Pricing Strategies of Amazon - Essay Example

?Pricing Strategies of Amazon Task: Pricing Strategies of Amazon In the business world of corporate entities, varieties of factors have to be considered in order to ensure unrivalled success. Companies and business entities are always formulating ideas and strategies that eventually ensure the success of the products, merchandise or the services that they offer. In these, decision-making and the formulation of feasible business strategies holds more in terms of success than most other factors considered in business. Proper decision-making that results in viable strategies should consider certain factors, and this includes gauging the market trends, consumer preferences as well as analyzing the strategies that competitors have laid out (Smith 2011, p. 231). The most important factor to consider is the pricing of a product, as it is from this that the company will be viewed by the other entities in the industry and also potential customers. In achieving this, companies in general consider three main factors in coming up with viable pricing strategies that ensure their overall success. These are in terms of their basis of laying emphasis. There are the cost-based pricing strategies, which focus on a means of determining prices through incorporation of profit essentials in the product (Cryns 2002, p. 120). Moreover, there is the pricing based on customer observation whereby a business entity considers the best price that could fit accordingly to the customer base of that product. In addition, there is the pricing based on competitor substitutes, which considers competitor pricing to come up with prices that would most likely put a business at a better position for proper and advantageous competition. While these are the main pricing criteria that most companies consider prior to formulating a viable strategy, other entities such as Amazon maximize on their potential in regards to formulating their pricing strategies (Wuebker 2008, p. 111). In analyzing the ways that Amazon strategizes itself price wise in order to be highly reputable, a brief but succinct look at the nature of the company would provide an excellent point of view from which to base the scrutiny. As such, Amazon is an electronic commerce business entity that was established in 1994 as an online bookstore specializing in the online sale of mainly books. Later on, it diversified into the sale of media such as CDs, DVDs and such other forms as MP3 based media files. After some years of relatively moderate growth, Amazon later on increased in terms of revenue and overall growth to become the largest online store (Smith 2011, p. 167). In addition, the store has diversified its products range to include most basic home appliances, extending further to even foodstuff. In order to achieve this status, and maintain these growth standards, Amazon has strategized effectively, successfully implementing a variety of pricing tactics that have ultimately exalted the entity forward. In light of the above, the first strategies that Amazon employs in attaining its status is the use of dynamic pricing mechanisms in order to spread their market base. In this form of pricing strategy, a company distinguishes between its customers, analyzing the various features that set apart the various categories of customers (Burton & Holden 2010, p. 145). Through this research, a company focuses on such aspects as the frequency and trend of shopping that a faction of consumers adapts to in the course of carrying out their transaction. Through this kind of critical analysis, a company comes up with prices for its goods in relation to the trends that customers have adopted while purchasing products. As such, the ‘peak’ periods that most customers are carrying out their transactions are often characterized by higher prices than the other periods that customer density is relatively low. In its practices, Amazon extensively uses dynamic pricing strategy to delimit the prices of its products in relation to the cycle of demand as occasioned by the customers (Shaw & Onkivist 2004, p. 191). The company, through its online presence and software-based platform, is able to assess the customer details such as their shopping records, and, through this, they effectively adjusted their prices, in harmony with the clients capacity to pay. As such, different customers are priced differently on the same product as per the trends shown by their shopping history. Though Amazon initially used this strategy as among its main pricing mechanisms, it backed following a series of negative media hype, though it still relies on the strategy but in low measures as compared to how it initially used (Schindler 2011, p. 276). Essentially, Amazon uses the strategy on its service delivery as opposed to product sales. In adopting this type of pricing strategy, factors such as the customer base have to be taken into consideration. This is because this marketing strategy delimits between customers, and therefore, a deep and detailed analysis of the customer trends is paramount for the successful implementation of this pricing strategy (Mills 2002, p. 321). Moreover, in a bid to attract and maintain a reasonable market base, Amazon has been highly involved in employing the use of relatively lower pricing strategies than its competitors, both on the online platform and in regards to physical stores. The company refers to this as a value pricing strategy for considering how to strategically price their products to effectively implicate their desires on the customers. By so doing, it is able to stay at a highly competitive position in relation to its competitors and attract a large customer base that gets attracted by their low pricing strategy (Irene 2008, p. 211). What is more, Amazon has been able to create a brand image highly related to low prices; hence, it easily comes to mind for individuals who are after online purchasing. Through this, the company has been able to maintain an online presence that enables it to be the brand of choice when it comes to online shopping. Consequently, this low pricing strategy results in Amazon being the company of choice, and through this, it is able to maintain its customer base as well as keeping its competitors at a safe distance in terms of pricing of their products (Damsch 2010, p. 99). In terms of viability, this pricing mechanism