Amazon loyalists shop on Amazon.com trusting that they are getting a bargain. The Amazon value proposition certainly includes advantages that are more unique than the simple act of offering low prices (assortment, convenience, experience, speed, ubiquity, security), but it’s this perception of low pricing that helps make shopping on Amazon almost instinctual to many consumers.
It’s this perception that keeps Amazon shoppers from checking other sites for lower pricing before hitting the “Place Your Order” button. It makes retail shoppers check their Amazon app before heading to the register. It’s enough to convince folks to make purchases with just an Alexa voice command or a Dash button-push without concern for how little visibility they have into actual market pricing.
Because of the trust that it creates, maintaining the perception of price leadership is a crucial part of Amazon’s ecommerce strategy and will remain so unless we see a far more significant shift in the ecommerce and retail landscape.
So, is Amazon’s Price Leadership Perception or Reality?
Both. And that’s what makes Amazon so impressive.
Amazon’s combination of price-saving programs and low everyday pricing easily justify its reputation as a price leader. However, a deeper look reveals that Amazon is particularly adept at creating a greater perception of price leadership than it actually deserves.
Most of the attention on Amazon’s price leadership centers around its proprietary programs, which continue to grow in both number and adoption levels (Prime, Lightening Deals, Deal of the Day, Prime Day, Dynamic Pricing, and 3rd Party Resellers to name a few). Rightfully so, as each offers a unique way for Amazon customers to save money, gives Amazon shoppers new motivation to spend money, and reinforces the aura of price leadership surrounding the eCom giant.
However, even with this arsenal of money-saving programs, everyday low pricing remains the cornerstone of Amazon’s price leadership strategy. Amazon’s everyday pricing varies by product category, and is much less generous in some segments (e.g. electronics accessories, home supplies), but within the relatively high-priced consumer/home/business electronics categories that gap intelligence specializes in, Amazon’s prices are consistently lower than competing retail and online merchants.
Amazon's Very Purposeful Pricing Strategy
A look at the pricing data from gap intelligence’s Televisions, Smartphones, and Vacuums Pricing & Promotions services reveals four core components of Amazon’s pricing strategy for high-ticket and high-competition categories like these:
Be the price leader on a large number of products
Offer prices that are below competitive channel averages for the majority of products
Consistently beat or match top retail/eCom competitors' pricing
Recuperate margins on sales of all other products, including products in associated categories
One sure way to earn a price leader role is to offer the very lowest prices across channels, and Amazon does just that with an impressive number of its TVs, Smartphones, and Vacuums. Within these categories, Amazon is the absolute price leader for between 8% and 41% of all products that also sell through other merchants (i.e. excluding products that only sell at Amazon), while pricing an amazing 44% to 80% of all products in these categories at levels that are either equal to or below the lowest competitive prices.
Amazon’s proactive pricing management plays a major role in allowing the merchant to achieve absolute price leadership. For example, 11 of Amazon’s 44 price-leading Vacuums experienced a price drop on Amazon.com during the week prior to this analysis in order to achieve or maintain these products’ price positioning.
Even more notable, out of the 141 Vacuums that Amazon priced equal to the lowest competitive prices across channels, 85 models exactly matched pricing offered on Walmart.com. That’s no coincidence. Amazon’s price leadership is often due to its practice of tracking and then matching (and sometimes beating) key competitors’ online pricing, allowing Amazon to offer what is still effectively the “lowest” price in the channel without going lower than it needs to.
Understanding how often Amazon achieves price points that are the very lowest in the channel, it is no surprise that the online powerhouse prices the majority of its TVs, Smartphones, and Vacuums below the average prices from all retail and ecommerce competitors (55% to 70%). When you consider that an even stronger majority of these products are priced equal-to or below competitive averages (TVs 73%, Smartphones 82%, Vacuums 85%) it’s easy to see why so many consumers trust that they are getting a bargain when they shop on Amazon. They usually are.
One core component of Amazon’s pricing strategy is to beat or match the pricing of specific competitors, both in-store and online, and there are some merchants that Amazon is particularly focused on beating. For example, 86% of the Vacuums that are available both on Amazon.com and in-store at Target are offered for a lower price at Amazon, providing Amazon shoppers with a very notable 13% average discount (and as high as 43%) compared to vacuums on the mass merchant's shelves.
Amazon similarly beats Walmart’s in-store TV assortment, offering lower prices on 82% of the TVs that sell at both merchants. However, this is not as impressive as it may appear, as the vast majority of Walmart’s in-store TV assortment (85% of all in-store SKUs) cannot be found selling directly by Amazon (excluding 3rd Party Resellers). Walmart is certainly no newcomer to the price competition game and its move to keep most of its in-store products off Amazon.com serves as a great example of how to guard against Amazon’s price competition. The only trick is, few competing retailers have the bargaining clout required to demand store-specific SKUs.
Despite the overwhelming volume of TVs, Smartphones, and Vacuums selling at below-market prices on Amazon.com, when Amazon’s low-priced products are averaged with the products that it sells for above-average rates, overall discounts offered through Amazon are actually quite modest. Amazon’s surprisingly-low aggregate discounts are due to the fact that the site sells its above-average products with much greater premiums in comparison to the discounts that it offers with its below-average products.
For example, the 82 TVs that Amazon sells at below-average prices are offered with just a 6. 6% average discount, while the 30 TVs that it sells with above-average prices are offered with an 18% average premium. As long as enough consumers purchase the TVs that are priced at above-market rates, and assuming many of Amazon’s TV buyers also order high-margin accessories (HDMI cables, TV wall mounts, etc.), Amazon more than makes up for the fact that the majority of its TVs are priced below the competition.
This is a where the perception and reality of Amazon’s price leadership diverge. Amazon very purposefully offers most of its high-ticket and high-competition products with low prices in order to beat the competition and support its reputation as a price leader, but it does so knowing that plenty of shoppers will buy higher-margin items in the process. Amazon certainly didn't invent the idea of driving high-margin sales by offering loss leader products (or low-margin products), but it does it very very well.
Bringing it back to the Amazon loyalists, they are certainly not wrong to do much of their online shopping on Amazon.com if that is where they prefer shopping, especially considering the fact that Amazon usually does offer products at a discount while providing numerous additional benefits. Heck, many of these loyalists would likely even accept a slight premium. They just need to understand that unless they look around, they will be buying their fair share of premium-priced products along the way.
Amazon’s competitors, however, face a different set of challenges, only one of which is competitive pricing.
