Harry Potter and the omen of value added

Citation

Fang Khoo, L. and Foley, P. (2001), "Harry Potter and the omen of value added", European Business Review, Vol. 13 No. 4. https://doi.org/10.1108/ebr.2001.05413dab.001

Harry Potter and the omen of value added

Harry Potter and the omen of value addedKeywords: Book publishing, Sales promotion, Internet

Introduction

The days, even weeks, before the release of J.K. Rowling's latest book – Harry Potter and the Goblet of Fire – had been filled with anticipation and excitement for "muggles" (ordinary humans with no magical powers). For those who were desperate to get their hands on the magical bestseller on its publication date, 8 July 2000, it had been a long torturous wait. For those selling the book, it had been a period of great activity trying to develop ever more alluring ways to persuade "muggles" to buy the book from them.

The hysteria surrounding the launch of Harry Potter and the Goblet of Fire was astounding. According to the Newsweek article, "Making the magic" (17 July 2000), the book broke all publishing records with the highest volume first print-run ever, both in the USA (3.8 million copies) and the UK (1.5 million copies). Advance orders placed at Amazon.com before 7 July 2000 exceeded 345,000.

Only time will tell whether the Harry Potter phenomenon is an isolated story or the start of a new and more complex dimension to Internet competition. Promotions associated with Harry Potter are used to demonstrate that in this electronic age the sale of products and services on the Internet is moving beyond mere price competition. This first part of this paper presents research from five countries to demonstrate that price competition is intensifying on the Internet. The second part reviews the strategies used by Internet and terrestrial retailers in the UK and USA to attract consumers to purchase Harry Potter and the Goblets of Fire at their Web site. The third part analyses promotional activities and observes that US retailers are providing a wider range of value-added services and that pure Internet retailers, with no obvious terrestrial presence, have the widest variety of activities and incentives for consumers. The paper concludes with a consideration of whether the Harry Potter phenomenon is merely marketing hype or an indication of the route Internet sales and marketing will take as Internet competition intensifies.

From price competition to value-added competition?

There are two main strands to competition in the terrestrial and Internet retail arena: price; and value-added services. When electronic commerce first took off, in the mid-1990s, many online retailers conducted business on the Internet largely competing on the basis of lower prices. Today, however, as the Harry Potter phenomenon shows, the nature of Internet competition in some markets has certainly changed.

In January 1999, the International Electronic Commerce Research Centre (IECRC) commenced a study examining the impact of electronic commerce on pricing within the book sector in the USA, UK, Australia, Germany and South Africa. Data collected on a regular basis between January 1999 and July 2000 indicate that online book prices are converging on a national and global scale (for more details, visit www.iecrc.org). The data set includes over 5,000 individual online price observations of about 20 book titles from 26 online book retailers in the five countries. Titles include bestsellers and backlists, fiction and non-fiction, hardcover and paperback, taken from a wide range of topics in the consumer book category.

Preliminary results from the study are consistent with Bertrand's "Law of one price". In the classic Bertrand model of price competition, products are perfectly homogenous, retailers have no locational advantages in attracting customers, and customers have perfect knowledge of all prices and product information. This results in competition occurring only on price, with consumers buying from the lowest priced retailers. Eventually retailers all set the same price as the "Law of one price" sets in. If the electronic market is a frictionless market, as some have claimed (Brynjolfsson and Smith, 1998), Bertrand's "Law of one price" should cause prices within a country and across the world to converge (Mankiw, 1998).

The Internet book industry demonstrated that prices of books are indeed converging. Figure 1 depicts the trend experienced in the UK. It shows a spread of US$6 (standard deviation of 4.16) in January 1999 and only a spread of US$4 (standard deviation of 2.06) in June 2000. It is possible that the entry of Bol.com and Alphabetstreet.co.uk towards the second half of 1999 have contributed to the price convergence through increased price competition.

