Business strategy case study Background You are being asked to refine the pricin
ID: 410001 • Letter: B
Question
Business strategy case study
Background
You are being asked to refine the pricing strategy for Zappos to drive 10% year-over-year growth for the upcoming summer season while maintaining current profit margins. Assume we are selling about 500 different brands across 10 different product categories (shoes, clothing, bags, accessories etc.) on Zappos. For most brands and categories sales follow a seasonal pattern, meaning demand for spring/summer will ramp up in March, culminating in April and May, and then trailing off over the summer holidays. Various holidays present an opportunity for marketing, as they typically see increased demand. The season ends around Labor Day and back-to-school sales, which is also when fall/winter product starts to sell.
Zappos’ customers roughly fall into these segments:
· Premium:
o Avg. Income over 200k
o Ages 45-65
o Average household of 4 people
o Don’t like crowded places
o Most profitable
o Most loyal visitors; premium customers visit Zappos 1 out of every 5 times they sign onto the internet
o Costly to acquire
o Average order value: $181
o Average order size: 3 items
o Favorite brands: Patagonia, Breville, Marc Jacobs, Stuart Weitzman, Theory, Dansko, Mephisto, Salvatore Ferragamo
· Young Professionals:
o Avg. income between $55k and $75K
o Ages 26-34
o Average household of 2 people
o Mostly located in urban areas
o Have a tough time balancing work/life
o Come to the site the least
o Not costly to acquire, but hard to keep their loyalty
o Average order value: $74
o Average order size: 1 item
o Favorite brands: Calvin Klein, AK Anne Klein, Levi’s, Cole Haan, Rockport, Samsonite, Nike, Dooney and Bourke
· Off Price:
o Avg. Income between $55k and $60K
o Ages 18 – 40
o Average household of 3 people
o Very savvy with online shopping; willing to price compare to brick and mortar
o spend the most time on the site
o “coin operated” – if you get word of good offer out to them they will at least check out the site
o Average order value: $48
o Average order size of 5 items
o Favorite brands: The North Face, Nike, Oakley, Rockport, Ugg, DKNY
· Families:
o Avg. income between $75k and $125k
o Ages 35 – 55
o Average household of 5 people
o Very busy with family life – spend the least amount of time on the site
o Average order value: $45
o Average order size: 2 items
o Least profitable due to high return rate
o Favorite brands: adidas kids, DC, Hurley, Babyjogger, Cuisinart, Omega, Oxo
Questions
What would be your plan to maximize sales given certain profitability margins for each segment and across all segments? Your levers are prices/discounts, a loyalty program, coupons and other incentives, promoting specific products on the site, direct marketing and online product ads. Assume that besides having access to customers’ order data, you can also obtain information on how customers shop the site (web logs) as well as how customers get to the site. You also have access to competitive data and have an idea which of your products are also carried by other retailers (though not the other way around) and at which prices. That data is not complete or current to the minute, but can be used for directional decisions. If you think you are missing certain assumptions or facts, feel free to make your own assumptions and state them in your answers.
1) What would be your pricing strategy for each segment? Considering the interplay with the other marketing levers you have available and make assumptions about or state how you would use them. Additionally, consider the change in demand over the course of the season.
2) Assuming no budget or resource constraints, what data would you want to obtain about Zappos’ customers to craft an even better pricing strategy? Explain how you would use the data to inform pricing decisions.
3) Outline for one of the segments an optimization model that considers all marketing mix factors. Be as specific as possible. What additional information would you need? Make reasonable assumptions for the missing pieces of information and provide the source of your information, as you incorporate the assumptions in your model.
4) How does your pricing strategy impact the financial metrics a retailer will be concerned about? What aspects of your pricing strategy may lead to trade-offs between the short term and long term financial health of the business?
Additional information
Additional information on the competitors and competitive data, as well as shopping patterns of customers, can be accessed through search engines and Web logs.
COMPANY OVERVIEW
Zappos.com, a subsidiary of Amazon.com, is an online retailer of apparel, footwear, handbags, watches, sunglasses and accessories. The company product categories also include eyewear, housewares, jewelry, sporting goods, watches and gifts. The company primarily operates in the US, where it is headquartered in Las Vegas, Nevada.
