BMGT 205: Assignment #4 Pricing

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Last week, Amazon announced a 25% increase in their Amazon Prime membership – from its current level of $79 to $99.  This is an example, a very visible one, of the importance of the P in the marketing mix equation (Price, Product, Place, Promotion).

Amazon Prime provides a lot of value – providing customers with free 2 day shipping, free streaming video, and free books on the Kindle lending library.   A key variable in a company’s ability to raise prices is the perceived value customers place on the product or service.  If the perceived value is higher than the cost, companies have a better ability of getting paid for the value they provide.  An overview of the price increase can be found here.

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An example of a customer who will be willing to pay for this value on twitter:

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Why this Amazon price increase is important is it really showcases a company’s ability to get paid for value if it is perceived highly by their customers.  Think about if if some other companies raised their prices by 25%:

  • A Gallon of Gas would be around $5.00
  • A Ford Focus would increase by around $5,000
  • A pair of $49 jeans would be $62

Would you be so quick to pay for these type of price increases?  Probably not – and the fact that Amazon can add 25% is pretty significant.  Some think it will work with minimal customer attrition.  Some don’t.

So for assignment #4 – I want each of you to be more aware of the P part of the pricing equation.  A few questions we will discuss in class next week:

1. Do you think that the Amazon Prime Price increase will be accepted by customers?  If so, why?

2. If not, and there is widespread attrition, do you think Amazon will back down and lower the price?  Why?

3. Think of your favorite retailer.  Give an example of how that retailer provides value to their customers.

4. What pricing strategy does your favorite retailer use (Chapter 15?)  Why do you think it is effective?

5. As a consumer – do you prefer everyday values and every low prices – or the thrill of getting a deal?

6. What part of the marketing mix are more important to you than price at your favorite retailer?

As always – post your thoughts in the comment section and we will discuss next class.

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8 thoughts on “BMGT 205: Assignment #4 Pricing”

  1. Dominic Landolina

    1. Its already seeming to be taken not too well. However, it seems like this price increase was necessary and is not getting in the way of any of the extra perks that Prime offers. I think Amazon will still successfully hold onto plenty of subscribers and will probably be making the money back already on people who stick with Prime despite the people who are leaving.

    2. I honestly think Amazon will be fine no matter what. Since Amazon seems to already be well aware of their drop in support, maybe they will lower their price again at some point. It would certainly get them more business back purely in quantity of subscribers but possibly not enough to make up for the lost revenue in dropping the prices.

    3. I would have to say my favorite retailer is The Exchange. They provide value to customers by selling old CDs and VHS tapes for mostly 1 dollar a piece, which is a value I hold higher than the actual money I spend on their items.

    4. I would have to say their pricing strategy is best classified as value based. Similar stores that have 1 dollar CDs and VHS tapes don’t usually cater to the things I am looking for, and thus those items have no real value to me despite being similarly priced.

    5. I’m way more into low prices. As i stated in the last 2 questions, I love collecting movies, CDs, video games, etc. so when I find a great deal on a game/movie/CD that I know is sought after it makes my day. It’s most of the reason I make sure I check out all of the local Exchange locations on a very regular basis.

    6. Place for sure. Most places sell the same things. I can get all of the same things I need at the Target that’s a 5 minute drive my house, instead of needing to go to a much further away Wal Mart for example. If a place is cool, I’ll be more likely to shop there because most of the time I’m not looking for specific things.

  2. 1. I do think that the price increase will be accepted pretty well. Most customers I know who have an amazon prime account LOVE it…and like it’s stated, it’s more than just free two day shipping…it’s so much more. I don’t believe that an extra 20$ for such a great and extremely convenient service will turn too many people away.
    2. I believe that Amazon would back down and lower their price. Amazon is all about customer satisfaction! I think that if they lost enough customers and people were verbally announcing how upset they were then the company would definitely retract its new price.
    3. Target is definitely a favorite retailer of mine and one that I shop at often. I would have to say that Target provides a great deal of value to their customers. They have so many products to offer…anywhere from brand name to their generic ‘up&up’ and their prices are very good!
    4. Target practices EDLP. Every now and then a product will be on sale…but it’s not a crazy discount. I believe that this is efficient because it gives customers a sense of stability…they know they’re always going to get a good deal at target because target always has low prices! They don’t send out many ads or promotions either, and I honestly don’t think they need to. Many people love Target…they are a good company and provide a huge variety of great products!
    5. This one is tough to say…because as much as I enjoy getting a ‘steal’ and purchasing something for much cheaper than it normally is, I do also like stability and knowing how much a certain item costs. For example, there are set items that I always buy at the grocery store every time I go, and sometimes they will be on sale and it’s a great deal, and then there have been times I go and they’re much more expensive because they’re not a sale item that week. That is pretty frustrating to me.
    6. I would say product is another part of the marketing mix that’s really important to me. I want to make sure what I’m buying is a good product, and it’s going to last me as long as I need it for. It’s also important to know that the place I’m going to has the product I need, so I don’t have to go searching somewhere else or find something similar but not quite the same.

