Impact Pricing Blog

Lessons from Amazon’s Nessie

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“Amazon Used Secret ‘Project Nessie’ Algorithm to Raise Prices,” blares a Wall Street Journal Headline.  Of course, I had to read it. 

The implication in the headline and the article is that Amazon is evil.  After all, who wants higher prices?  Well, you do for your products.  The article says this project was discontinued because it didn’t work, but it also says Amazon made an extra $1B because of it.  I hope all of your projects don’t work with the same results.  

Project Nessie was a pricing algorithm that increased prices and watched how competitors responded.  If competitors raised their prices, Amazon left the price high.  If competitors didn’t, they brought the price back down.  

This is EXACTLY what all competitive businesses should do, with or without a software algorithm.

Amazon claimed they did this because prices were artificially lowered.  One competitor lowered their prices for a promotion, Amazon followed, and the prices were now stuck at this lower level.  Nessie was designed to get the prices back up to “normal.”  

You can do this even if your prices are at “normal” levels.  Raise your prices.  Watch your competitors.  If they follow, smile all the way to the bank.  If they don’t follow, bring your prices back down.  It’s very possible that your competitors are currently trying to figure out how to raise prices but are afraid to, just like you.  

As a business, your job is to offer products at prices that buyers are willing to pay.  You can’t force someone to buy.  If they think your price is too high, they won’t buy.  If your price is too low, they get consumer surplus.  There is no one right price.  The market ensures that all transactions happen between the seller’s willingness to accept and the buyer’s willingness to pay.  

As a business, it is OK to try to deliver great value and to try to get paid higher prices.  Testing your competition is one strategy you should use.  

What do you think when you wear your business hat?  How about when you wear your consumer hat?  

Share your comments on the LinkedIn post.

Now, go make an impact!

Tags: amazon, pricing skills, value

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