An Example of Why Pricing Decisions Are Tough

Amazon.com to Capitulate to Macmillan Price Demand (USA Today)

Ebook PricingSetting price is one of the trickiest of all marketing decisions.  Marketers have to take into consideration many factors when coming up with the right price.  Some of these factors they control, such as product costs (e.g., product development, promotion, etc.), which the marketer knows must be covered.  But other factors the marketer does not control and these are the ones that drive marketers crazy.  For instance, what customers expect to pay and how competitors will respond are important considerations impacting pricing strategy.  But for retailers there is another factor that can often override all other issues, namely what do the suppliers want you to charge for their products.

As we discuss in our Pricing tutorial, suppliers have an important stake in the price a product is sold for at the retail level.  Unfortunately, for many suppliers when they are dealing with major retailers (e.g., Wal-Mart), it is often a take-it-or-leave-it situation when it comes to what the retailer charges.  That is, either the supplier accepts the price and the retail distribution that comes with it, or they reject the price and lose distribution.  Of course, for most suppliers that deal with a market dominating retailer like Wal-Mart it is hard not to accept the retail price.

But Wal-Mart is not the only major retailer that controls price.  While Wal-Mart dominates the offline retail world, Amazon holds that crown in online retailing.  Which makes this story very interesting.  Here is a case where a book supplier, Macmillan, had little choice but to accept Amazon’s pricing approach to ebooks when Amazon first entered this market a few years ago.  Amazon’s approach was to sell most digital books for cheap, only $9.99.  Macmillan claims they never liked this deal but felt they had little choice but to accept this pricing given that Amazon was the only major ebook distributor.  But now Apple has announced entry into the ebook market with its iPad and is willing to charge a higher price and give publishers a bigger cut of the revenue.  This appears to give Macmillian more bargaining power with Amazon resulting in a change in Amazon’s retail pricing of Macmillan ebooks.

Watch for other publishers to follow Macmillan’s lead in requesting that Amazon raise prices.

Amazon told customers in a posting on its online Kindle Forum Sunday that it “expressed our strong disagreement” with Macmillan’s determination to charge higher prices. Under Macmillan’s model, to be put in place in March, e-books will be priced from $12.99 to $14.99 when first released and prices will change over time.

Why would Amazon pursue a low-price pricing strategy when it launched its ebook sales when they essentially had the market to themselves and could have charged significantly higher prices?

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