Knowing and Making

An article in BusinessWeek about the success of Amazon Prime contains this interesting revelation: One challenge was selecting the annual fee for the service; there were no clear financial models because no one knew how many customers would join or how it would affect their purchasing habits. The team ultimately went with $79 mainly because it's a prime number. We see this problem a lot with our clients - new product or service launches are one of the main occasions when people hire us for pricing advice. But I have never yet seen anyone argue for a price level because of whether it factorises! Other interesting points: Amazon Prime in the UK costs £49 (not a prime number) and is one of the few items that is cheaper  in the UK than the US. It also provides next-working-day delivery in most cases, rather than the two-day US service. But then, the UK is a smaller place and perhaps delivery services are cheaper in general here. Finally, a funny quote from, of all people, a profe...

You might remember a previous discussion of Amazon's pricing policy. I came across a further thread about it on... Amazon's own website ! I hope that guy with the last comment is doing it for research purposes and not because he thinks it will save money. Some theories from that discussion: currency fluctuation (which is plausible); stock position of different suppliers (not so much); testing of the demand curve via small price adjustments (quite an interesting hypothesis and certainly possible); and adjustments to changing demand (if true, would reveal a surprisingly detailed understanding of demand for individual books - but you never know). Another possibility: it could be driven by competition - but as the market leader, it's less likely that Amazon adjusts its price to competitors than vice versa. Maybe then they deliberately make frequent pricing changes to stop competitors from finely undercutting them. Anyone know whether competitors can use Amazon's API to...

I'm studying behavioural pricing as part of my response to the forthcoming OFT market study , and Amazon has an interesting history of this. Whether or not they still offer personalised prices to different customers for the same product (probably not, as they were shot down for it last time ), their pricing strategy is still fascinating. Take a look at this screenshot: Because I have a ton of books in my 'Saved for later' list, I get a message like this nearly every time I visit the Amazon checkout. Often the same book moves up or down by £1 or 50p several times over the course of a few weeks. The only plausible explanations for this are that Amazon either: has an incredibly sophisticated demand management process and knows exactly when people will pay more or less for a book or, is testing different prices to measure the overall demand curve (or my personal one, which is even more interesting). Either way, it's fascinating to watch one of the most sophisticated behavio...