This is the first in a three-part series on Amazon’s threat to retailers. With Steve Jobs gone, a lot of us are giving more thought to “now what?” I believe Jeff Bezos has the answer to that. While he seems to be the antithesis of Steve Jobs when it comes to self-deprecating humour (watch his speech at Carnegie Mellon’s 2008 commencement ceremony for an example), he has long been regarded as a visionary founder by shareholders, market analysts and retailers alike.Amazon.com was named after the Amazon river for two reasons – to suggest scale and reach, and to guarantee a good placement in website listings that were often alphabetical back in 1995 when the website was launched. The online retailer has succeeded on both counts, as demonstrated by the steady rise in stock price over the years. Amazon now enjoys an annual revenue that is 16% higher than Google’s revenue, accounts for a third of all U.S. online retail and 20% of global online retail, and owns brands like Zappos, IMDB and Diapers.com that are iconic in their own right. While Facebook may be poised to take over the world, it seems Amazon already has. How did a company that didn’t report a profit until 2003 get so far, so fast?
Understanding the retail cocktail
Despite a vastly different landscape from 15 years ago, the recipe for success in the retail business hasn’t changed much. Large selection + low prices + convenience still equal success for a retailer. Amazon applied this lesson early.
The online retailer started by building the largest online listing of books in the world, made sure that these listings appeared in search results and delegated the long tail by allowing third party sellers to sell less popular titles via the Amazon Marketplace – a game-changing feature that Amazon launched in 2000 and now accounts for 6% of the company’s revenue. The retailer then scaled this recipe across 15 other categories, including music, thus providing both the breadth and depth in selection that consumers seem to crave. Where necessary, it purchased strong affinity brands like Zappo’s that shared Amazon’s e-commerce ethos and customer focus.
If Amazon had a secret sauce, it would be supply chain optimization. The retailer stores high turnover items at each of the 60+ fulfillment centres for quick order fulfillment at low cost, takes on logistics such as storage and shipping for third party sellers and also relies on these sellers to drop-ship items where appropriate to reduce lead time and cost. As a result, an item spends only 33 days on Amazon’s shelves on average vs. 70 days on Best Buy’s shelves resulting in considerably lower prices. In fact, prices on Amazon are lower than those offered by competitors eBay, Walmart and Target on average. The Amazon Marketplace further reinforces low prices by promoting competition amongst third party sellers and giving consumers’ access to second-hand goods. On the flip side of the coin, Amazon ensures high margins by bypassing intermediaries wherever possible.
Ranked #1 in customer service in 2009 and 2011 in BusinessWeek’s Tempkin Experience Ratings, enabling customer convenience is in Amazon’s DNA. In fact, every employee – from the CEO on down – is required to spend two days at the service desk responding to customer queries, at least once every 24 months. Much like Google, Amazon’s innovations tend to be laser focused on improving customer experience and hence amplifying peer recommendations, and exploring the outer bounds of what benefits can be derived from digitizing/automating operations. As a result, Amazon can be credited with establishing several customer-centric innovations that are now best practice in online retail, including –
- Launching customer reviews in 1995; 15 years later, 44% of online retailers now offer this feature and 70% of shoppers consult product reviews before making a purchase.
- Pioneering A/B testing website content, layout and offers in 1997.
- Vastly improving conversion rates and getting around cart abandonments by using one-click ordering in 2000.
- Offering Free Super Saver Shipping in 2002 where customers ordering $25 worth or more to the same address qualified for free shipping. Fast forward nine years and other online retailers like Walmart are offering free shipping in order to meet shoppers’ expectations, particularly around holiday time.
- A personalised website experience such as allowing a visitor to see what other visitors with a similar profile purchase on the site (“Customers Who Bought This Item Also Bought”).
Stay tuned for a closer look at how other retailers can combat the Amazon threat going forward.
This post was originally published on Seedwalker.
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