should be executed under many control measures. In order to effectively gain from it, a company has to be able to keep its prices lower than the competition while at the same time ensuring that it is in a position to obtain a profit margin. However, in the initial stages of obtaining a market share and gaining ground in the industry, a company could consider it, as it results in a reputable brand name being identified with the company in the long-run as highlighted by Amazon’s case. In addition to this value addition pricing strategy, Amazon engages its customers on other fringe benefits in addition to their distinctly low prices. This is the company’s promotional form of strategy that it uses in its operations. Such benefits include free shipping on most of the products purchased through the Amazon site. This eliminates the hassles that customers would have to go through in the course of the actual delivery of their goods. The company takes this responsibility for them in relation to their strategy of value based pricing strategy. Moreover, it is able to establish an excellent connection with the customers through this means, hence further enhancing their market base (Marn et al 2010, p. 180). In addition, Amazon uses discounting means to ensure it further attracts customers through its value oriented pricing strategy. The levels of discounts are appropriately decided in accordance with the price of the item. As such, the company focuses more on the volume of sales as the source of profits as opposed to the pricing of the commodity. The reasoning is that increase in sales of a discounted commodity is more efficient for the company in the log-run than sale of a highly priced product. Moreover, sales to many customers because of the discounted price results in increased market share in addition to the profits realized due to the increased sales volume results in increased market share hence further benefits for the company. Through this, it is able to maintain a brand synonymous with customers privy to value as shown by their value oriented pricing strategy. This strategy is highly efficient, but its adaptability is not an easy task especially as it takes toll on the profit margins registered by a company. Indeed, Amazon has stated that this mechanism highly delves into their coffers, but as the company CEO conceives, the customer’s needs and welfare come first, hence they have to consider it among their operations. Therefore, despite this strategy being efficient and a convenient pricing mechanism of value addition, it is subject to considerations and cannot be easily integrated into business operations before considering these implications and the company’s ability to successfully implement the strategy (Burton & Holden 2010, p. 245). In light of the above, Amazon has been able to successfully implement these strategies due to other factors that the company enjoys courtesy of its nature of operating on an online platform. This is because Amazon has been able to do away with the concept of intermediaries that is associated with most retailers; therefore, it obtains from suppliers as a wholesale entity then sells the products at a retailer pricing level (Berends 2004, p. 123). Through this, the company has been able to harmonize its pricing level at a point that most of its competitors find hard to match up to in their operations. Moreover, this is especially in the book sales industry, as this is an industry where there is no substituting a book for another (Mould 2006, p. 143). Consequently, a book will only be its own single identity with the delimiting factor being the differential pricing employed by the various retailers (Tasabehji 2003, p. 127). To cement further their presence, Amazon uses its online platform to reduce the possibility of a customer lacking a desired product. This is due to the shortcomings associated with mainstream stores that can lack a product. This online presence increases the volume that Amazon can engage in at any given time, therefore increasing its sales volume in line with its low pricing in relation to trade volumes. Through this Amazon focused on eliminating physical stores and focused more on the limitless advantage of an online presence for its operations (Mennen 2010, p. 289). This is where Amazon had its sight and it effectively utilized this knowledge to its advantage. Furthermore, this strategy of eliminating the intermediary level in its business operations has resulted in reduced operational costs thereby putting the company at a good position to include its promotional mechanisms to further cement their position as the world’s most trusted online store. In order to effectively conduct this practice, Amazon only orders from its suppliers once it has received an order of a commodity. Through this, the company is at a position to effectively price the product in question at a price level that is in harmony with all factors such as supplier level of pricing and customer expectations (Yates 2004, p. 189). Apart from the highlighted strategies applied by Amazon as aforementioned, the company also employs the use of price setting in its business operations. This is whereby it regularly determines the pricing of its merchandise in relation to market and industry standards and transformations. Given that the company operates in an industry that is highly dynamic in relation to the prices of goods, the constant changes need a viable strategy that ensures that it stays above the rest (Nantel 2005, p. 173). However, Amazon enjoys an advantage over the other retailers of the same merchandise. This is due to the huge brand name it has created for itself, and which works in its favor in relation to the constant changes in price that it witnesses in the course of operations. The constant changes experienced price-wise always drive customers on a window-shopping spree where they seek to determine the best prices of commodities. This is where Amazon’s strategy of price setting comes to view. The company, in regards to its relative might, comes up with prices from which the other companies can then adopt their prices for the same product (Shaw 2004, p. 301). This price setting technique results in Amazon constantly varying its prices in relation to market trends, and this is done through fixed prices that vary from time to time, as the other market players relate their prices