Are Amazon price discriminating and if so how can other retailers do the same thing?
What is price discrimination?
Imagine you have 2 widgets to sell, they cost you £5 each. Buyer A will pay you £10, buyer B would only be willing to buy for £8. How do you price your widgets?
If you price at £10 you will only sell one and you’ll make £5, but you’ll have one left
If you price at £8 you’ll sell both and make a profit of £6.
What if you could sell one for £10 and the other for £8? You’d sell all your stock and make the maximum profit of £8.
So how do you do this? You could price at £10, wait until you sell one then have a 20% off sale. You could price at £10 and send buyer B a coupon. There are a few ways to go about it but the basic principle is called price discrimination; charging the maximum possible price that each customer will pay for a given item.
To do this effectively you need to know the maximum prices your customers are prepared to pay which isn’t always easy. But if you’re a massive online retailer with vast amounts of data available on all of your customers you could take this to a whole new level.
How are Amazon price discriminating?
We noticed that some products on Amazon have a new pricing feature. Rather than a reduced price there’s a “coupon” available, you just tick the box and the price gets reduced. But why would Amazon do this? Why not just discount the product?
It’s possible that this is a way around MSRP agreements with suppliers, by advertising at or near MSRP then handing out coupons they may be able to get away with pricing that might otherwise fall foul of supplier agreements.
It’s also possible – and to be clear this is pure speculation on my part – that Amazon are price discriminating. They have more than enough data on many of their customers to be able to make a good guess at a customer’s price sensitivity and guess how much of a discount they need to offer to get them to buy.
Amazon has form for this sort of thing. Back in 2000 they got caught offering products at lower prices to new customers than existing customers. This didn’t go down well with customers, no one likes paying more than they have to. But someone else being given a coupon doesn’t feel so bad as them being flat out given a lower price for the same product.
So if this is what they’re doing the question becomes how would you as a customer exhibit behaviour that gets you the biggest discount?