need to make a better effort at understanding the type of information that is being regularly collected about their online browsing and buying habits, and how this information may potentially be used for or against them.

2nd Intro Post: Why I'm Here

2005-05-19T18:49:00.000-04:00

This blog has been created as part of the required coursework for my MKTG 411-Introduction to Marketing class here at Wharton, which I am taking as part of the Wharton Programs for Working Professionals Business Essentials certificate program. I have been assigned to become a "topic expert" on Amazon.com's pricing strategies (which may come in handy considering how often I order from them!). I hope to use this blog to share information I learn about this topic, and gather feedback from and collaborate with my teammates who are exploring other aspects of Amazon's marketing strategies.

1st Intro Post: Joining the Ranks

2005-05-19T18:30:00.000-04:00

Welcome to my foray into the world of blogging! My name is Rachel, and I currently live in Ambler, PA in the NW suburbs of Philadelphia. I am employed by the University of Pennsylvania, in a small management research center at the Wharton School. I primarily spend my days organizing academic conferences and administering research grants, and my free time reading, cooking, traveling, and trying to spend as much time in the great outdoors as I can.