Week 8 Case Analysis – Case Study Example

Order Just About Anything from Amazon at a Reasonable Price Case Summary The case study discusses the business trajectory of Amazon. The company started as an online bookstore and today it has become one of the largest online retailers in the world. A marketing strategy that helped the company obtain customer retention is offering free shipping on orders above $25. A niche market that Amazon targeted is sales of digital products. The profit margin on these types of products is higher because the company does not have any inventory or shipping costs. The emergence of Amazon as a top retailer of digital products is threatened by the entrance of many new participants into the industry. Key Marketing Issues Sales promotion – Amazon is using a sales promotion technique that might be hurting the profitability of the company. The company has no control over the size and weight of goods purchased. These two factors can increase the cost of shipping significantly. Cooperative advertising – Amazon does not seem to be using any effective cooperative advertising strategies to achieve higher customer reach at a lower cost. “Cooperative advertising is a way to stretch your advertising dollars” (Scoredelaware). Pricing Objectives – The pricing objectives of the company are not optimizing the profitability of the company adequately. Amazon has to find ways to increase profits, while offering the best value to its customers. The product variety companies have available will either limit or broaden the pricing strategies a firm can use (Psu). Variable Costs – Amazon is not managing well its variable advertising costs. The free shipping promotion represents a variable cost that that is very unpredictable. The financial effect of the free shipping offer is lower net margins. Personal Case Analysis Amazon has built over the years a strong reputation as on online vendor. The company provides its customers an online platform that can be used to sell goods using e-commerce. In 2011 e-commerce generated sales in the U.S. of $188.1 billion and the market is expected to grow to $269.8 billion by 2015 (Plunkett Research). The free shipping on orders above $25 offer was an innovative idea that has helped Amazon attract more customers to its website. The strategy also helps increase customer satisfaction. Amazon identified a niche market that the firm can exploit to increase its revenues. Digital books are a hot trend that will continue to grow in the next decade. Global e-book sales grew by approximately 94% in 2011 (King). Case Questions 1. Are Amazons shipping costs variable or fixed? How is the companys profitability likely to be affected if customers do not buy more than $25 worth each time they shop? The free shipping offer at Amazon is a variable cost. The amount of shipping expense varies depending on the order. The purpose of the $25 free shipping policy was to attract more customers and to entice customers to make larger purchases. The profitability of the company is higher when it does not have to pay for any shipping charges, but the company benefits more when it increases the sales total per transaction. 2. Why would publishers be so concerned about the difference in price between a hard-cover best seller and the digital version? Explain your answer in terms of this chapters pricing concepts. The publishers were concerned about the differential in prices between digital and hard copy books because Amazon was diluting the price of digital books by selling them too cheap. The publishers of digital books felt price discrimination from Amazon. Best seller books should be priced at a premium to optimize profitability. Price competition in the e-book industry is intense. 3. Do you think Amazon should be concerned about losing market share in e-book retailing? What are the implications for its pricing decisions? Amazon should not be concerned about losing a bit of market share in the e-book retailing industry because the industry is on the rise. As the industry continues to grow a smaller market share will be worth more for Amazon than what the firm is achieving today. A good strategy to increase market share is to lower the prices. Amazon can take market share away from some of its top competitors such as EBay by charging lower selling fees to its customers. Conclusions The sales promotion Amazon has used of offering its customers free shipping on purchases of $25 and above has been an effective strategy that increased the market share of the company. The downside of the strategy was that the firm was assuming a variable cost that decreased the profitability of the company. Amazon has a great opportunity to achieve further growth in the near future due to the fact that e-commerce is a hot trend among consumers in the United States and abroad. The use of cooperative advertising can help improve customer awareness at Amazon. The company would benefit from the implementation of new sales promotions. Work Cited Page King, P. 30 August 2011. “Global E-Book Sales Forecasts by Region: 2010-2015.” 3 March 2012. Psu.edu. 2007. “Understanding Pricing Objectives and Strategies.” Penn State. 3 March 2012. Plunkett Research. 13 February 2012. “E-commerce & Internet Business Overview.” 3 March 2012. Scoredelaware.com. “Cooperative Advertising Is a Retailer’s Choice.” 3 March 2012.