Les Jones

E-commerce > Virginia Postrel on E-commerce Pricing

Virginia Postrel has an article for the New York Times, "The Internet Book Race". (Via Bill Hobbs.)

The gist of the article is that researchers studying price and selling information at Amazon.com and BN.com showed that Amazon customers were less price sensitive:

Not surprisingly, the researchers found that higher prices mean fewer sales. But the effects are notably different at the two sites. Both sites lose customers when prices rise, but Barnes & Noble loses a lot more.

A 1 percent price increase at BN.com pushes sales down 4 percent, making price rises a bad idea. By contrast, the same increase at Amazon reduces sales by only 0.5 percent - a net revenue gain.

It's interesting, but not terribly surprising. We've all heard that you should sell on quality and service, not price. In reality, it's a lot harder than it sounds. Price-sensitive customers leave Amazon when prices go up. Others stay, in part because of quality, but in part because of laziness.

Jakob Nielsen noted years ago that his readers were far more likely to buy his books from Amazon, even when other merchants he linked to had lower prices. Buyers like Amazon for the simple reason that they already have accounts there, and already know how to use the shopping cart. Shopping carts haven't converged, and there are peculiarities that throw customers off. It's also a hassle to re-enter shipping and billing information at a new site. People who are used to Amazon keep going back because it's familiar and trustworthy.

OK, but so what? As I noted in the comments at Bill Hobbs's site:

I think the message is "It's good to be Amazon," meaning: it's good to be first, biggest, and best-known.

Part of Amazon's current position is the result of lock-in and customer loyalty. True, Amazon built that lock-in and loyalty through good service, advertising, marketing, and billions of dollars in investor money.

The question is, what now? What lesson is there? If you were starting a company to enter the music-book-video market, how would you go about unseating Amazon?

Maybe the message of the study, then, is that there isn't a good way to unseat an established dominant like Amazon, at least not on price alone. It may be possible, however, to offer a slightly lower price to attract the value market segment, but not spend those billions of dollars to pioneer the market.

The other possibility, of course, is to avoid established niches like the music-book-video market. It may be best, in other words, to locate smaller niches that haven't been taken over.