How Amazon beats competitors with - Simon-Kucher & Partners

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Setting the right prices – always a book seller’s biggest performancelever – has never been more important because of ever-changing competitors,formats, and sales channels. But figuring out the right price for a booknowadays is a jigsaw puzzle with half of the pieces missing.Before they start filling in those blanks, however, book sellers should stepback and reconsider some outdated pricing assumptions that may haveserved them well years ago when all books were printed and sold in physicalstores. Book retail labours under several outdated assumptions, primarilyaround how to discount, how to decode Amazon’s underlying strategy, andhow to adapt to consumer behaviour in the e-commerce age.To help book sellers improve their price performance and generate smartprofit growth, Simon-Kucher & Partners, a marketing and strategy consultancyspecializing in pricing, undertook an extensive study on the prices ofthe top 100 print books across online book sellers in the U.K. 1Once book sellers have re-thought the assumptions, they need not start theirpricing from scratch. Believe it or not, Tesco has a wonderful model they canborrow and adapt.Outdated assumption 1: Book pricing doesn’t need muchwork (it should largely be “set it and forget it”)Many retailers take a “set it and forget it” approach to pricing, only adjustingprices during pre-defined seasons or promotion events. This is hardly surprisinggiven the number of products they have to manage.Amazon, on the other hand, takes a more dynamic approach. Simon-Kucherlooked at how the prices of the monthly top 100 books on Amazon changed10 days later. 2 Of the 62 titles that remained in the top 100 over the period,one third had different prices.Missing puzzle piece: Actively managing prices in a smart way helps companieslike Amazon boost their profitability. Other book sellers should followAmazon’s lead and develop processes to manage book prices over time.These processes could adjust prices on the basis of book popularity, time ofday, seasons, competitor prices, or other factors altogether. Minor differencesin price applied over time and selectively across the portfolio add up to smartprofit growth.“ Book sellers shouldfollow Amazon’s leadand develop processesto manage book pricesover time.”1The study has excluded e-books due to the current legal challenges around e-book pricing2Simon-Kucher study compared prices of October bestsellers retrieved from Amazon’s websiteon October 30 and November bestsellers retrieved on November 9Simon-Kucher & Partners | How Amazon beats competitors with ‘Tesco’ tactics | December 2012 1
Outdated assumption 2: Consumers buy books onlinemainly to get lower pricesAmazon’s dynamic pricing strategy reveals a smart insight into consumershopping behaviour. Consumers purchase books online not just because oflower prices, but also for reasons like convenience and a wide selection.A recent Simon-Kucher survey of U.S. consumers’ multichannel purchasingfound that for 76% of consumers the price of print books was not their mainreason for buying books online. Furthermore, the study found that the morebooks a consumer buys online, the less sensitive to price she becomes.Missing puzzle piece: Book sellers ought to focus on building loyalty andencouraging repeat purchases rather than trying to attract deal hunters withdeep promotions that destroy profitability. Value-adds such as personalisednewsletters, expert reviews, or user experience improvements are smarterinvestments than aggressively low prices.Outdated assumption 3: Hence, discounts work for booksellers, especially on slow moving productsWhen retailers change prices, it is often to move old inventory. They bring innew, high-demand merchandise at premium prices and quietly discount theirolder and slower moving products.Grocery stores like Tesco do the reverse. They offer low prices on high visibility(“loss leader”) products like nappies, eggs, or milk while maintaining apremium on slower moving or more niche products. So does Amazon.From our analysis of Amazon’s bestseller list, books in the top 20 sell at higherdiscounts (on average 55% off the list price) than those further down thebestseller list (on average 48% for numbers 21-100).Discounts and product sales often go hand in hand, one might point out. Buta discount difference of 7pp. is unlikely to trigger a volume shift that wouldpush a middling title into the top 10. Rather, this looks like a smart pricingstrategy drawing on lessons outside of the ‘old’ book selling world.Missing puzzle piece: Having lower prices on high visibility products cementsa low price image in the minds of consumers. As in supermarkets,consumers enter the site because they are attracted to discounts on highprofile items (the nappies, eggs, and milk), but may end up buying somethingentirely different. (This is where Amazon’s recommendation engine proves soeffective.)“ Grocery stores offer lowprices on high visibilityproducts and maintain apremium on niche ones.So does Amazon.”“ For 76% of consumersthe price of print bookswas not their mainreason for buyingbooks online.”Simon-Kucher & Partners | How Amazon beats competitors with ‘Tesco’ tactics | December 2012 2
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How Amazon beats competitors with - Simon-Kucher & Partners

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