Why it Matters
Overview
Teacher resources for Unit 11 can be found on the next page.
Provided by: Lumen Learning. License: CC BY: Attribution
Why It Matters: Pricing Strategies
Resources for Module 11: Pricing Strategies
Slide Deck - Unit 11: Pricing Strategies
Unit 11: “Simulation: Demand for Food Trucks”
Discussion Assignments and Alignment: Pricing Strategy
Pacing
The Principles of Marketing textbook contains sixteen units—roughly one unit per week for a 16-week semester. If you need to modify the pace and cover the material more quickly, the following units work well together:
- Unit 1: What Is Marketing? and Unit 2: Marketing Function. Both are lighter, introductory units.
- Unit 15: Global Marketing and Unit 16: Marketing Plan. Unit 16 has more course review and synthesis information than new material per se.
- Unit 5: Ethics can be combined with any unit. You can also move it around without losing anything.
- Unit 8: Positioning and Unit 9: Branding. Companion modules that can be covered in a single week.
- Unit 6: Marketing Information & Research and Unit 7: Consumer Behavior. Companion units that can be covered in a single week.
We recommend NOT doubling up the following units, because they are long and especially challenging. Students will need more time for mastery and completion of assignments.
- Unit 4: Marketing Strategy
- Unit 10: Product Marketing
- Unit 13: Promotion: Integrated Marketing Communication
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Learning Outcomes
- Discuss how price affects the value of the organization’s products or services
- Explain the primary factors to consider in pricing
- Compare common pricing strategies
- Explain price elasticity and how it can be used to set price
- Explain the use of competitive bidding for B2B pricing
Why use pricing strategies to enhance marketing of products and services?
When Amazon.com was created in 1994, the company sold books online. While many viewed it as a real threat to traditional bookstores, few, other than its founder and CEO, Jeff Bezos, imagined what the company would become. Today the services that Amazon offers are extensive, and many of them center on a quiet service membership called Amazon Prime. The following video shows the impact of this offering on one American family.
You can view the transcript for “Amazon Prime” (opens in new window).
What is Amazon Prime? When Amazon launched the product in 2005, it included free two-day shipping for most orders, and it was priced as an annual $79 membership fee. At the time, analysts wondered how Amazon could justify the value to customers (implying that it was too expensive) and, at the same time, how it could afford to keep offering the service if demand should grow (implying that it was too cheap to cover costs).
Greg Greeley, the vice president of Amazon Prime Global, reflected on the company’s decision and told the Washington Post,
We have always thought of it as the best bargain in shopping—Jeff [Bezos] went on record again saying that—in 2005 when we launched it with unlimited two-day shipping on 1 million items. But we did not think of it as a shipping program, but as a convenience program.
Prime introduced three concepts. It had two-day shipping at a time when people expected to pay for shipping and still not get their items for four to seven business days. It was very predictable: We put it on the Web site that if you ordered in the next 3 hours and 20 min., for example, you could have it in two days. And it was an unlimited, single membership fee that made fast delivery an everyday experience instead of an occasional indulgence.1
Was the initial $79 price too low? Too high? Does it really matter that much?
After 2005, Amazon began adding services to the Prime membership without raising the price. Today the service includes unlimited video streaming, unlimited music streaming, $5.99 flat-fee shipping on discounted household items, access to a Kindle lending library and a host of others services. In spite of increased services, Amazon held pricing flat at $79 per year. In 2013, Amazon admitted that by simply adjusting the 2005 price for inflation, transportation, and fuel costs, the price would be more than $100 today.
Finally, in January 2014 Amazon told its customers to expect a price increase of $40 for Amazon Prime memberships, which would make the new price $119. In March 2014, the company announced the actual price increase: a $20 increase, or annual price of $99. While there were some disgruntled customers, the majority accepted the increase without complaint.
While Amazon doesn’t share its usage or financial data for Amazon Prime, analysts have completed customer surveys, analyzed Internet traffic, and reviewed enough detailed financial data to support the following:
- Amazon loses at least $1 billion annually on Prime-related shipping expenses
- Amazon spent $1.3 billion into Prime Instant Video in 2014, over and above the shipping costs
- Amazon Prime has between 40 and 50 million subscribers
- Prime members spend an average of $538 annually with Amazon, far more than the $320 by non-Prime members2
Is it strategic genius or terrible folly for Amazon to lose billions of dollars a year on Amazon Prime on account of its pricing? Is Amazon actually losing money on Prime, or is Prime bringing in enough other sales to cover its costs . . . and more?
Choosing a price is as easy as picking a random number. As you’ll discover in this module, however, finding the right price to achieve company objectives and provide sustained value to customers is much more complicated.
- https://www.washingtonpost.com/news/the-switch/wp/2015/02/03/what-amazons-learned-from-a-decade-of-prime/
- http://fortune.com/2015/02/03/inside-amazon-prime/
Licenses and Attributions
CC licensed content, Original
- Why It Matters: Pricing Strategies. Provided by: Lumen Learning. License: CC BY: Attribution
CC licensed content, Shared previously
- Amazon Prime. Provided by: BBC. Located at: https://youtu.be/bh5nT_dqN4Q. License: CC BY-NC-ND: Attribution-NonCommercial-NoDerivatives