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June 11, 2012

Emmett Dulaney: Price is the most flexible variable

ANDERSON, Ind. — A funny thing happened on the way to purchasing a book from Amazon.com — the price changed. Forty-two times within a 30-day period.

The book in question was “A+ Guide to Managing and Maintaining Your PC” by Jean Andrews (ISBN: 978-1435-49778-8). I happened by chance to notice in February that the price was fluctuating a bit. This struck me as peculiar for a technology book published in December of 2009 about a set of two IT exams that are scheduled to retire this year. A new set of A+ exams from CompTIA — and a new book on them from Andrews — is scheduled for release later this year, and any promotion being conducted would be geared toward the new publication and not the old. It was then that I started monitoring this title, and 11 more on the same set of exams, to see if my observation would amount to anything more than just anecdotal.

Of the 12 titles monitored for the one-month time period (a total of 245 observations), 10 of them changed price but none more than “A+ Guide to Managing and Maintaining Your PC.” Not only did the price change 42 times, but there were a total of 22 unique prices given to it. With a list price of $105.95, an Amazon customer could have paid as little as $71.27, or as much as $82.42.

Why did Amazon change the price on this book so much? The simple answer is because they can. Of all the variables associated with any product, the easiest to change is the price (think of how many times the price changes on a gallon of gasoline during this same time period). Every price change sets off a series of events — one of which is that every customer who had placed a copy of the book in their shopping cart and not completed the order received a message each time telling them that the book was going up/down and giving them another opportunity to complete their order.

Economics states that if the product in question is a normal good, then when the price goes up, Amazon should sell fewer copies. Conversely, when the price goes down, they should sell more. While Amazon does not publish the actual number of copies sold (proprietary information that a customer need not see), they do rank everything they sell. It is possible to take the rank numbers at every observation point for the 12 titles on the same topic and compare them to create an ordered list for those books only. By factoring in the price changes — ceteris paribus — it can be ascertained whether the title moves within the ranking order more than it normally would otherwise through the use of regression.

In this case, the changing in price was found to be statistically significant in the bouncing of the “Managing and Maintaining” book from 2nd to 9th in ranking among the 12 titles. Armed with this kind of real-world price testing, Amazon can better tweak prices to meet the demands of the market, and this is something we should expect to see more of in the future.

Columns from the Falls School of Business at Anderson University appear Tuesdays in The Herald Bulletin. This week’s columnist, Emmett Dulaney, teaches marketing and entrepreneurship.

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