Last month I read an article, How Amazon’s Pricing Algorithm is Designed to Hurt Consumers, that implied Amazon is not as customer focused as they claim. The article said that the online retailer does not always have the lowest-priced item first in their results list, and therefore is trying to take advantage of their customers. I disagree. What Amazon is doing is aligning their merchandising and pricing strategies. They are trying to sell more products by delighting their customers, and they are trying to make more money in the process. Isn’t that the point of retail?
When you shop in any physical retail store, you can see the merchandising choices the retailer has made. The products that have the most prominent placement, which makes them most likely to be seen, are seldom the least expensive products. In simple terms, they are usually products that either drive more traffic or generate more gross margin per foot of space. The store layout is also designed to encourage customers to spend more. In some cases, that means moving high-demand items to the rear of the store so that customers flow through the aisles and are tempted by other items on the way. It can also mean spreading the most recognized brands widely within a section to encourage more browsing. Rarely does it mean putting the lowest-priced items closest to the doors.
In grocery stores, customers usually pass the produce and prepared foods first, engaging positive feelings from visually appealing displays and pleasant aromas. Research has shown customers spend more when they are hungry (which can be triggered from the nice smells) or enticed by the fresh vibrant colors of fresh produce. The stores do not start customers there because the lowest-priced items are there! In addition, within any aisle in a grocery store, the low-priced and generic brands are not often at eye level. That premium space is usually reserved for the premium brands.
Retail is an inherently low-margin business. (If you doubt it, just look at Amazon’s return on sales.) To survive, retailers use many tools to determine how they can sell more to customers and at higher prices. In recent years, data science has become a much more important part of the retail toolkit. By analyzing how customers make purchase decisions, which factors affect those decisions, and how customer selections affect profitability, retailers can make much more informed and effective merchandising choices. Those choices include having an array of products to serve multiple segments, including the more price-sensitive buyers, and providing a simple path for each segment to find the products they want. Those merchandising choices also mean presenting higher priced, higher value alternatives to customers.
When online retailing started, low prices were one of the primary competitive strategies of online retailers. However, Amazon and other online retailers have learned that customers care about more than just low prices. They value a broad portfolio of products, service, ease of use, and the ability to find what they are looking for. The retailers also understand that product placement in their search results is similar to product placement on physical store shelves. They can and should use a more scientific approach to making those merchandising decisions. The fact that Amazon is using their considerable data science capability to improve their profitability should be expected. After all, they are in business to serve customers and to make money.