How Amazon beats competitors with 'Tesco' tactics - media Mark Billige Kyle Poyar Adrian Pusz

 
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How Amazon beats competitors with 'Tesco' tactics - media Mark Billige Kyle Poyar Adrian Pusz
How Amazon beats competitors
with ‘Tesco’ tactics

                                   media

                                  Mark Billige
                                   Kyle Poyar
                                  Adrian Pusz

                               December 2012
Setting the right prices – always a book seller’s biggest performance
lever – has never been more important because of ever-changing competi-
tors, formats, and sales channels. But figuring out the right price for a book
nowadays is a jigsaw puzzle with half of the pieces missing.

Before they start filling in those blanks, however, book sellers should step
back and reconsider some outdated pricing assumptions that may have
served them well years ago when all books were printed and sold in physi-
cal stores. Book retail labours under several outdated assumptions, primarily
around how to discount, how to decode Amazon’s underlying strategy, and
how to adapt to consumer behaviour in the e-commerce age.

To help book sellers improve their price performance and generate smart
profit growth, Simon-Kucher & Partners, a marketing and strategy consul-
tancy specializing in pricing, undertook an extensive study on the prices of
the top 100 print books across online book sellers in the U.K.1

Once book sellers have re-thought the assumptions, they need not start their
pricing from scratch. Believe it or not, Tesco has a wonderful model they can
borrow and adapt.

Outdated assumption 1: Book pricing doesn’t need much
work (it should largely be “set it and forget it”)
Many retailers take a “set it and forget it” approach to pricing, only adjusting
prices during pre-defined seasons or promotion events. This is hardly surpris-
ing given the number of products they have to manage.
                                                                                             “Book sellers should
Amazon, on the other hand, takes a more dynamic approach. Simon-Kucher                        follow Amazon’s lead
looked at how the prices of the monthly top 100 books on Amazon changed
10 days later.2 Of the 62 titles that remained in the top 100 over the period,                and develop processes
one third had different prices.                                                               to manage book prices
Missing puzzle piece: Actively managing prices in a smart way helps com-                      over time.”
panies like Amazon boost their profitability. Other book sellers should fol-
low Amazon’s lead and develop processes to manage book prices over time.
These processes could adjust prices on the basis of book popularity, time of
day, seasons, competitor prices, or other factors altogether. Minor differences
in price applied over time and selectively across the portfolio add up to smart
profit growth.

1
 The study has excluded e-books due to the current legal challenges around e-book pricing
2
 Simon-Kucher study compared prices of October bestsellers retrieved from Amazon’s website
on October 30 and November bestsellers retrieved on November 9

Simon-Kucher & Partners | How Amazon beats competitors with ‘Tesco’ tactics | December 2012                           1
Outdated assumption 2: Consumers buy books online
mainly to get lower prices
Amazon’s dynamic pricing strategy reveals a smart insight into consumer
shopping behaviour. Consumers purchase books online not just because of
lower prices, but also for reasons like convenience and a wide selection.

A recent Simon-Kucher survey of U.S. consumers’ multichannel purchasing
found that for 76% of consumers the price of print books was not their main
reason for buying books online. Furthermore, the study found that the more
books a consumer buys online, the less sensitive to price she becomes.

Missing puzzle piece: Book sellers ought to focus on building loyalty and
encouraging repeat purchases rather than trying to attract deal hunters with
deep promotions that destroy profitability. Value-adds such as personalised
newsletters, expert reviews, or user experience improvements are smarter
investments than aggressively low prices.

Outdated assumption 3: Hence, discounts work for book
sellers, especially on slow moving products
When retailers change prices, it is often to move old inventory. They bring in
new, high-demand merchandise at premium prices and quietly discount their
older and slower moving products.                                                  “Grocery stores offer low
Grocery stores like Tesco do the reverse. They offer low prices on high vis-        prices on high visibility
ibility (“loss leader”) products like nappies, eggs, or milk while maintaining a
                                                                                    products and maintain a
premium on slower moving or more niche products. So does Amazon.
                                                                                    premium on niche ones.
From our analysis of Amazon’s bestseller list, books in the top 20 sell at high-
er discounts (on average 55% off the list price) than those further down the
                                                                                    So does Amazon.”
bestseller list (on average 48% for numbers 21-100).

