Price War

Although I was hesitant at first to write about the current book price war between WalMart/ Target/ Amazon.com due to my own personal history in the book business and my desire to write about more of a variety of topics, I have to admit that such a compelling and interesting story of pricing does not happen terribly often.

Whoever starts a price war better be sure about what they’re doing. This is a strategy that is difficult to get out of once you start it, and only those with strong operations and balance sheets with survive. Usually, the goal is to force others out of the market and gain market share. The problem is that market share does not automatically lead to profitability, which is why this move is often a mistake.

What happens:
Company A lowers prices. Company B needs to compete, so it lowers its prices as well.
Repeat until one company either
• Loses so much money in the price cuts that it can’t stay in the business
• Has to raise prices back up to account for lost profits, and likely loses customers and subsequently withdraws from the business
• Prices remain at the lower price as the new market standard, forcing out any companies who can’t sustain it and making it more difficult for new companies to enter the market.
If the price war ends and the “losers” are forced out, the “winners” can then raise prices again, sometimes to an even higher level than before, depending on who is left in the market.

Illustration—the “Prisoner’s Dilemma”

Neither company wants to be the first to climb out of the hole because they would lose (by falling into quadrant II or III). Both companies have to come out at the same time to get back to quadrant I, and they can’t legally communicate with each other directly on their pricing, so no one wants to budge, and they both end up losing (staying in quadrant IV).

Market competition is healthy—it forces companies to find the best ways to meet consumer needs to compete for their business. And usually, since for-profit companies are interested in making money, they would be interested in finding the appropriate price that would meet demand and consumer willingness-to-pay, which would be comfortably high enough to make money and low enough to draw consumers. However, before the average consumer gets too excited about falling prices on their favorite products, there are several things to consider:

Why a price war is bad
1. Once companies get involved with a price war, it’s difficult to get out of it. If it withdraws and raises prices back up, it loses business to the company that still has the lower prices. If it stays in, however, it could potentially lose a lot of money with cut prices that often go below costs and has to hope it is the stronger company to win the war.
2. Usually the price war affects a lot more down the supply chain than Joe Consumer realizes. In the case of the book price war, publishers and even authors get less money because there is a smaller pie to pass out. This might mean that some publishers may go out of business, and some authors may not be able to write as much and need to find other income sources. Because of reduced funding, other activities such as book tours may be reduced or eliminated.

The Book Price War
In the case of the current book price war, it is difficult to say what exactly will happen. The major players involved did so to try to lure in customers to the rest of their products, and used books as a sacrificial lamb. They are most likely losing money on the lower-priced books, but hope that interested customers will make up the difference in purchasing other products. That means that—you guessed it—prices are likely a bit higher on those other products, or at least their profits are a bit larger. Since the selection of books at WalMart and Target is lower than at major booksellers like B&N and Borders, the large chains will probably take a hit, but not be forced out of business (although those reduced-price blockbusters do bring in a big chunk of the business). Small booksellers will have a harder time holding steady, though, because they usually can’t cut prices as much and are already at a disadvantage in selection. Amazon.com has the advantage of the broad selection as well as the ability to cut prices in a sacrificial category, so I predict that they will come out on top, however it plays out.
Predicted winner: Amazon.com

Further Reading

Recent news story on what's happening in the book price war

Another blog take on what will happen in the book price war

Brand Associations

Basic Branding

When we make a choice at a store about what to buy, there is usually a lot more at play in our minds than even we realize. Celebrity perfumes are generally successful not because they necessarily smell better or because the celebrities who make them are particularly good at creating perfume. But simply having that celebrity associated with the perfume gives that fragrance an image—of status, of coolness, of luxury, or some other such impression that is related to that celebrity. And if consumers relate to that image or aspire to make it part of their lives, they are more likely to buy it. The same goes for all images that appear in any advertisements—they are not there just to look pretty or appealing to the senses. They also appeal to something deep within the type of customer the company is targeting—a feeling, a personal value, a wish or aspiration, or a lifestyle.