in order of the way in which Amazon is managing its prices. Similarly, Amazon adopts a permanently fixed price, and only decides on constantly updating the discount it puts on the prices, thereby managing the net price of the commodity (Rita et al 2007, p. 291). This way, Amazon sets the pricing and determines the prices at which most of the commodities in the market go. This form of price setting is only applicable to large firms such as Amazon that have already established a brand name for themselves. Relatively newer firms that are yet to grasp the market and maintain their market share may find it comparatively harder to adopt this kind of strategy in setting their prices. On the other hand, such firms can only act as price takers and adopt the prices set by the other larger firms such as Amazon. On a more understated note, Amazon has been involved in another pricing in which it seemingly seeks to drive out other competitors from the industry, or potentially create a tough working environment for its competitors. This is a form of predatory pricing whereby it keeps it prices particularly low, to a level that the other industry operators find hard to maintain and eventually yield to the pressure piled upon them by Amazon (Dennis et al 2004, p. 211). In order to achieve this, Amazon ensures it floods the market with a variety of products that are already being offered by the other companies in the industry. But in a bid to distinguish itself from the other business entities, it sets the prices for its inventory at a discriminatingly low price in regards to what the other companies can actually afford (Goodin et al 2011, p. 193). By so doing, it is able to continually create a difficult working environment for the rest of the companies in the industry, as its pricing is exceedingly low beyond what the rest of the businesses levels can match. Consequently, it succeeds in drawing the customer base from the other companies and directing them towards their entity through their enticingly low prices. Subsequent to this, the other companies market base will be highly affected thereby forcing them to operate in unfavorable business conditions (Marn et al 2010, p. 209). On the other hand, Amazon enjoys the increase in their market base as occasioned by their pricing. During this time that it is enticing customers through predatory pricing, it is willing to forego profits and can even maintain this standard with the focus in the future whereby the market will largely belong to them. Amazon heavily relied on this strategy while in its formative years, hence the long period it took to actually realize its first profit in 2003. Post using this approach to define their market niche, the company then integrated the other tactics such as price setting to reinforce their status. Apart from this tactic being overwhelming to the competitors, the approach also results in a business environment that highly discourages new entrants, as they cannot match up to the standards already set by Amazon (Tehrani 2008, p. 199). On Amazon’s part, it effectively managed to utilize the strategy to gain a sizable market share mainly because at the time online bookstores were a relatively new idea and not many companies had garnered enough market ground to counter it. As such, Amazon has continually and effectively used the mechanism of predatory pricing to its advantage (Vulkan 2003, p. 131). The strategy can be used sparingly in a bid to publicize a company, but the factor to be kept in mind is that it cannot be maintained over a long period, and proper planning should be incorporated into the strategizing to ensure that the strategy is slowly and carefully scrapped after a company gains enough market shares. From the analysis, it is notable that some of the strategies employed by Amazon in its operations are viable and can be applied easily by any other business entity. On the other hand, some of the mechanisms that Amazon uses to strategically set their prices are only synonymous with business entities that are already developed to a status that they can almost be termed as a monopoly of sorts. Such practices as dynamic pricing can be easily adopted by a business entity, as the only hurdle is for the business entity to carry out some slight research on its consumers before distinguishing how to set the prices for its merchandise (Shelton 1997, p. 231). Therefore, this is a feasible idea that can easily be adopted by any business entity after which its success rate is scrutinized in relation to further modifications. In addition, the value addition pricing strategy, with its promotional and discounting variants, pose quite some challenge in their adoption. This is due to the reduced revenue that that is occasioned with the two practices. Amazon is able to rely upon it due to its reduced operation costs, and should this be the case, then it could be easily considered. However, such other strategies as price setting and predatory pricing are not easy to execute, as they are synonymous with larger companies that are already established and have established a strong business footing in the industry. Such practices as predatory pricing are highly risky especially for a small firm as it could easily lead to bankruptcy. In order to implement it, all factors should be considered to ensure its overall success (Dennis 2004, p. 201). Business strategies are among the most essential practices that define a successful business entity. In forming the most viable business strategies, all factors surrounding the viability of such strategies have to be effectively analyzed to ensure that a given company effectively gains from implementing the strategy. Chief in the strategies formulated by companies is the pricing strategy for their goods and services, which must conform to a company’s ability as well as project a successful future for the company (Baker 2010, p. 389). What is more, companies can easily learn from the path that other comparatively successful companies have taken to relate it to their situation and consider whether they can adopt similar strategies, or consider modifying them to fit their scenario. Amazon is one such company whose pricing strategies have propelled it forward on most platforms; thereby, it can easily act as a platform from which other companies can draw their strategies. 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