Discounts and product sales often go hand in hand, one might point out. But
a discount difference of 7pp. is unlikely to trigger a volume shift that would
push a middling title into the top 10. Rather, this looks like a smart pricing
                                                                                   “For 76% of consumers
strategy drawing on lessons outside of the ‘old’ book selling world.                the price of print books
Missing puzzle piece: Having lower prices on high visibility products ce-           was not their main
ments a low price image in the minds of consumers. As in supermarkets,              reason for buying
consumers enter the site because they are attracted to discounts on high
profile items (the nappies, eggs, and milk), but may end up buying something
                                                                                    books online.”
entirely different. (This is where Amazon’s recommendation engine proves so
effective.)

Simon-Kucher & Partners | How Amazon beats competitors with ‘Tesco’ tactics | December 2012                    2
Outdated assumption 4: After all, that’s what Amazon does
(isn’t it?)
We already know Amazon acts like a grocery store, but we do not know which
one. Is it more like Asda or Tesco (or even Waitrose)?

The default assumption would be Asda given Amazon’s promise to “offer
consistently low prices on [its] entire catalogue.”3 That assumption would only
be partly correct.

Simon-Kucher compared the prices of the top 100 Amazon bestsellers against
the same titles sold online at seven other leading UK bookstores, including
Abe Books, Blackwell’s, Book Depository, and W.H. Smith.

Amazon has the lowest price on best sellers ...                               ... but not necessarily on less visible books

                        Rank                   7                                                   Rank                53
      The Casual        MSRP                   Ϋ20.00                              Thinking,       MSRP                Ϋ8.99
       Vacancy                                                                   Fast and Slow
                        Price at Amazon        Ϋ9.00                                               Price at Amazon     Ϋ6.02
       J.K. Rowling     Lowest alt. price      Ϋ9.99                             Daniel Kahneman   Lowest alt. price   Ϋ3.46

                        Rank                   19                                                  Rank                76
      Fifty Shades      MSRP                   Ϋ7.99                               Entwined        MSRP                Ϋ7.99
         of Grey                                                                   with You
                        Price at Amazon        Ϋ2.99                                               Price at Amazon     Ϋ7.19
        E.L. James      Lowest alt. price      Ϋ3.19                                 Silvia Day    Lowest alt. price   Ϋ5.99

Source: Simon-Kucher analysis; prices for Amazon and compeƟtors retrieved on October 30, 2012

For titles in the top 20 Amazon is on average 6% less expensive than all other
competitors. On the flip side, Amazon charges an average premium of 13%
on books in its top 21-50 and 15% on books in its top 51-100 compared to
the competitor with the lowest price.

Amazon still offers its customers competitive prices. But it is strategic about
where it needs to be the absolute lowest price and where a ‘low’ price is suf-
ficient.

Missing puzzle piece: While other book sellers are sticking to the high-street
fashion model, Amazon is beating them with tactics from Tesco.

3
    From Amazon’s website

Simon-Kucher & Partners | How Amazon beats competitors with ‘Tesco’ tactics | December 2012                                    3
Conclusions: Book sellers should act more like Tesco
Amazon’s strategy is clear, and telling. Amazon has leapt ahead of other book
sellers by introducing more prices and smarter pricing. They have avoided
cut-throat prices while establishing a low price image with consumers.

In order to survive, other book sellers must take note and reconsider their
outdated assumptions. The first place they should look, surprisingly enough,
is the neighbourhood Tesco.

About the authors
                     Mark Billige is a Managing Partner                                           Kyle Poyar is a Consultant at Simon-
                     of the UK practice at Simon-Kucher                                           Kucher & Partners London office. His
                     & Partners in London.                                                        areas of specialisation are publishing,
                                                                                                  media and telco industries.
                     email: mark.billige@simon-kucher.com
                                                                                                  email: kyle.poyar@simon-kucher.com

                     Adrian Pusz is a Consultant at Simon-
                     Kucher & Partners London office,
                     specialising in consumer behaviour.

                     email: adrian.pusz@simon-kucher.com

About Simon-Kucher & Partners
Simon-Kucher is a global consulting firm specializing in strategy, marketing,
pricing and sales. Founded in 1985, the company focuses on Smart Profit
GrowthSM by helping clients to boost their top line instead of cutting costs.
With 650 professionals in 25 offices worldwide, our practice is built on evi-
dence-based, practical strategies for profit improvement.

www.simon-kucher.com

What others are saying

           Priceless*
“ The influence of Simon-Kucher                            “...the world’s leading                     “...world leader in giving advice
  on the prices we pay for just                             pricing consultancy...”                      to companies on how to price
  about everything is as little                                                                                 their products...”
  recognized as it is staggering.”
                -William Poundstone
*William Poundstone - Priceless: The Myth of Fair Value (and How to Take Advantage of It), January, 2010

Simon-Kucher & Partners | How Amazon beats competitors with ‘Tesco’ tactics | December 2012                                                 4
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