Amazon is winning more price battles than not

Price is a significant factor in why a good number of people buy products on Amazon.com, either from the e-tailer itself or a third-party on the site. A report published earlier this year by researchers at Ohio State’s Fisher College of Business made the case, showing that Amazon customers in states where the company began collecting sales tax cut their spending by nearly 10 percent.

Now, new research from William Blair, an investment bank, shows that even with state sales tax included, Amazon has lower prices on identical items sold by a group of 40 large retailers. In total, Amazon’s price was 5.9 percent for the same items when purchased by non-Prime members and 8.3 percent lower when purchased by Amazon Prime subscribers.

Among the chain’s that faired least favorably compared to Amazon were:

Chart 1

A small number had better prices on the same item than Amazon:

Chart 2

Interestingly, Amazon’s savings advantage on the same items has declined slightly in recent years for non-Prime members, from 6.4 percent in 2012 to 6.1 percent in 2013 and 5.9 percent in 2014. During the same period, the average savings have gone up for Prime members, from 7.5% in 2012 to 8.2 percent in 2013 and 8.3 percent this year.

BrainTrust

Discussion Questions

How important is price perception to Amazon’s performance? What types of retailers do you see as being most or least at risk to Amazon based on William Blair’s findings?

Poll

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Max Goldberg
Max Goldberg
9 years ago

Without having physical stores where consumers can instantly have the items they want to purchase, Amazon needs to have lower prices to effectively compete. Yes, some consumers like the convenience of not having to drive to the store, but overall, Amazon built its brand on price, selection and service, and it needs keep prices low in order to compete.

David Biernbaum
David Biernbaum
9 years ago

Price is one of the factors that drives Amazon’s customer loyalty, but in my opinion, as long as it doesn’t cost more at Amazon vs. traditional retail, they still succeed more because of convenience, outstanding service, ease-of use and no shipping cost with Prime membership.

Paula Rosenblum
Paula Rosenblum
9 years ago

I never believed that sales tax collection was going to impact Amazon’s performance, even though a lot of others seemed to think it would.

Amazon’s biggest competency is that you know they’ll be close or better on price, but their delivery performance is impeccable. And according to our data, that even trumps price in consumers’ minds.

Get it while you can, kids. Sooner or later, the street is going to force Amazon to start actually making money—and then we’ll have price parity.

Keith Anderson
Keith Anderson
9 years ago

These findings are interesting and certainly highlight the growing pressure on retailers to be price competitive.

That said, pricing data from a point in time doesn’t tell the whole story. Data from Profitero’s pricing intelligence platform shows that Amazon changes prices millions of times daily. Amazon’s algorithm is driven by online competitors’ prices and other inputs like stock levels, item and category profit, as well as whether items have been designated as key to overall price perception. On top of Amazon’s own prices, its third-party (3P) marketplace further supports actual and perceived price leadership through competition on the platform itself.

This dynamic pricing engine combined with Amazon’s comparatively asset-light business model (higher sales productivity per square foot of physical space than Walmart or any other brick-and-mortar retailer) gives it a compelling advantage. Amazon can lead on price when necessary and match the market leader dynamically.

The arms race that has been underway for years as price transparency has grown is intensifying.

The good news for Amazon’s competitors is that matching Amazon on price often isn’t the best strategy. But without accurate, continuous intelligence on where Amazon and other players stand, it’s difficult to remain competitive, online or in-store.

Ralph Jacobson
Ralph Jacobson
9 years ago

Price was the founding message of Amazon when they only sold books, so it may prove difficult to escape that perception anytime soon. Every merchant should see them as both a competitor as well as a partner. Many merchants and brands, large and small, have done well doing business with Amazon.

Dan Raftery
Dan Raftery
9 years ago

Although price perception is an important image for any retailer, Amazon has at least two additional strengths. Variety and convenience. If prices are creeping up on Amazon, it will not be an issue because prices are creeping up everywhere and—see above.

Retailers most at risk from Amazon and probably Alibaba are those with physical stores and without a clear value proposition. Don’t forget, it is still quicker for a shopper to pick up an item at a store. I don’t see enough retailers shouting out that message.

Breadth of variety is probably the biggest soft spot for some retailers. By the way, reducing true variety (not just SKU count) can be an early warning sign that a particular retailer is in trouble and fading away.

Bill Davis
Bill Davis
9 years ago

Price perception is extremely important to Amazon’s performance. Amazon changes prices far more than any other retailer, and this works to their advantage.

I see every retailer that carries products that Amazon stocks as being at risk.

