Amazon: Signaling You to Buy No Matter What the Price

imgresFor 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.

READ: Amazon Is Quietly Eliminating List Prices

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?

Target’s Target Market, Decided By Kids?

 

Sam Walton once said “There is only one boss.  The customer.  And he (she) can fire everybody in the company from the chairman on down, simply by spending his (her) money somewhere else.
TargetIt is a rough time in the mass merchandiser sector. Consumers are migrating away from brick and mortar stores like Target seeking the efficiency and flexibility that online shopping provides.  Why spend the time schlepping your kids to the mall or shopping center just to shop for school clothes for your children.  Most parents dread fighting traffic, the crowds and adding one more weekend task to their already chaotic life. If your family is kid centric like mine, then you can find a dozen reasons why buying junior’s new shoes online from an online retailer like Amazon or the direct to consumer (DTC) webstore from Nike is appealing.

So why would Target focus on the very reason why I don’t want to go their physical store?  The answer is simple follow the dollars, teen related purchases account for $117.6 billion in US discretional spending.  Target estimates that the youth related purchases account for  $25 billion in high margin annual sales.  Target realizes that getting kids to buy in to the Target brand of hip, funky, cool clothing will provide the

The answer is simple follow the dollars, teen related purchases account for $117.6 billion inTeenage Consumer Spending US discretional spending.  Target estimates that the youth related purchases account for  $25 billion in high margin annual sales.  Target realizes that getting kids to buy in to the Target brand of hip, funky, cool clothing will provide the differentiation from their physical and virtual competition.

So off to Target we go… but wait… how do you get kids to follow the plan? Well, this is where it gets tricky because most 10+ year olds can smell a gimmick 100 yards away.  During the recession Target lost the bubble on what made them special, they began to differentiate with lower prices, which any marketing class student will tell you is an unsustainable strategy.  This was evidenced by their slogan “Expect More. Pay less” however consumers perception of Target indicated that shoppers felt that they were paying more for less.

After years of declining sales Target remembered its secret sauce. To re-capture market share they need to generate sustainable brand differentiation by catering to the wants and desires of their target market (youth).  This is dangerous territory because today’s youth can be fickle if they feel pandered to, Merchandiser’s must genuinely seek out their input and then deliberately integrate preteen and teenager input into their product plan. (kids today are inherently suspicions of institutions) and can be very vocal of their displeasure if they feel slighted.  Based on their focused research they discovered that kids want to be unique but not different.  So how do you walk that fine line.  Easy…. Like Target you have kids draw it.  Currently, Target engages with close to 1,000 kids ages 4-12 nationwide developing one of their signature brands.

Most retailers conduct research on kids.  Target on the other hand integrates kids in the entire process.  Kids are advising the clothing designers, helping produce multimedia ads and informing merchandisers of store physical layouts.  This approach can sometimes become contentious because well this shouldn’t be a news flash but spoiler alert kids and adults don’t always see eye to eye.  So why bother with all this drama? Well Target realized that in order to capture the hearts and minds of the decision making unit they needed to increase the odds.  Kids today have a significant sway in consumer purchasing decisions.

Target experienced a shift in its typical consumer from a boomer mini-driving suburbanite mom to an urban ethnic millennial.   Target’s strategy is to develop products & marketing material that appeals to the parent’s projection of love while still satisfying the youths need to express themselves.  This is a marketing play on Maslow’s hierarchy of needs focusing on the desire for love and belonging.

The school lesson for the day is not to follow the fashionable trend in both business and apparel purchase.  This may seem counterintuitive but is it pure genius when you think about it.  If you spend all of your time chasing the latest management or marketing fad you may miss the big picture strategy of chasing your consumer which in the end is what the retail game is all about. Paraphrasing Sam Walton “your customer will spend their money somewhere else”  if you don’t pay attention to them.  So if your consumer wants to buy online and pick it up in the store give it to them.  If your customer wants a fun shirt that works for both girls and boys then produce it. So what do you want?  Well, if you are like me you want a kid that feels confident in his own skin, one that sticks out from the crowd just enough to be recognized but not bullied and you want value because why should we spend a ton of money on a t-shirt that will get stained or out grown before it goes out of fashion.