Pricing 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:

  • Avg. Income over 200k
  • Ages 45-65
  • Average household of 4 people
  • Don’t like crowded places
  • Most profitable
  • Most loyal visitors; premium customers visit Zappos 1 out of every 5 times they sign onto the internet
  • Costly to acquire
  • Average order value: $181
  • Average order size: 3 items
  • Favorite brands: Patagonia, Breville, Marc Jacobs, Stuart Weitzman, Theory, Dansko, Mephisto, Salvatore Ferragamo

Young Professionals:

  • Avg. income between $55k and $75K
  • Ages 26-34
  • Average household of 2 people
  • Mostly located in urban areas
  • Have a tough time balancing work/life
  • Come to the site the least
  • Not costly to acquire, but hard to keep their loyalty
  • Average order value: $74
  • Average order size: 1 item
  • Favorite brands: Calvin Klein, AK Anne Klein, Levi’s, Cole Haan, Rockport, Samsonite, Nike, Dooney and Bourke

Off Price:

  • Avg. Income between $55k and $60K
  • Ages 18 – 40
  • Average household of 3 people
  • Very savvy with online shopping; willing to price compare to brick and mortar
  • spend the most time on the site
  • “coin operated” – if you get word of good offer out to them they will at least check out the site
  • Average order value: $48
  • Average order size of 5 items
  • Favorite brands: The North Face, Nike, Oakley, Rockport, Ugg, DKNY

Families:

  • Avg. income between $75k and $125k
  • Ages 35 – 55
  • Average household of 5 people
  • Very busy with family life – spend the least amount of time on the site
  • Average order value: $45
  • Average order size: 2 items
  • Least profitable due to high return rate
  • 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?

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