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Why Amazon can’t raise its product prices to increase its margins

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Raising product prices for Amazon won’t be easy

Amazon’s (AMZN) margins continue to decline. In 3Q14, it took its biggest net loss in 14 years. We discussed this in an earlier series titled Why Amazon could take another operating loss in Q4 2014. In that series, we also discussed how the company’s operating expenses are increasing at a faster rate than its revenues.

Common sense suggests that Amazon should increase its product prices to improve its margins. But that won’t be easy because Wal-Mart (WMT) and Target (TGT) have beefed up their product offerings online and are selling some of them at a cheaper rate than Amazon.

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Amazon’s product prices are higher than Wal-Mart and Target in four main categories

According to a report from the Wall Street Journal citing 360pi, a research firm that tracks online products prices, Wal-Mart’s and Target’s prices online could have been 5% to 10% cheaper on average than Amazon’s prices in four main categories over the past year. These categories are clothing and shoes, electronics, housewares, and health and beauty.

Although the report also mentioned that Amazon’s prices were cheaper than online prices at Kohl’s (KSS), RadioShack (RSH), Sears (SHLD), and Macy’s (M), Wal-Mart and Target are bigger retailers. So they’re more important competition for Amazon.

According to a report from eMarketer and as the chart above shows, electronics, apparels, furniture, and healthcare are the four biggest categories among the top six categories in the US retail e-commerce market. These are the four categories in which Amazon’s prices were higher than Wal-Mart’s and Target’s. This shows that Amazon can’t raise its product prices in order to improve margins.

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