Amazon pushes retail into a new era of pricing strategy

August 1, 2016 

Heads up! Amazon’s decision to stop showing “list prices” signals a new era of pricing strategy that could have a major impact on how retailers compete for business: They are testing how much their level of penetration and their original price reputation can insulate the company from the pressures of price transparency.

In other words, if you already use one or more of Amazon’s streamlined selling programs like Prime or Subscribe and Save, will you jump ship for a slightly lower price on individual items? They were bound to make such a move eventually.

Making costs less visible

Retail value propositions include two main components, price and transaction costs.

• Price is usually the most important when there are significant differences among competitors.
• Transaction costs are all the direct and indirect costs customers must absorb to take advantage of the prices.

Price usually attracts the most attention, but Amazon is building an increasingly wide "moat” by reducing the visible transaction costs; e.g. making deliveries seem almost free to consumers, so that the first place they turn is to Amazon.

Finding the sweet spot

The retail giant is exploring how much latitude they have to charge higher, but still “reasonable” prices. If they can find the “sweet spot” – the place where higher prices generate greater profit, but don’t cause consumers to switch to another retailer – they’ll have a winning proposition. Given their scale and data-driven insight into shopping behavior, it’s only a matter of time before they find it. 

As the moat Amazon is building grows wider, it will be very hard for any competitor to go toe-to-toe with them in the mass market. Instead, competitors will be forced to identify specific market segments and build value propositions tailored to meet the needs of that segment.

Source: Brick Meets Click