For over twenty years Amazon has been losing money on every transaction but winning in volume. The now $100 billion E-commerce giant has eliminated the list price. For individuals not familiar with the marketing and the signaling theory let me explain. Amazon signals to the consumer that the item is on sale because the list price is depicted as what the item should sell for in an ideal market.
Let’s say you need to get a new Iphone 6 case. After a couple minutes
searching on line you spot a Crushed Damson Purple / Pink Otterbox Defender Series 6 case with a list price of $47.76 using Amazon Prime but wait, hold on, just for you …it is now selling for $39.77. You think to yourself hold on I need to logon to my Amazon Prime account right now and capture this deal before it goes away. Deep breath you captured the deal and it will be on your doorstep in a day thanks to Amazon Prime.
So what happened, well your primordial brain sensed prey in the form of a deal, your adrenaline started pumping because you are on a proverbial hunt. This is when your rational brain kicked in asking the question “Hey is this a good deal?” Now your primordial brain trying to appease the rational side of your mind says “ hey dummy chill out we just saved $7.99 from the list price. We got a killer deal! High Fives all around!”
Now is as good a time to bore you with the details of the Signaling Theory.
In the context of marketing the seller has full knowledge of the total cost
of the item, the quality, the breadth of similar items and the market price
that consumers are willing to pay. The consumer meanwhile has few resources to compare the item to and in most cases revert to user reviews that have been cultivated by the merchandiser. Information asymmetry occurs where one side as all the information and the other side has little to none.
Back to the iPhone case, Amazon has all the information of what it costs to
buy the purple Otterbox Defender 6 case from the manufacturer. Amazon has calculated the administrative, holding and shipping costs down to the penny. They have metrics to determine product quality and demand for this and all similar iPhone 6 cases, so they know what is hot and what is not down to the tenth of a percentage point (or more).
But what do you know, well, let’s see you can see the list price and the
quoted price on Amazon’s website. You know that users like the product and that you can get it in 24hours if you buy it now. More importantly, you know that you got a fabulous deal, a savings of $7.99 is real money. But did you save money, well that is another question? It is a relative
question with a nebulous answer. Yes, you saved money from an artificially high list price, remember Amazon and OtterBox are in the business to make money. But did you get a good deal? Well, this is where Signalling theory comes into play because Amazon has signaled that you are getting a great deal, and you have accepted the signal without question.
So why does Amazon want to change business as usual, well to be honest
because we have now been so conditioned to buy almost everything from Amazon that they don’t need to signal that you are getting a good deal anymore? In fact, Amazon has collected so many data points from you that they know what you buy when you buy it, the frequency that you need it, who you are sending it to, what colors you prefer and the urgency in which you need it.
Like Pavlov’s dog, they have you trained and can predict what shipments to direct to their local distribution centers even before you click send on
your order. Because they have taken all the guessing out of this process,
there can fix the price on the optimal value proposition for the consumer
and Amazon. To some, this is a thing of beauty but to some, it is very
scary, almost Orwellian. Rest assured big brother Amazon knows if you have been naughty or nice and will be shipping your Purple iPhone 6 case to you even before you … oh wait the delivery guys here with an Amazon box. I wonder what it is?