It’s been interesting to watch as online businesses have pulled apart and re-organised traditional business models over the past few years. Even a few brick-and-online businesses have been doing the same, though arguably a harder task. The power of doing so was brought home in a recent interview in AdAge with Lisa Utzschneider, Global VP Advertising Sales, from Amazon in which she discusses the use of advertising to maintain a lowest price position. I recommend you read the article, however a simplistic overview is this: Amazon is able to charge less for their items because they offset their lower prices with advertising.
As a publically traded company we know that their share holders are going to want the same return on their investment of equal, if not greater, value to any other opportunities out there. Which is why Amazon’s approach is so intelligent. Sure, they could just offer lower prices and take the hit on yield, however this is going to reflect in their share price. Keeping high yields and a lowest cost strategy is difficult without increasing risk loading by purchasing higher quantities of item.