Price wars typically hurt the retailers involved, and often times their suppliers, especially if the cost cutting is shared by the two parties. The Amazon and Wal-Mart recent decision to deeply discount a key group of titles just seems like a race to the bottom. What are they really trying to achieve with this? The suggestion in the New Yorker article is that deeply discounting a select group of things brings people to the store, and then you can sell them more stuff once they’re there. This has been the Wal-Mart model for years. Appear to be “the lowest price is the law” (on a lot of things) and you get people there for the discount, but once they’re there, they aren’t going to price compare, they’ll just purchase the non-discounted products as well.
What the two companies appear to be fighting over is a selection of bestsellers, but James Surowiecki argues that it’s really customers.
Quote: So you might wonder why Wal-Mart recently decided to start its own price war, taking on Amazon in the online book market. Wal-Mart began by marking down the prices of ten best-sellers, including the new Stephen King and the upcoming Sarah Palin, to ten bucks. When Amazon, predictably, matched that price, Wal-Mart went to nine dollars, and, when Amazon matched again, Wal-Mart went to $8.99, at which point Amazon rested. (Target, too, jumped in, leading Wal-Mart to drop to $8.98.) Since wholesale book prices are traditionally around fifty per cent off the cover price, and these books are now marked down sixty per cent or more, Amazon and Wal-Mart are surely losing money every time they sell one of the discounted titles. The more they sell, the less they make. That doesn’t sound like good business.
Not good business, if you’re involved in selling books and you’re not Amazon or Wal-Mart. For the two behemoths, they’re only taking a hit on about 10 titles and the impact on revenue is minimal, if they can bring in other sales. The price war is also worth the publicity. Wal-Mart certainly wasn’t top of mind yesterday but I’m thinking about them today. (Nasty thoughts, but thoughts nonetheless.)