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Loss Leading in an eCommerce World

Revenues up by over 20%, stock price increased over 25% over the course of the year and yet… for two of the four quarters of 2013, Amazon posted a loss. Despite what would otherwise be a possibly alarming trend for most companies, analysts have been expecting Amazon to return to profitability and the stock price fell by less than 2%. How can it be that with an increase in sales revenue of over 20%, Amazon managed to operate at a loss? And why would repeated losses like this not have a bigger impact on their stock?

The simple answer boils down to strategy. These recent losses are the result of an intentional loss leading strategy and the market apparently agrees about the potential future value for Amazon – resulting in little to no impact on their stock prices (or even an increase!). Loss leading is a familiar concept to retailers with the goal being to “get them inside” and then shoppers will inevitably buy more than just the loss-leading item that got them there. This concept works for online stores as well although there is increased “risk” for online sellers adopting this tactic. With the ever increasing ease of online shopping, it’s fairly easy for shoppers to log on to one site to buy from the loss leader and then jump to another site to purchase anything else they might be interested in that is more competitively priced elsewhere. An ideal solution for online stores would be to use the loss leader to get shoppers to the site and using a re-pricing solution to ensure that shoppers are not leaving your site for those other items.

Amazon has been investing heavily over the past few years in research and development, with the bulk of their spending devoted to the Kindle that has evolved from an e-reader to a full-fledged tablet. They have essentially turned the entire product line into a loss leader, selling the devices at cost or at an actual loss. While most stores need to be concerned about shoppers possibly only purchasing their loss leader and going elsewhere for other items, Amazon has managed to remove that concern completely. For Amazon the “other items” here are downloads of books and movies for the Kindle. By making their platform (Kindle) widely available at a low cost, they gain tremendous exposure and visibility and by being their own exclusive providers of the content people want to purchase for their Kindles, they are essentially guaranteeing that shoppers will be buying their other items.

There are also reports that Amazon has been developing its own hardware in the form of a set-top device that will compete directly with Apple TV and Roku. If Amazon does introduce this device, it will be the first major company to offer an integrated hardware and video streaming package. The Wall Street Journal confidently predicted this device would be available for this coming holiday shopping season.  This device can go a long way to pushing Amazon back into the black and offer an additional integration opportunity with their Kindle line.

The takeaway from all of this for your own online business (assuming you are not Amazon) lies in loss leading strategically. As a means of getting shoppers to your website, loss leading may prove effective in increasing traffic, but it also runs the risk of shoppers just buying your loss leader and leaving. Using a repricing solution can help keep shoppers there for “other items”, and the final piece of successful loss leading lies in borrowing a page from Amazon’s playbook. Ideally, your loss leader should directly connect to a product or accessories for which you either carry exclusively or can offer exclusive pricing. Use your repricing solution to guarantee that any exclusive pricing actually remains as such and combine these elements to offer a loss leader that will boost your bottom line.

Arie Shpanya

Arie is the former COO, Executive Chairman, and Co-Founder of Wiser, a dynamic pricing and merchandising engine for online retailers and brands. He has extensive experience in business development with a focus on eCommerce (eBay and Amazon), and is a guest blogger on Econsultancy, VentureBeat, and more.

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