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Posted September 21 2018
Written by Swann Petiton

Amazon, a New Business Models Incubator

Amazon, one of the worldwide leaders in e-commerce, posted sales of $178 billion in 2017. This is an increase of 31% over the 2016 fiscal year. This growth is supported by a net profit of $3 billion over the same period, with a 28% increase over the previous year. This double-digit growth once again demonstrates Amazon's dominance in a market where competitors are finding it increasingly difficult to retain customers looking for new buying experiences.

Behind these staggering numbers, Jeff Bezos' business model and expansion strategy has become a success story, even beyond logistics and retail. However, how is this success so profitable and how can Amazon continually innovate, capture, and retain consumers in constant search of new experiences?

Amazon Business Models
An innovative vision, based on the retailing dogmas:

The peak of the Internet in the early 90s gave Jeff Bezos the original idea of creating an online virtual store accessible to all. The concept was born of a simple and avant-garde premise: using technologies, including the Internet, it is relatively simple to create an online sales site that will not be exposed to the constraints of a physical store. Also, the use of digital technology makes it possible to offer an endless supply of products to the end customer and thus satisfy their requirements.

Digital technology then became the cornerstone in the realization of its business model in 1994, quickly allowing it to stand out from its competitors. While the commercialization of digital technology was revolutionary in the early 1990s, the fundamentals of its strategy are based on basic precepts of retail activity. The bright idea of Jeff Bezos was to simply transpose these into a digital perspective, and more precisely by applying the following recipe:

Offering a wide choice to the consumer:

A digital platform makes it possible to present an unlimited number of products. In 20 years, Amazon has been able to combine:

  • A scalable sales offer, from one product category, ie. books, to 21 categories to gain considerable market share in the United States, ie. 44% of e-commerce shares in 2017.
  • A distribution network supported by new technologies by implementing a computerized supply chain such as warehouse mechanization or robotization.
  • A network of partners giving it the opportunity to benefit from an offer and a consequent inventory (acquisition, association) to accelerate the development of each new category of sales introduced on the market, supported by the provision of their expertise.

A flawless customer experience:

Thanks to digital technology, the experience with customers can be greatly improved. Amazon continually seeks to build a relationship of trust and loyalty with them. It is through a consumer-centric approach that Amazon's synergies are defined. Decisions are dictated by the customer and not by competition, because the basic assumption is simple: the money comes from the customer and not from the competitor. Amazon takes a proactive stance by investing money to build a meaningful customer experience and identify what brings value to the end customer.

At the same time, constant searching for the customers’satisfaction is a source of innovation. Amazon is always aiming to implement innovative solutions that will lower prices, increase supply and simplify the customer's journey during the ordering process. Concretely, the customer experience sought by Amazon is based on a short-term strategy that takes into account the man/machine dimension, in order to try to push the limits of technology and optimize the conversion rate. This experience is essentially based on the following foundations:

  • Invest in a faultless customer service, including consumer comments and recommendations, to ensure proximity, resolve sales order issues, analyze and monitor recurring complications, and analyze behavior. Third-party providers reduce consumer and partner dissatisfaction.
  • Invest in innovations that create value for the customer, including:
    • speeding up the shopping journey to increase the conversion rate, without going through the traditional shopping cart (one-click order);
    • customized marketing, offer subscriptions to services like Amazon Prime, etc.
    • discover new buying experiences for consumers;
    • Build customer loyalty by offering fully integrated services such as Amazon Price Check, Amazon Go, etc.

Offer the most competitive prices in the market:

Digital technology can offer the lowest prices and take advantage of larger margins than in a store. Here again, to offer the best prices in the market, Amazon is continually looking for new business models based on the use of new technologies. The leader pushes the limits to optimize storage and transportation costs. To do this, the company reduces the variable costs associated with distributors by bypassing them or developing business models like Amazon Locker. All this is done with the aim of optimizing and controlling margins by offering the lowest prices on the market. This is possible by combining the following elements:

  • Optimizing the supply chain to improve the customer experience and reduce costs through the implementation of automated logistics and warehousing processes. Products with strong rotation (the best-selling) and the easiest to transport are present in largely automated warehouses. Direct delivery (or drop shipping) is preferred if possible: Amazon therefore makes the packaging available and the supplier sends the goods directly to the customer. In addition, investment in robotics, new technologies and the internalization of this knowledge allows them to significantly reduce costs.
  • Developing services for third-party vendors such as Fulfillment by Amazon and delivery customers such as Amazon Prime (five billion products were shipped via Amazon Prime in 2017), as well as Amazon-provided investments. Years in the air transport (owner of four Boeing aircrafts), road (own distribution network: Amazon Fresh) and maritime demonstrate the desire of the company to internalize the value chain to control transport costs and share these .
  • The creation of MarketPlace in the 2000s has allowed Amazon to take advantage of its third-party vendors and to have a master's degree in the following business segments:
    • Inventory management: storage of best-sellers and high-turnover products. Other low-turnover products are managed by the supplier and Amazon's preferred stock delivery.
    • Vendors compete directly for customer visibility. By exposing the prices of products from third-party sellers, Amazon directly competes with sellers and reinforces the message to the consumer about its ability to offer ever lower prices.

Jeff Bezos has undoubtedly been able to orchestrate his futuristic business strategy, including a focus on the customer experience, an essential element of today's online business. Stay tuned! We will soon publish this article’s second part soon, focusing on the technology initiatives that have helped this pioneer of e-commerce become a giant.

Source:
- The Four, The Hidden DNA of Amazon, Apple, Facebook, and Google. Scott Galloway

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