Amazon: Dominating Pricing and Consumer Perception

Consumers always are looking for the best price for the products that they are looking for, but they also what purchasing to be convenient. Amazon provides the unique opportunity for consumers to purchase a multitude of products from the comfort of their own homes, while oftentimes offering an extremely competitive price. Price changes, selling strategy, and behavioral economics have helped Amazon create a dominating presence in the e-commerce world. These key areas have helped the company not only be successful in their own right, but also make their competitors scratch their heads wondering how to keep up.

Amazon’s Pricing Strategy: Amazon has very competitive prices. Shoppers, much like myself, believe that Amazon has the best prices possible (or very close to the best). An analysis performed by Boomerang Commerce, a pricing company founded by a former Amazon employee, found that Amazon offers the biggest discounts on its most popular products and accepting lower profits on less popular products. One example that was found by Boomerang Commerce was on a $350 Samsung television. Amazon dropped the price of the television to $250 on Black Friday. That discounted price put them at a better price than competitors, but Amazon was quite lucrative with their pricing as they increased the price of a HDMI cable that consumers would want to buy with the television (D’Onfro). This is a very intelligent way to sell products. Consumers will look at the television and believe that they are receiving a great deal because consumers have higher demand on the more popular product (the television) at the lower price and would be more open to paying a premium price for the less popular product (the HDMI cable). Amazon beat out competitor pricing with this strategy as they maintained a higher profit by selling the less popular product at a higher rate. Amazon uses various products to go with their unique pricing strategy. The company listed an Asus Dual-Band Wireless Router for 20% less than the price of competitor Walmart.

Despite offering this 20% discount to consumers, Amazon listed a less popular model at a 29% higher price than Walmart’s listed price (D’Onfro). The pricing strategy of Amazon can be labeled as dynamic as they approach selling items differently than their competitors. During the Christmas season, Amazon changes the prices on about 80 million products throughout just a single day. Internet Retailer Magazine had reported in 2013 that Amazon changes the prices on their website for about 40 million products in a day (Loeb). An HP printer was on sale in April 2013 at Sears for around $160, but Amazon had it listed for $120. At 9am on the day of the sale, Sears increased the price to $190, then dropped it to $155, before increasing it once more to $190. By this time, Amazon had increased their price listing to $130. Office Depot and other competitors had their prices remain constant, but Sears and Amazon had changed their prices multiple times. By the end of the day, the lowest priced seller was Amazon at $105 (Loeb). Amazon changed their listed prices on their products to stay one step ahead of their competitors. This puts the competitors in a very tough position. Retail stores that sell products online appear that cannot keep up with the price changes that Amazon is implementing. This puts profit and inventory as a major concern for competitors such as Sears. Amazon may be killing off competition from stores like Sears with the way they approach these pricing changes at their amplified pace.

The image above shows how frequently Amazon changes the prices of their products when compared to their competitors. Even if their competitors are offering products at a lowered cost, Amazon’s changes one-up the competition daily. Even with large competitors such as Walmart and Target, Amazon makes over triple the amount of changes that Walmart does during Black Friday and weeks after Black Friday. Black Friday, being a prime online shopping time for most consumers, provides Amazon with the opportunity to have a large amount of sales and beat their competitors to pricing opportunities. As we have already seen, Amazon has an edge on retail stores. Combine this edge with outperforming the competition with online pricing strategy, and you have a winning recipe for Amazon. What Makes Amazon Successful In 2016, CEO Jeff Bezos discussed Type 1 and Type 2 decisions in a shareholder letter. Type 1 decisions cannot be reversed, while Type 2 decisions can be reversed and should be made quickly. Following the Type 2 decision pathway has enabled Amazon to create lasting success, according to Scott Galloway, clinical professor of marketing at NYU Stern School of Business (Lebowitz). Galloway claims that Amazon does not shy away from about killing investments that are not profitable so that the company has money to invest elsewhere. With this strategy of killing investments that are not working out, Amazon has created some great winning investments. For example, Amazon Prime and Amazon Web Services.