  3. 1. Yes, most customers the value that they perceive they are receiving out weighs the price increase.

    2. I do not feel that the percentage lost will effect the bottom line; in fact the increase will probably make up the difference.

    3. I work at Target so I would say that when a giftcard is offered if you buy 3 products adds to the value as well as their cartwheel app that adds to the value by saving even more when you scan it at the register.

    4.I would say that they are closer to every day value; not as much as say Walmart but they offer value with again their giftcards, cartwheel app and coupons.

    5.I as a consumer prefer everyday value but I do sometimes get very happy when I get a deal on something. I have 3 girls to care for and buying items at a lower price appeals to me.

    6.I would say that product quality is more important than price when it pertains to certain products and services. If the product looks cheap and or poorly put together the low price is not a value to me if I would have to replace it in a month or two.

  4. 1. Yes, I believe it will be accepted because I think most customers believe that even with the increase the service offers more bang for the buck. Most people who sign up for Prime seem to be people that use all of the sevices it offers, making the value still worth it. Price increases are something that happen with time in everything and being this is the first hike in the nine year exsistence, people are more open to it.
    2.I want to say that they will not lower the price because it will open the door to questioning how much the value of the service is really worth to start with. They explained their reasoning and in the end people will still like all the services and conviences it offers more than not having it.
    3.Unfortunately, I don’t shop very often for anything currently but I do love me some Kohl’s. As we have discussed in class the value you get for the price is awesome and the feeling you get when you look at the receipt, like you are the greatest shopper in the world. They literally print the value out in bold letters. What crazy people who shop elsewhere pay, then what you super thrifty shoppers pay.
    4. I think that Kohl’s could fall under cost, competitor, and value based pricing strategy. It is value based because of the great deals offered for the price. Competitor based because they show you before and after purchase how much the original or competitors cost is then what their price is and after the total amount saved.
    5. The majority of my shopping currently is in the grocery store and my preference is almost entirely dependant on the amount of money I have at the moment. I find that when I am broke I tend to go to the everyday low price(or go to work and eat for free) and when I have extra money I tend to go to Giant Eagle and go for the thrill of the deal. Not sure if it makes sense but…
    6.Product is a big one for now unless the point of purchase is cheap. As I have mentioned I am broke all the time now and I would much rather buy something once that will last awhile than something that needs to be replaced constantly. Quality of the product often outweighs price.

  5. 1. I think it depends on the customer. A customer who uses Amazon prime a lot during the year probably wouldn’t mind a price increase, but a customer who only uses the benefits occasionally might not take the price increase well and back out. It all depends on if the value to the customer outweighs the cost.

    2. Although the increase in the cost probably covered the difference for the people they lost, I think that Amazon will eventually drop the price in an effort to reach an equilibrium with their customers. Maybe they should meet in the middle and charge $89, which looks a lot more attractive, to me at least, than $99.

    3. My personal favorite online retailer is Crutchfield electronics. They sell their car audio speakers at very competitive prices, and promote a “DIY” kind of attitude, as opposed to expensive car audio shops that insist that you don’t know what you’re doing and they should do the install for. They also offer free professional support from experts in the field, along with a feature that allows you to ensure the electronics will fit into your specific car.

    4. I think Crutchfield focuses on both competitor based and valued based. They have extremely competitive prices as opposed to electronics stores, and they offer a lot more than just the product you buy when buying from them.

    5. I personally enjoy searching for a deal. For some reason, I get a sense of “accomplishment” after finding a really good price online or in a store, almost like I beat the market.

    6. I think it’s a mix of product and place. When buying new speakers for my car, I have a choice of driving to an audio shop and looking around their limited selection, or I can go on Crutchfield and search through all of their inventory that will specifically fit my car, and they mail it right to me with all of the necessary tools that I need to complete the job.

