Jeff Bezos is well on his way to be the richest man in history, and by a wide margin. His final fortune will make Bill Gates, the former long-running richest man in the world look like just another billionaire. Bezos is extremely skilled with computers, and fighting his Amazon company is a formidable challenge, but one that any company selling similar products in the marketplace has to face. Amazon has terrific customer service, a fabulous logistics team, and a great reputation. But is their pricing advantage that built the company.
In my case I was helping out a friend who had a packaged software company, who sold products on his website, but also had an affiliate store in Amazon. He had a few hundred shrink-wrap kids educational computer games. These products sold from $10 to $40 each, and the problem he faced was that although he ran a tight ship with family doing the work, Amazon was undercutting his pricing slightly, and when you did a search, Amazon was one cent cheaper than his pricing and given the two vendors are selling exactly the same thing, the consumers in a very rational behavior pattern, selected the cheapest product, and Amazon was getting most of the business.
After some quick analysis, i realized that he was competing against a computer algorithm, not a human strategist who varies his attack pattern. I wrote a program that scanned the pricing on Amazon’s store, and then automatically in a little Python script adjusted his prices so that they were 1 cent lower than Amazon. He runs this every day, and at night Amazon adjusts their prices one cent lower again. So he runs the program every day, and thus it alternates who has the lower price, but he is beating them because Amazon is only adjusting once per day at a fixed time. The price battle continues, with Amazon and him dropping a penny at a time, until it reaches some magical threshold below the wholesale cost of the item, in the Amazon computer whereby amazon doesn’t want to lose any more money, and Amazon sets the price back $39.95. At which case my little program set his price to $39.94 and the battle starts over again.
Most of the time the product is above wholesale pricing, and he is beating amazon, but always on a treadmill of running the script so that he stays ahead of them. Amazon is a fairly simple system, and the concept of holding 100% markup retail pricing for ordinary products is a vanished thing. Sure, in luxury goods like those sold by LVMH (owned by the richest man in France) they can control the retailers and prevent any discounting, but for the vast majority of products, every retailer is going to have to do battle with Amazon.
Amazon is a tough competitor, and its computer is not afraid to go below cost for a spell in order to get you to quit, but its internal algorithm is more attuned to making a profit than crushing all the other retailers, so it is possible to fight them to a draw. Amazon destroyed book retailers through a scheme where they discounted the bestsellers, because their statistical analysis showed that the heavy readers (the 20%) were the people who kept bookstores alive. So he wiped out the bookstores’ air supply by eliminating that crucial income component, which he could subsidize with higher prices on lower selling books. The other thing he did which the government should never have allowed was he bought the main book distribution company in the USA, Baker and Taylor, and once he had control of the wholesaler he put the squeeze on the stores by lowering their basic profit margin. That should never have been allowed by the government. The destruction of bookstores was quite an evil for the USA, because book culture is what built up the USA in the first place.
I hope this inspires more script writers to help the independent merchants who have to deal with this tough algorithmic selling system of Amazon. Since Amazon sells millions of products, unless you are in an area targeted for destruction (like computer hosting, Bezos’ second multi-billion dollar business), you don’t have fight an opponent who has any imagination. The Amazon computer does the same thing all the time, and it has been shown with chess computers that if you repeat yourself too regularly it is a weakness.