Next, we look at a second major marketing mix tool—pricing. If effective product development, promotion, and distribution sow the seeds of business success, effective pricing is the harvest. Firms successful at creating customer value with the other marketing mix activities must still capture some of this value in the prices they earn. Yet, despite its importance, many firms do not handle pricing well. In this chapter, we'll look at internal and external considerations that affect pricing decisions and examine general pricing approaches. In the next chapter, we dig into pricing strategies.
The Harry Potter phenomenon has swept the world, but in Britain it has brought a vicious price war between supermarkets and other retailers, with the author and the publisher unable to influence or stop the fighting. Hundreds of thousands of copies of the' last of the Harry Potter series were discounted to draw customers in as loss leaders. Among the big hitters in the war was Wal-Mart's and the ASDA supermarket chain.
In July 2007, some half a million fans of Harry Potter faced disappointment if they expected to pick up a cut price, hardcover copy of the final episode in the series by J.K. Rowling. That is, if the buyers headed for Wal-Mart-owned ASDA in Britain.
The publisher of the series, Bloomsbury, cancelled the supermarket's order for 500,000 copies in a dispute over money even though tens of thousands of buyers had already ordered copies from ASDA. In response, ASDA accused the publisher of profiteering by pushing up the recommended retail price of the book to £17.99. The dispute also came at a time when smaller bookshops discovered that they would make a better profit and would be able to compete more easily with bigger stores by buying the books from them rather than wholesalers. Tesco and other supermarket giants would be offering the title not at £17.99, but at £7.99. The best price from a wholesaler for a smaller book retailer would be £9.89.
ASDA, among others, noted that progressively, Bloomsbury had increased the price of each successive book in the series. The first book in the series, Harry Potter and the Philosopher's Stone, had retailed at £11.99; the sixth book in the series, Harry Potter and the Half-Blood Prince, had swelled to £16.99. ASDA claimed that Bloomsbury had cancelled the order because it had intended to sell Harry Potter and the Deathly Hallows for £8.87; the publisher claimed the order had been cancelled because ASDA owed them money.
Minna Fry, Bloomsbury's marketing director said of the cancellation, "It's to do with the fact that they owe us money and haven't settled their bills. It has been going on a while, going on for weeks actually, and we always said we wouldn't provide them with the books until that was sorted out. And that's what's happening."
A day later on July 18, the story changed. ASDA climbed down and apologized for claiming that Bloomsbury was profiteering.
They withdrew their press release of July 15 and hoped that this would mend the broken bridges with Bloomsbury.
Bloomsbury was quick to grab the olive branch and the mammoth order went through. The Harry Potter price war was on and by July 20 the supermarket chain Morrisons was offering the book for £4.99. It had chosen this price point because it undercut ASDA by lp. Morrisons would restrict buyers to one copy of the book each and ASDA to two copies per customer. Tesco adopted a different approach by selling the book for £5 to those customers who spent at least £50 on other products, and £10 to all others. Amazon.com's global advanced sales were 2.2 million (some 47 percent higher than the last Harry Potter book). At its peak in the first week of sales of the new book, Amazon.com was selling a copy every 4 seconds.
Despite the price war, there were sales for everyone. The last installment of the Harry Potter series became the fastest selling book ever. In the first two
Although ASDA captured an enormous market share of the Harry Potter books, it was in fact losing money on every copy sold, which amounted to a loss of millions of dollars on its initial order of 500,000 copies of the book.
days it had sold over three million copies. That was one million more than the previous record holder, Harry Potter and the Half-Blood Prince. The early sales figures for everyone were bright. ASDA sold 250,000 copies between midnight on the day the book was released and many more the following morning. By noon, nearly all of its 500,000 copies had sold. Tesco had forecast that it would sell 350,000 in the first twelve hours, but this was a massive underestimate.
Charles Walker, a member of the U.K.'s parliament, had warned of the dangers of this price cut war and its effect on smaller bookshops. He was worried that the smaller bookshops relied on the profits of a handful of blockbusters each year. They simply could not compete with supermarkets, which were using these blockbusters as loss leaders. Whilst he applauded the fact that increased book sales boosted literacy, the result could be that smaller bookshops would be forced to close. The price war made it difficult for smaller bookshops to be viable.
A year later in July 2008, ASDA reignited the Harry Potter price war by placing newspaper advertisements to promote the paperback version of Harry Potter and the Deathly Hallows. The sales price would be £1. ASDA ran the offer from July 10 to July 13. The recommended retail price had been set at £8.99, but the advertisement proudly proclaimed: "£1. Magic Price. ASDA: why pay more?"
ASDA was able to report a 79 percent market share of sales of the Harry Potter and the Deathly Halloivs children's edition. It could not have possibly made a profit from the sales; in fact, it was calculated that it lost £150,000. It had sold the book at 89 percent off its recommended retail price.
ASDA was also able to claim that it had captured 53 percent of the sales of the adult edition. According to Nielsen BookScan, the figures from the week ending July 12 meant that overall the book's selling price in all outlets was £1.96 (78 percent of the recommended retail price). In all, retailers had shifted some 46,257 copies in a week.
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