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UI Study Connects Price and Service in Online Book Market

Leading online booksellers can charge higher prices because they provide a satisfying shopping experience both before and after the sale, according to a recent study by a University of Iowa marketing professor.

Tom Gruca, associate professor of marketing in the UI's Tippie College of Business, says that leading retailers are not necessarily charging higher prices than their lesser-known competitors based on the strength of their brands, but because of their high levels of service and customer satisfaction.

In the study published in the Journal of Interactive Marketing, Gruca and his colleague Yong Cao at the University of Alaska, Anchorage collected prices of nine titles sold by eight Internet book retailers over four months in 2000 and 2001. The retailers were divided in two groups: market leaders Amazon.com, Borders.com and barnesandnoble.com, and lesser-known competitors such as A1Books.com or eCampus.com.

The study correlated the price data with ratings of pre- and post-sale customer satisfaction surveys conducted by BizRate. Pre-purchase satisfaction was based on factors such as product information and website performance; post-purchase satisfaction was based on quality of delivery, order tracking and customer support.

Gruca and Cao found that retailers with high satisfaction ratings for after-the-sale service were the market leaders who charged higher prices, which may have been done to compensate for the high cost of shipping and order tracking.

The study also showed that differences in satisfaction with pre-purchase services didn't have much bearing on price differences among the retailers. All retailers could provide information and take orders on about the same level.

Gruca said booksellers sell essentially the same products, but differ in service. Service before and after the sale is key to maximizing profits, he explained. "Once you have paid the cost of playing the game on the front end, you can charge more after the sale if you fulfill your promises. Serious businesses care about keeping their promises."

Even non-leading brands can have excellent service, but larger companies like Amazon may have the advantage of economies of scale in areas such as warehousing and distribution.

The study found that prices remained relatively constant over the time period, which included a very competitive holiday shopping season, and suggests that Internet retailers don't take advantage of their ability to easily change posted prices.

Conventional wisdom about Internet retailing once dictated that prices of products sold online would decline because of competition, and that retailers would quickly change prices in response to a competitor's price change. Instead, Gruca contends that the Internet is a convenience channel for consumers, rather than a price channel where items can be bought at the lowest price.

For example, a grandparent might be willing to pay more on Amazon for a book sent to a grandchild across the county, knowing that the book will arrive in time for Christmas, Gruca explained, instead of buying the book at a local bookstore and mailing it.

For more information about the study, contact Gruca at 319-335-0926 or thomas-gruca@uiowa.edu. Gruca is also available to the media for comment about related issues of online pricing.


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