Figure 1 Average price levels of titles in the UK (January 1999-June 2000)

Figure 2 demonstrates that prices within the Internet book retailing sector are also converging at the global scale. The figure reveals the possible impact that changes in the supply chain can have in reducing the price of some Internet goods and services. Direct supply of goods and services to customers without having to absorb the costs associated with terrestrial intermediaries and stores have allowed Internet booksellers to reduce costs. Price competition has also increased due to the relative ease of comparing the prices of books and other goods and services online and through the use of intelligent shopping agents (Foley, 1999). In addition, new entrants have also increased the intensity of competition amongst retailers causing prices to decrease further. IECRC research found that the cost of books in several countries has reduced in relation to US prices. During the same time period US online prices remained relatively static (see Figure 2).

Figure 2 Relative price levels of titles - world comparison (January 1999-June 2000)

The intensity of price competition for Internet book retailers appears to be increasing and is perhaps most pronounced in the case of bestsellers. Over the last year, the majority of the online book retailers offered between 40 percent (in the USA) and 50 percent (in the UK) discounts for bestsellers. As prices converge on a national and global scale and Internet retailers have their margins squeezed, they have started to develop other value-added services to distinguish themselves from competitors.

Promoting Harry Potter on the Internet

The hype and hysteria surrounding the launch of Harry Potter and the Goblet of Fire is clearly exceptional. It offers Internet book retailers with the greatest incentive to develop innovative promotional and marketing tactics. If nearly all leading retailers are selling the book at half price, how else can individual retailers lure muggles to their Web site to make a purchase?

Tables I and II show the prices and offers from leading UK and US retailers on 7 July, the day before the release of the book. The tables show how Internet book retailers in the USA and the UK no longer compete on prices alone but have started to provide a significant number of value-added services as well.

Table I Price and value-added competition for Harry Potter, 7 July (USA)

Table II Price and value-added competition for Harry Potter, 7 July (UK)

Price is still an important and competitive part of the Internet offering. Prices posted online are normally not inclusive of postage and package charges. For online retailers offering free national delivery, the final costs to the customers are more clear-cut and transparent. However, for customers who are initially attracted to making a purchase with a specific retailer based on the price they first see, the total cost of the purchase is usually much higher than it first appears.

Tables I and II show that prices prior to adding postage and packing charges are very similar. In the USA, the leading retailers were offering Harry Potter and the Goblet of Fire at $15.57 – a 40 percent discount. Barnesandnoble.com quickly adjusted its price from $18.16 – a 30 percent discount – to $15.57 to match other leading Internet stores soon after the publication of the book. By 12 July four out of the five US Internet retailers studied were offering Harry Potter and the Goblet of Fire at $15.57 (a 40 percent discount). In the same way, in the UK, most retailers were offering the book at 40 percent to 50 percent off its list price. Bol.com adjusted its price from £8.99 (a 40 percent discount) to £7.50 to offer customers 50 percent off the book soon after publication. The volatility of prices, as retailers adjust their prices to match or more effectively compete with their competitors, is not insignificant. However, our research on previous bestsellers has shown that the period of price volatility for each book will decrease as competition intensifies. That is, retailers will react faster to changes in competitors' pricing tactics. This in turn will contribute to a greater degree of price convergence as retailers strive to match each other's prices within an increasingly shorter time frame.

Price competition has been intense and at a glance, prices seem to be very much the same across retailers on a national scale. Adding postage and packing charges to the price of the book reveals that the final cost is in fact much higher. Waterstones' offering illustrates how postage and packing charges can make a difference to the final cost of buying Harry Potter. An order placed on the Waterstones Web site for the book will cost a total of £9.95 if the book is to be delivered by standard post to the customer's home. If an order for the same book placed online was delivered to a Waterstones branch of the customer's choice, delivery is free and the customer only has to pay a total of £7.50. Alternatively, the customer could purchase the book direct from a Waterstones terrestrial outlet and pay £9.99 for the book. Obviously, several factors such as time, convenience and the cost of acquiring the product will come into play in determining how a Waterstones customer makes his/her purchase decision.

Prices vary across the different Internet retailers. By the time most customers find out what the total charge of the purchase is, which is usually not until they have started filling in details required for processing the order, the switching cost is likely to have risen to a point where customers are less likely to drop their order and start searching again. Perhaps this will make the offer of free national delivery by a number of the UK Internet book retailers more appealing since the price customers see when browsing is the price they will be charged.

