The Price Cut in amazon.com: Was this a good idea? What was its intent and did it work??

Price cuts are market strategies that companies introduce when they enter into competition. Barnes and Noble’s and Amazon.com’s case was no different. As seen from the case study, Barnes and Noble introduced deep discounts of 30% on hard-covers and 20% on paperbacks, same as that of Amazon.com, to pose direct threat to online sales. Responding to this, Amazon.com introduced price cuts of up to 40% on future best sellers and on selected titles. Applying these figures, from Exhibit 5, a best seller in Barnes and Noble was priced at $21.41 while it was only $18.92 in Amazon.com. The intent of introducing price cuts in both the cases was to pose threat to each other by increasing customer base and sales.

We can easily derive at whether this was a good idea or not, from thier financials. For Barnes and Noble, the market valuation did a positive climb after mid May 1997, when it launched the deep discounts. Whereas for Amazon.com, it can be seen that there was a fall in the same during the mid of May 1997. even though it introduced more discounts. The reason for this fall in market valuation can be explained from Exhibit 7 which shows negative ratios of Operating costs and Net Income (huge values during 1997) that slowly break even by 1999 (1.58 and 2.0 respectively). So, from the above analysis, Price cut was successful in the case Barnes and Noble’s to increase its market valuation, whereas it turned out to be not so beneficial for Amazon since the huge price cuts and increased Operating costs did not break even. It was a good idea for both the companies as far as remaining competitive. Yes, it worked for Barnes and Noble, where as it turned out to be a financial burden for Amazon.com.