Amazon is extremely careful about not going all in on a project until they are completely positive that the project will work. Galloway also notes that most CEO’s “won’t take risks that have less than a 50% chance of success – no matter how big the potential payoff. ” Amazon CEO, Jeff Bezos, said in 1997, “Given a 10% chance of a hundred times payout, you should take that bet every time. ” (Lebowitz). Having access to capital provides opportunities for Amazon to invest in areas that they want to see work. Being able to walk away from an investment and moving onto the next one allows the company to not waste time on projects that are not having profit-maximization and try to find a better scenario. Also, having a CEO, much like Jeff Bezos, be willing to take risks to have the company expand should be valued greatly. Leadership needs to be able to accept faults and create better situations for the company. It’s clear that Bezos can take risks, accept faults and try to create profit-maximizing projects based on his 1997 quote alone.

Behavioral Economics and Decision Making

Behavioral economics has been labeled the science of decision-making. Marketers find behavioral economics extremely valuable because it can explain how emotional or rational consumer decision-making is, how much information consumers can take in, and how quick the consumer decision-making is (Saunders). Daniel Kahneman, known as the father of behavioral economics, believed that we have a two-system brain; broken up into System 1 and System 2. System 1 is comprised of perception and intuition. This part of the brain helps sense when something is wrong. System 2 represents reflective thinking and in this system, you are aware of what you are thinking. System 2 is also about how we make deliberate decisions. The default mode of thinking is System 1. System 1 is an early warning system for that of System 2, then System 2 comes in to see if your instincts are correct (Saunders). The systems are broken down in a way to analyze the information that is present in front of you about a decision, see if a warning sign should be derived, and then analyzing if that warning sign is applicable to the situation.

There are a few implications that come from this two-system model. The first is that we are much less rational than we believe (Saunders). Rationality can oftentimes be overstated. The second is that we can be subconsciously primed to act and the third being that we use mental shortcuts. As humans, we can act differently without even being aware of it. Also, with processing a lot of information comes with shortcuts that we take to make decisions. There are practical implications for marketers given this information. Brands that make things easy are more trusted is one of the first implications. Most people would agree that Amazon is an extremely easy website to use. The company provides a quick and efficient way to make a purchase and potentially save money. The second implication would be that the perception of popularity sells (Saunders). If something is used by many people, then it will most likely be viewed as a safe bet. Amazon is a perfect example of this. The company is known by many people and can be labeled as a popular website to purchase goods.

The third implication is that details make a significant difference. Amazon provides users with the ability to see price listings (and percentage changes), details about a product, how many days it will take to ship, etc. The company provides a multitude of details to consumers. The last two notable implications are that you must be different to be noticed and to change perception, you must change the context (Saunders). Amazon is different because of their price listings and seemingly endless inventory on hand. Walmart and other retail giants cannot compete with price listings as already explained in this paper. Combine these price listings with having the same, if not more, products than your competitors. The way a company sells products and how they sell the product can stand out to consumers. Amazon has a recent track record of quality service to consumers. They provide students with unique features such as free two-day shipping to have books more readily available. Also, Amazon Prime provides a unique feature that consumers can feel that they pay more for the luxury of quicker shipping methods. Despite Amazon already having great price listings and a unique selling strategy, they also provide users with customized features such as Amazon Prime to enhance the selling experience.

Conclusion

Amazon’s pricing strategy creates a unique opportunity for the company to beat out competition by changing prices on millions of products on a given day. The pricing changes create a way for Amazon to beat the competition at a rapid pace that keeps them on their toes. The behavioral economics that relate to Amazon show that the company provides a quality experience to consumers and does not require much need to analyze if the decision that the consumer made is the correct one. With having a CEO willing to take capital risks like Jeff Bezos, it appears that the company will continue to grow and be a dominating force in the near future.