Question

In July 2007, Scholastic Publishing released Harry Potter and the Deathly Hallows at a suggested retail price of $34.99 and was rumored to be selling the book to retailers at a wholesale price of $18.99.  Costco and Walmart offered the book for $18.18 and $17.87, respectively.  Amazon was more aggressive offering the book at $17.99 and a $5 gift certificate and free shipping.   What do you think is the strategy of these firms in offering this book as such a reduced price?

Answer 1

These firms offer large discounts in order to boost their sales. The competitive prices of these sellers, substantially lower than the retail price (MRP) is an example of economies of scale - that is, operating on a  large scale. These firms have an enormous advantage with the publishing houses. They can buy books at rates much cheaper than the MRP mentioned on the book. As a result, they buy books in huge lots. They may keep a marginal profit rate and fix the selling price (may also combine it with a free gift to make it more attractive). Just like their purchase, their sales volume is also big. So, even if their mark-up per book may be small, the final figure of profit from sale of thousands of copies of the book will result in a huge profit. Large scale operation also lowers overhead costs and operating costs substantially, adding to their profits.