Psychology

While some of us would like to think we are immune to the influence popular culture or advertisements have on our decision-making skills as consumers, marketing in this way really is based on the psychology of how we process information. The truth is that we make hundreds of decisions every day, small and large, and are bombarded with information everywhere that has some say in how we should make our decisions, whether it is values that we hold within ourselves or our family, influence from friends or co-workers, messages from the media, advertisements, the news, or the internet. When you walk into the aisle in the supermarket for laundry detergent, you are presented with dozens of options for detergent, sometimes at different prices, sometimes not, and all with different colors and claims on the packaging. How will you decide what to buy? We all try different routes—some rely solely on products they have used in the past or recommendations from others, some just choose the cheapest product no matter what. But for many of us, when there are so many important decisions to make in life, we often look for “shortcuts,” or assistance in making decisions so that we can more easily process all the information we have gathered. What branding does is create an easy reminder for what a product stands for so that we can instantly think of it when we see that product in the store, hopefully making our decision easier. The stronger and more positive that association is, the more often we will buy it over something else that has no association at all, even if the products themselves are very comparable.

Benefits of Association

Creating a brand image is not easy, cheap, or quick, unfortunately. Companies like Coca-Cola have spent a lot of money over a lot of years to become arguably the most recognizable brand in the world, through many avenues (advertising, distribution, sponsorships, endorsements, etc.). This becomes a real challenge for small or startup businesses to compete in the marketplace. But even though building a brand is no small task, small companies can make a big leap of progress in developing an image for themselves by branding by association. By simply building a relationship with another company (or public figure or non-profit organization, etc.), a company can quickly tell the general consumer what that company stands for. And often times if you can find a company or person who can also benefit from the relationship, the partnership can cut down on costs and both parties win.

Example Ads

A great example of brand associations is advertising from Gap. Gap positions itself as a retailer that sells great quality basics, and is known for t-shirts and jeans. Yet in its advertising, it often features very simple photographs of different celebrities wearing Gap clothes, personalized in their own style. The ads feature a wide variety of celebrities with very different styles, showing that with Gap's clothing, anyone can take basics and work them into their own style. Shown here are Will Arnett and Amy Poehler from a 2007 print ad.

Another example is shown here, in a video ad for the American Cancer Society, featuring John Wayne. This association is one of ultimate "coolness and masculinity," suggesting that one should not feel less cool or manly for getting a cancer screening or checkup, or for giving up smoking. This is most likely based on research that people may not be getting screenings because they feel too embarrassed (although I can't confirm that). Ironically, John Wayne did commercials for cigarette companies like Camel in the 50s, and is well-known for his many years of smoking and his battle with lung cancer. This makes his message for the American Cancer Society even more influential.

Further Reading:
Colored by the Company You Keep (Kellogg School of Business Article)
Building a Better Brand (Chicago Booth School of Business Article)

Introduction

I would like to welcome you to reading my latest professional venture—a blog where I can ponder all things marketing. My interests in marketing are vast, so I plan to cover all kinds of topics:


• basic marketing elements
• analyzing modern advertisement
• reviewing market research methods
• offering thoughts on current marketing trends
• consumer psychology
• etc.

Also, because I am interested in other business issues, I expect I will occasionally deviate from core marketing topics to discuss other business-related topics that a good marketer might be concerned with:

• leadership
• staff incentives and productivity
• the green movement/sustainable businesses
• reflecting on modern business trends or strategies
• discussing what’s “in the news” in business
• etc.

My goal for this blog is to discuss marketing topics in a practical way. I believe marketing to be part science and part gut instinct, so I think a blend of the two is the best way to approach a blog like this. Therefore, I plan to conduct some baseline research where necessary, and add in my thoughts on the issues based on my own knowledge and experience.

I won’t go into a lot of detail about who I am or my credentials; you can read about those things in my profile if you would like. But I hope that my posts will open up a discussion with people of all sorts—the beauty of marketing is that it is all about serving the consumer, and we are all consumers. Consumers may not know how a product gets from the factory to their local stores or how they got on certain mailing lists to receive certain catalogues, but they make choices every day about what products to buy and how they will manage their homes, and are constantly faced with marketing messages everywhere they look. Marketing affects us all no matter what we do for a living. Therefore, I hope that what I write about will be of interest to everyone from those deeply involved in marketing to those who know nothing about it.