Loss Leader: Why is Amazon a Master at it?

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Are you a fan of the intelligent and comprehensive pricing strategy of Amazon?

Dive in for 3 minutes, and you might take away some valuable insight and replicate them into your business model.  

How big are we talking about?  

July 1994, based on a statistical gold mine citing Internet usage was growing by 2300%, Jeff Bezos started an online bookstore.

On May 15, 1997, his online venture, now named Amazon.com Inc., was listed on NASDAQ, with each share priced at $18. 

Soon that infant online venture matured into the worlds world’s largest online retailer.

Now it offers A to Z goods, AWS technology Infrastructure, Artificial intelligence operations and a parallel human spaceflight program aimed literally to carry man to the moon and back.

Amazon’s market value crossed $1 Trillion in 2018.

Its share is currently priced at a four-digit mark, hitting a new high of $ 3,339.85 per share as of July 7, 2021.

What did Amazon get right?

Amazon became a juggernaut because of its Customer-Centric focus, distribution efficiency, top management and human resources, marketing practices, etc.

But above all these matrices, Amazon’s intelligent Price distribution strategy is ranked as a significant contributor to its success. 

Loss Leader as a Price Distribution strategy 

Loss Leading is a much talked about and used pricing strategy.

The economic literature fundamentally means that a firm sells its products or services at a price much below the cost price.

This revised selling price might incur a loss on that particular commodity. But the seller compensates their loss by gaining a massive volume of trade due to its competitive pricing.

In 2019, Amazon’s share in the global e-commerce market stood at 13.7 % worldwide and 52.4% in the U.S. 

By offering target commodities at a much lower price than its competitors, Amazon managed to build a massive chunk of loyal customers.

This traffic converted into an impressive sales figure even though their margins fared low compared to classical retailers such as Walmart and BestBuy.  

Loss Leading strategy usually transforms a mere commodity into a highly infectious epidemic transmitted through word-of-mouth.

Major Sale seasons encourages more and more customers to click attractively priced things.

In June 2021, Amazon.com had over 2.7 billion combined desktop and mobile visits, up from 2.3 billion trips in February 2021.

Once customers get through the door, they buy additional items that compensate for the seller’s loss and exceed the desirable margin.

Special care is taken to advertise cheaper commodities.

Loss Leader: Why is Amazon a Master at it?
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 Doing so builds a public perception of the firm as the most affordable dealer. Besides, Amazon also makes efficient use of Basket based discounts and cashback.

Transaction based offers require the usage of third-party vendors, which further adds to Amazon’s coffer.  

An analysis of retail pricing habits by a price intelligence firm revealed that Amazon changes its prices more than 2.5 million times a day. It means that an average products cost changes every 10 minutes.

It is far beyond the price regulation done by Walmart and BestBuy, which changes prices roughly 50,000 times in a month.

How does Amazon achieve such a dynamic pricing mechanism? 

It uses algorithm-based manipulation to dig into its vast data cache and determine the best possible price with the best ROI. In an interview with BBC correspondent,  

one of the former executives at Amazon revealed that Amazon happen to sell products, but they are a data company.

“Each opportunity to interact with a customer is another opportunity to collect data.

Founder Jeff Bezos frames it in terms of being a “customer obsession”, saying the firm’s priority is to “figure out what they want, what what’s important to them”.  

With over 1.5 billion items listed for sale and a support base of 200 million users, Amazon has been able to fish out about one billion GB of data on their articles and users.

That’s over eight times as tall as Mount Everest if the total data is stored and stacked in a 500 GB hard drive.

Amazon’s data pool enables it to understand demographic segmentation better and cater to the demands of its customers based on location, consumption behaviour and demography.

With these practices, the Amazon algorithm entices all possible target audiences.

One can adopt and appropriate them based on one’s discretion and the nature of their business line. 

 

 

 

Satvik Singh
Satvik Singh
Satvik Singh is Teaching Assistant for foundation Programme at Amrut Mody School of Management , Ahmedabad University. Prior to his appointment at the University, he received a bachelor degree in English from Banaras Hindu University and subsequently a master degree(English) from Pandit Deendayal Petroleum University. His area of research during Masters studies were Indian Philosophy and Gender Studies. Satvik dreams of a day when characters from his amorphous musings would confront him in the corner street. An admitted Stock market fanatic, he feeds his addiction by watching Penny stocks chart on Sunday afternoon.

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