As a subsidiary of Amazon.com, Zappos.com is not obliged to release its financials.
MAJOR PRODUCTS & SERVICES
Zappos.com, a subsidiary of Amazon.com, is an online retailer of apparel, footwear, handbags, watches, sunglasses and accessories. The company's key products include the following:
Accessories, Baby shop, Bags and handbags, Beauty products, Clothing, Eyewear, Gifts Housewares, Jewelry, Shoes, Sporting goods, Watches.
TOP COMPETITORS
The following companies are the major competitors of Zappos.com, Inc.
Boot Barn Holdings Inc. ; Foot Locker, Inc.; J. C. Penney Company, Inc.
Customer experiences
https://www.forbes.com/sites/advisor/2013/05/13/what-zappos-taught-us-about-creating-the-ultimate-client-experience/#4b1c98e220fb
https://www.owler.com/iaApp/124589/zappos-competitors?onBoardingComplete=true
Explanation / Answer
Pricing strategy: It is the strategy which helps to price a product. A product can be priced under the following categories:
Penetration price: Under this criterion marketers price the products at a low value to attract maximum customers.
Premium pricing: this pricing strategy is used to attract elite class people.
Discount pricing: Discount is provided on the product in this technique. The discount can be given in two ways. One way is to reduce the final price and the other way is to increase the quantity offered.
Marketers use the appropriate pricing strategy based on the products performance in the market.
1.
In this case the following strategy should be used for each segment:
For premium segment:
Premium pricing should be used. It is because they do not like to visit crowded places. Also, their income is very high and order size is very considerable.
Since they are most loyal visitors they can also be provided certain discounts on their purchases.
Young professionals:
They use the site least of all the other categories. So, a penetration pricing will serve the purpose.
Off price:
They spend most of the time online. Thus, it is sure that they will be attracted towards any site which provides better discounts. So, using a discount pricing will help to serve the purpose.
Families:
Families possess high return rate. Therefore, the need to make them loyal is very acute. Order value is also less. A high revenue can be made by attracting them for more frequent visits. A more frequent shopping will lead the company to achieve economies of scale. This can be done by providing discounts. Thus, the strategy suggested is discount pricing.
Considering the change in demand over different season, the best profit can be made by using the seasonal pricing strategy. The seasonal pricing strategy refers to increasing or decreasing the cost of the products as per the demand.
2.
The demand of any product is very helpful in determining the price of any product. For example, a product which is in high demand can be priced high or medium range but a product which is not very popular needs to be sold at low prices so that the breakeven is achieved and a little profit are also made. Thus, if there would be no budget constraint, I would like to obtain the data regarding consumer demand to make better pricing strategy.
3.
The marketing mix consists of four major factors which are mentioned below:
Product: Offerings by a company
Price: Cost at which the product is being sold
Place: Places where the product is being offered to the public.
Promotion: Promotion strategies used by the organization to attract public.
Optimization model for Premium category:
Products:
It would be effective for the company to offer their favorite brands that are especially mentioned in the case (Patagonia, Breville, Marc Jacobs, Stuart Weitzman, Theory, Dansko, Mephisto, Salvatore Ferragamo).
Price:
Since the purchasing people are elite class they can be charged a little higher than the usual prices. However, the price of product should not be very high, the extra charge that can be levied is for the services provided to these people.
Place:
The firm should try to make the products available at every such place which is visited by the elite class people very often. Some of the places can be sport clubs, high end showrooms, shopping malls, and online stores.
Promotion:
The places where the promotion should be done to attract elite class people are online mediums, shopping centers, red lights etc.
4.
A retailer is most concerned about his profits. The pricing strategy will thus, either give him a room for earning more or will eat up the scope of having nominal profits also.
This is because if the pricing strategy is leading to soaring prices, people will get attracted towards the retailers who are providing low price products.
The fact that the prices are kept high will result in the lowering of the number of customers. This will ultimately lower down the profits. Also, it may happen that the firm is not even able to achieve break even. Thus, a firm should very carefully fix prices for their offerings.
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