“Step Aside Black Friday - Meet Prime Day!” announced on July 15th Amazon, promising that this day would be “filled with more deals than Black Friday”. With Prime Day, the company founded by Jeff Bezos celebrates its 21st birthday and enters a new path on their journey of lowering product prices and keeping customers loyal.
The 21st birthday of the Seattle-based company is inevitable attracting a lot of attention both with media and competitors. One of its biggest competitors, Walmart, which we mentioned in our previous article, simultaneously rolled out its own sales extravaganza, offering “atomic specials” and a number of spectacular deals.
The battle for customers continues. The question is whether Amazon has enough strengths to become the victor in this ongoing war.
A balance between strengths and weaknesses
When you look at the chart, which illustrates the relationships between Amazon’s strengths and weaknesses along with its opportunities and threats, you can clearly see that the weight is distributed more or less evenly.
On the one hand, Jeff Bezos’ idea is to make his customers happy. Consequently, the company for years has utilized the strategy known as “zero margins” which allows it to constantly lower the prices of its products and services. Undoubtedly, as it is happening with Walmart, this type of policy can attract a seemingly unlimited number of customers. By the end of 2014, Amazon was able to boast that their customer base have reached the astonishing level of 240 million people.
On the other hand, the e-commerce market is famous for instability and capriciousness. People like online shopping because it is convenient and the selection of products is wide, but the most important factor is still price. Therefore, the stereotypical e-commerce customer cannot be necessarily described as being loyal. Whenever clients of companies such as Amazon are able to find a better price, they will simply turn to cheaper competitors.
Jeff Bezos wants to break this vicious cycle by providing excellent customer service. I remember a situation from last year when my Kindle broke - the screen just stopped responding. I bought Kindle not directly from Amazon, but using a third-party middleman. I didn’t have a receipt or any record that I bought this specific item. Previously, I had only bad experiences with return policies from other stores, so I thought that I would have no chance to get my Kindle repaired or replaced.
Then, something interesting happened. I talked with a person from Amazon customer service; I described my situation to her and, after fifteen minutes, received confirmation that a brand new Kindle was ready to be shipped to me for free as a replacement. No questions asked. No interrogating about how my Kindle broke. Pure trust.
Amazon trusts its customers because it thinks that in return, the customers will trust it. And, in retail trade, trust cannot be overestimated. Prices can be lowered in a second, but company’s customer service reputation is built up over years.
Costs of being generous to customers
But the trust coin also has a flip side. Keeping customers happy and maintaining very low prices also has its own price. To provide fast shipping or to maintain a vast selection of products Amazon has to employ an enormous supply and logistics chain, and this costs a lot.
Alibaba, one of the biggest e-commerce players in the world, has built its dominant position on the market on the backs of Taobao, which is a Chinese equivalent of eBay, the costs of which are significantly lower than Amazon’s due to the fact they have no warehouses or logistics infrastructure. As a result, the profit margin of Alibaba in 2014 fluctuated around 40%, while the profit margin of Amazon is still close to 0% and the American company is recording more and more losses.
But, Amazon doesn’t want to stop. In 2014, when Flipkart - a local competitor in India secured $1 billion from investors, the American company announced that will invest $2 billion in the coming years to support the growth of its local branch.
These facts are crucial to understanding the reason for Amazon’s low profits. Everything that Amazon earns is immediately spent on investments. Some of these investments, like the development of Kindle e-Reader are right on the money, but others, such as the Fire Phone, have turned out to be a complete disaster.
But even those disasters are justified by Amazon’s philosophy of embracing bold moves even if they result in failures. Jeff Bezos when asked about his company’s failures said that:
“companies that don’t embrace failure and continue to experiment eventually get in the desperate position where the only thing they can do is make a Hail Mary bet at the end of their corporate existence.”
So, what will be the next bold move of Amazon?
Some suggest that the company will focus even more on innovative technologies. The most significant example is Amazon Web Services which are a number of services related to cloud computing and offered by Amazon, with growth of 50% a year. Last year alone it generated almost $700 million in operating income, which is a remarkable amount compared to other Amazon services.
AWS is currently used by companies such as Netflix, Reddit, Airbnb, Pinterest and Spotify (…and also CayenneApps) and the number of services which utilize the Amazon infrastructure is still growing.
On the other hand, Amazon is investing in a new growing market known as Internet of Things (IoT). It’s new product - Echo, exploits speech recognition technology and supports its users in the conduct of everyday tasks such as checking weather, making appointments or listening to news or music. Just take a look at the video and get a foretaste of Echo’s capabilities.
Unfortunately for Amazon, they are not the only company which is investing in innovative technologies. The cold war between Amazon and Google is more than obvious. On the one hand, Amazon is rolling out its own App Store; on the other hand, Google attempts to supersede Amazon by improving its own service called Google Shopping. No one knows how it will end up, but for sure this cold war will cost Amazon a lot.
Amazon’s first 20 years of was a roller-coaster ride fueled by a rapid growth. Now, Jeff Bezos’ startup is a mature company, and the next few years will determine whether it can remain at its current size or will begin to steadily decay like, for example, Yahoo. We will see!
In the meantime, check out the SWOT analysis for Amazon which we have prepared and which is now available as an example in the CayenneApps SWOT Library. Do not hesitate to use it. Now, you can also prepare your own version using “Clear Next Steps” button by entering different values to get your own recommended strategy for Amazon.