Peter J. Charness
Peter J. Charness
9 years ago

It’s critical. When you shop at Amazon (or Costco, frankly) you know that you don’t need to do additional research and waste your time checking out competition. If they have the item, they will have the best price, or at the very least always an acceptable price. When impulse buying is still the vast majority of all items purchased, being able to see it, click it and own it without leaving the website to check for better pricing elsewhere is paramount.

Richard J. George, Ph.D.
Richard J. George, Ph.D.
9 years ago

Amazon is more about value than price. While price is important, Amazon customers, particularly Amazon Prime customers, are looking for a combination of attributes: Price, convenience, selection, service, etc.

The retailers who attempt to compete with Amazon on all of the above will be challenged. Retailers who select and compete on specific attributes and develop a differential advantage may be able to operate in a sustainable niche.

Tony Orlando
Tony Orlando
9 years ago

Amazon still holds a huge perception advantage, and brick-and-mortar stores will still continue their downward slide, as convenience trumps the hassle of shopping for Amazon’s hardcore customers. The sights and smells of fresh foods, and other wonderful things in stores will not fade away soon, but believe me, the bottom lines are shrinking due to brutal competition for the consumer dollar.

The customer experience I received last month at Best Buy is what will keep them in business, as they had a similar price, plus free delivery and set-up for the new ultra high-definition curved TV, and Amazon can not match this. Good for Best Buy, and others need to up their games to stick around in this crazy retailing world we live in.

Jenn Markey
Jenn Markey
9 years ago

Having a low price perception is key to Amazon’s performance. However, having a low price perception does not necessarily mean having the lowest price. We (360pi) have seen an erosion of Amazon’s price competitiveness over the past year in several categories including housewares, health and beauty, and electronics, usually to the benefit of Walmart and Target. See housewares historical pricing trends for six retailers, including Amazon.

Gordon Arnold
Gordon Arnold
9 years ago

There are many reasons for the consumer to purchase product and services using an e-commerce retail supplier. Amazon has always focused on pricing, customer service and shipping costs as the reason to buy through them. As the cost to produce and support an internet site gets lower, the need for their expertise is dwindling. The manufacturers and service suppliers can now offer lower prices than the Amazons and eBays of the world simply by returning a good portion of the costs back to the customer.

Cottage industries will continue to need their services until they can expand to a sales level that can assume these responsibilities. The future for business expansion and awareness is found in the Bings and Goggles of the world. As voice and translator software expands in speed and scope, this will become more and more obvious. A Google and IBM merger would be very interesting and most probably made illegal.

Lee Kent
Lee Kent
9 years ago

As long as Amazon is not held accountable for their lack of profitability, they can continue to be the leader in price. And, yes, they do need price on their side to compete.

They have great pricing algorithms, dynamic pricing engines, great service and a spot-on delivery model, but how long can we keep calling them golden when they aren’t profitable?

I hate to be the sour puss for bringing this up but hey, Paula did too! … And all for just my two cents!

Joel Rubinson
Joel Rubinson
9 years ago

My guess is that Amazon sales would take a hit if a switch flipped in shoppers’ minds and all of the sudden, they began to believe that Amazon was NOT less expensive. Now one thing to be mindful of is that consumers don’t necessarily calculate and compare prices. Often perceptions are based on generalized impressions and do not necessarily follow an accounting-style price audit. I saw this when I did B2B brand equity research on dentists. They had strong impressions of which supplier of the two leaders was less expensive, but their impressions were quite different from the reality if you just analyzed the two catalogs.

Craig Sundstrom
Craig Sundstrom
9 years ago

The most vulnerable are sellers of high ticket items that don’t really require any kind of inspection before buying: $200 sunglasses, yes; $800 tailored suits, probably not. The percentage difference is actually greatest in the $30-100 range, but the actual dollar savings are obviously higher when prices are in the hundreds.

How do others compete? Quite easily, if their goods are under $20, since Amazon appears to actually average higher; and Amazon only carried 44% of the comparison items overall.

Cathy Hotka
Cathy Hotka
9 years ago

I had dinner last night with an electronics chain exec who said they change their prices twice a day. Sounds impressive, but Amazon does it several times an hour. When price is king, this poses a problem for traditional retail. The clear message is to carry differentiated products if at all possible.

Arie Shpanya
Arie Shpanya
9 years ago

Price perception is one crucial factor in Amazon’s performance. It positions itself as the loss leader, but also a leader in convenience. Two day shipping on almost anything a shopper could want drives Amazon Prime subscriptions. While Amazon’s hold on low pricing could be disrupted by other retailers like Walmart and Family Dollar, its convenience and wide assortment keep it relevant. When another retailer is able to out-do its pricing, assortment, and convenience, then Amazon will have found its match.