Price competition for Harry Potter and the Goblet of Fire has been intense. Perhaps because of this intensity online and terrestrial retailers have been undertaking special promotions and offering value-added services. These enable retailers to differentiate themselves from others offering the same products at similar prices. Examples include Bloomsbury (the book's publisher) offering a variety of author interviews, games and customised Harry Potter e-mails that can be sent to friends. Red House, the mail order business, ran a competition to win 25 signed copies of the book. Similar value-added services have also been offered by Internet retailers.

Value-added services offered by Internet retailers included the provision of information on Harry Potter and its author, J.K. Rowling, interviews with J.K. Rowling, free Harry Potter e-cards, and dedicated Harry Potter page and stores. Several stores such as Waterstones, Amazon and Borders were using draws and contests to encourage customers to pre-order the book with them. Amazon.com cleverly cashed in on the Harry Potter hype by selling toy and wizard apparels and even watches to Harry Potter wannabes.

Pre-order services are now a common feature provided by all the Internet book retailers. In order to compete, Internet book retailers are offering more services to customers at no extra charge and new services, such as out-of-print searches and the tracking of order status, have very quickly become normal features of e-commerce.

Probably the most alluring way for Internet retailers to compete was the promise of delivering Harry Potter and the Goblet of Fire to muggles first thing on the morning of publication (8 July). Terrestrial retailers copied this offer with pyjamas and breakfast parties, allowing them to release the book at 12.01 a.m. on the day of publication.

Amazon.com and Amazon.co.uk were careful to place a limit on the maximum number of pre-orders that could be delivered by 8 July. Waterstones.co.uk, however, had to burst the magic of 8 July for many who placed their orders online believing that deliveries of the book will be made on 8 July. On 7 July, Waterstones.co.uk announced on its home page that it would not be able to deliver some of the orders placed a few days before the publication date until the following week due to overwhelming response.

Tables I and II show that retailers with terrestrial stores in the USA utilised their online presence to promote activities taking place in their physical outlets. Wordsworth and Barnes & Noble posted information about Harry Potter parties. Borders provided customers who pre-ordered Harry Potter and the Goblet of Fire with the opportunity to win coupons worth over $125 at local Borders stores. Amazon.com has no terrestrial presence and the purely online retailer therefore adopted a different approach to attract and retain its customers and passing surfers by providing a longer list and wider variety of Harry Potter related activities, promotions and sites. Amazon.com, one of the first Internet bookshops, offered more value-added services than any other store. This was probably because of a desire to maintain its position as the leading Internet book retailer and a need to compete with terrestrial stores that were able to offer different promotions.

A similar pattern of promotional activities was also experienced in the UK. However, the promotion of terrestrial activities online by Internet retailers with terrestrial presence is still very limited. It is possible to see how, in general, the pure Internet retailers with no obvious terrestrial presence have a wider variety of activities and incentives to offer to customers online than Internet retailers with physical outlets.

The limited range of value added services offered by the UK Internet retailers, compared to the US Internet retailers, is probably attributed to the US Internet retailing market being longer established. Our research has shown that US Internet retailers face the most intense price competition and greater congruence in book prices. Since the USA has reached this level of price competition or convergence earlier than the other countries, it is no surprise that the US Internet retailers are also providing a wider level of value-added services to differentiate themselves from their competitors. It is probable that as price competition further intensifies in the UK, more Internet retailers will be providing a wider range of value-added services.

Conclusion

Barriers to competition on the Internet are falling fast. New and creative approaches to competition are being developed. Competition is taking on new dimensions. Promotions associated with Harry Potter demonstrate that the sale of products and services is moving beyond mere price competition to become more complex. In addition to competing on prices, Internet book retailers have attempted to stimulate the interests of customers through a variety of value-added services.

Internet retailers are now not only enticing customers with attractive discounts but also a range of other complementary services, generally at no extra charge. The only costs not immediately obvious to customers at this point seem to be postage and packing costs.

Only time will tell whether the Harry Potter phenomenon is an isolated story or the start of a new and more complex dimension to competition, with more emphasis on the provision of value-added services. Customers now have many more considerations besides the price of the book before making a purchase decision.

Lih Fang Khoo and Paul FoleyInternational Electronic Commerce Research Centre, Graduate Business School, De Montford University, Leicester, UK