The $23M Book

While you shouldn’t compete on price, it’s a very important hygiene factor.

 

High-speed pricing software has been introduced on Amazon to apply pricing rules based on competing retailers’ prices. With software that was originally designed for data-mining in banks it can now set automated rules to allow it to always be cheaper. I guess that might be good for buyers, but isn’t it worrying if you are one of Amazon’s 2M sellers who often compete with them?  When it comes to selling direct from its own site, Amazon is always likely to be able to dictate pricing.

This new tool can make sure it is never knowingly undersold online, but as with automatic stock trading, things can easily go wrong when machines takeover. In 2010 the “Flash Crash” was caused by such software and intriguingly there was a similar, but much less costly, cyber-aberration last year which inflated the price of a book The Making of a Fly to $23M: I don’t think many were sold at that price though.

In economics a commodity is just a marketable item produced to satisfy wants or needs, but the term has a more specific meaning when applied to goods, as being something “in demand which is supplied without qualitative differentiation across a market”.  A commodity has full or partial fungibility, meaning it is treated by the market as equivalent, or nearly so, irrespective of who produces it.

One of my pet hates is the unnecessary commoditisation of stuff.  The last thing that most businesses want is to compete on price alone, as they will not win and it will just destroy margins and the rationale for being in business in the first place: it’s just lazy marketing. Whilst price is certainly not insignificant, there are almost always other reasons we buy things from a company. Why don’t we put more emphasis on them rather than worrying about emphasising price all the time? Well, I guess it’s all a question of balance and, as Amazon are neatly demonstrating; price always has a place in the buying decision equation.

When Eddie Murphy and Dan Aykroyd traded places, and pork bellies, they were just focused on the margin, not any other characteristics of the product, but even if you buy something as apparently commoditised as electricity, you may be swayed by the environmental, door-to-door selling, or other reputational characteristics of suppliers, not just the price. Apart from pork bellies, perhaps, there aren’t that many true commodity goods and no commodity services, that I can think of anyway: as you consume a service it is being delivered and that delivery can be easily varied. Many commodity goods though are sold by a service which is highly differentiatable. A new book comes pretty close to being a commodity, but the service wrapped around it, the retail element, doesn’t.

My point?  Well, in case it isn’t obvious, Amazon is far too sophisticated a retailer to be competing on price alone, or even, majoring on it, however, by pushing this story it is reinforcing one of the most important hygiene factors that validate it as a retail option. By installing this software it is making the point that it is on top of pricing, so that the more important differentiating messages, that really dictate why we should buy from it, are not diluted by worries about price. Its sellers shouldn’t worry too much either, whilst it may look to be in direct competition Amazon needs its sellers and the broadly low pricing proposition, reinforced by this new technology, will help them too. Some may even benefit directly from a “bot” going off the rails – someone may actually buy a million dollar book.

Mark

 

 

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