  6. 1. Yes I think customers will accept Amazons price increase, because it was strategically increased. Personally I don’t use Amazon Prime but as a consumer of goods I know the feeling of paying for a service that I believe is beneficial. Even without all the perks I think Prime is still a good deal if you use Amazon a lot, so a small $20 bump is not that bad, especially since the service was already close to $100. So to answer the question I feel Prime will only lose its most fragile customers, or customers who are in doubt of its value-cost relationship.
    2. No I don’t think Amazon will back down and decrease their costs. Because if does customers will feel like they can manipulate the services and Amazon will not allow that. If anything based on Amazons previous problem solving, I see them adding more consumer value to the Prime service, to ensure customers that they are getting a beneficial service.
    3. A retailer that I like is Nordstrom. They have higher end clothes and shoes, I am not a regular consumer at this store because I don’t personally have the money to afford it all the time. But what Nordstrom does offer is a Nordstrom Rack where you can find the high end products at around the lowest prices available for them. And what it is, is just a bargain because Nordstrom knows people are not always willing to pay that high price for an item. So if that item in particular is not selling it is sent to Nordstrom Rack where someone will pay a more convenient price for it.
    4. Some of my favorite retailers use high/low-pricing strategies. I tend to gravitate towards companies that do this, because a bargain is always available, or I just feel ensured that I am receiving quality. Dollar stores are all for quantity over quality and I hate that idea; I am more of a firm believer in quality. I also am more importantly a believer in value, and my favorite retailers like Urban Outfitters, Nordstrom, and Macys are all companies that give you value. You receive deals and get items that are already superior, so what better feeling than to have superior and value?
    5. As a consumer I value and look more for deals versus everyday low prices because low prices usually means cheapest. Why pay for an item that might need replenishment after a short period of time versus something of quality that may cost more but will last longer and work better, my philosophy.
    6. Product is the most important factor in the marketing mix to me when I make a purchase. This is just based on my values growing up, because my parents always stressed quality to me. I don’t care that I am spending money because chances are that if I am spending money it is for a purpose. Everyone has only one life and with mine I plan on spending money on quality products so I can enjoy them.

  7. 1. I think it will be accepted by Amazon Prime customers because the value really outweighs the cost if Prime is used to its full extent. The free shipping as well as the streaming of music, movies and books makes it a hard deal to beat. the features that come with Prime make it easy to always be connected with your online streaming needs and even though the price jumped $20, I have a hard time believing that many people will back out of a still good deal.

    2. I don’t think that Amazon would lower the price if it is not well received. If anything, I think that they would add some new features to bring in more customers like free overnight shipping once per month or something along those lines. This will not only allow for customers to return to Prime, but would also bring in new customers with their new features.

    3. At H&M their prices are consistently low making their products very valuable. Their quality is fairly good and their clothes are up to date with the current trends.

    4. H&M uses the everyday low pricing strategy. The consistency in pricing makes them very reliable which makes them effective and successful.

    5. As a consumer, I prefer everyday low prices. Knowing what I am getting and that the prices will always be as low as possible pleases me more than waiting for special deals.

    6. Product is the most important part for me. I don’t want to spend money on a product that won’t last or will break fairly quickly. I especially don’t want to spend money on a food product that isn’t of good quality. air something is of really good quality, with good reviews and that I believe will last, I will be more willing to spend the extra money on it.

  8. 1) Not only do I believe that the change will be accepted by amazons customer base, I believe it will go largely unnoticed. The backlash that UBS found was probably just a gut reaction to change. A customer that is upset enough to cancel at a $20 price increase probably isn’t using the service to its full extent.

    2) I don’t believe that there will be enough customer backlash to create a reversal. Especially after they already told customers they were going to have a price increase before implementing it. The board of shareholders would not allow a reversal as well.

    3/4) For shopping, I tend to walk into Express for clothes. Express is definitely a high-low retailer, because I receive emails almost daily on the weekly specials. I believe it’s value is in its quality designs and cloths used.

    5) I’m all in on value. I do not enjoy haggling or dicing for the best price. I have a decent understanding of retail and profits, and I am willing to pay for the best product for any need.

    6) I tend to stick to with the trends and changes in consumer wants that fit my style. If the product is marketed as being sleek and intuitively designed, it usually catches my radar for purchase. I tend to buy specific products, rather that just whatever is on the shelf at the closest store.

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