From a consumer standpoint, it’s easy to understand Amazon’s success. Amazon is the largest and most successful retailer in the western world because they built the best customer experience. Customers expect three core things when they buy products online:
- Large Selection: Consumers always want to find the product they are looking for and this product should be in stock
- Low Price: Consumers want to pay as little as possible for a product
- Fast Delivery: Consumers want to get their orders as quickly as possible
What set Amazon apart is the long-term strategy for success, even in the face of the relatively short term loss of profit. For perspective: It took Amazon 14 years to make as much as they did last quarter.
Because they wanted to be the biggest, they had to be the best, and to be the best, they had to become the biggest. Here’s how they did it:
This logic or mechanism perpetuating growth is called the ‘Amazon Flywheel’. Let’s start with Customer Experience. If customers have a great (and consistent) shopping experience on the platform, they will reliably return to it, and even suggest it to their friends. This creates Traffic.
Sellers will certainly follow traffic – they need to put their products in front of the eyes of consumers. More sellers means more product selection. More product selection, means a better Customer Experience (“they have everything!”).
With these four elements feeding the growth of the platform, you now have economies of scale. Meaning lower cost structure, leading to lower prices, which again ultimately will feed the growth cycle by offering customers the best Customer Experience.
You may have noticed a trend: Amazon’s success is built on serving the customer and the customer only.
1. Amazon Success Factor: Selection
So if you want to have the world’s largest store, you must have the world’s best selection. But, this is easier said than done. In any store or product line, a small number of products will make the most margin and the most money while many others make very little or none at all. This is known as:
The Fathead vs. Long Tail Problem
It might sound tempting to limit your product selection to those high demand high ticket items as these generate the most profit.
The problem is that we don’t buy high ticket items every day, and when we do, we buy them from a retailer that we know and trust. And, the only way to build trust is through a series of consistent and positive shopping experiences. Amazon wants to earn your loyalty so that you buy everything there.
|“Fathead” Products||“Long Tail” Products|
|• High demand|
• High profit
• Strong brand
These products sell themselves and sell often.
I.e. The Instant Pot
|• Low demand|
• Low profit
• Niche / specific / hard to find
• Less brand-dependent
Individual demand is low, but as a whole the cumulative sales make up 58%
I.e. An avocado slicer
Typically, having a vast selection would mean being a “superstore” (also called Horizontal E-Commerce), which comes with the burden of investing in a super large inventory. In this case, prohibitively so.
If Amazon approached this problem the traditional way, that would mean purchasing and storing nearly one hundred and twenty million products as of April of this year. To put that in perspective, a typical Walmart Superstore carries 120,000 items, and up to 3 million online.
Clearly, the traditional superstore model can’t respond to Amazon’s vision of superior selection (“long tail” products).
Another conventional strategy for Amazon could have been to forego the “superstore” model and institute a marketplace instead, like Ebay. That would mean no responsibility over inventory, but at the cost of not having control over product selection.
But a marketplace environment cannot attract major brands accustomed to selling wholesale B2B (“fathead” products).
So neither could properly deliver on Amazon’s desire for a superior customer experience, including both a high-demand selection of products and an unprecedentedly large range.
The Solution: A Platform Like No Other
Amazon’s success depends on the fact that it is two very different but seamlessly integrated shopping places at once: A store, like Walmart, (with Vendors providing product to Amazon) and a marketplace, like Ebay, (with Sellers selling direct to consumer).
The flip side of this unique value to the consumer is a challenge to its sellers and vendors. How can you make your product seen in the biggest store in the world when real estate is so very limited?
If your product doesn’t make it to the first page of search results it may never be seen at all, let alone purchased.
These ads allow sellers and vendors to bid on ad space in search results. This is especially helpful if a brand’s organic rank is beyond the first few results or off the first page entirely.
At the same time, Amazon has created another revenue stream for itself from Ads.
Having observed Amazon’s massive success with this hybrid platform, others have attempted to follow suit. But each of Amazon’s success factors are greater than the sum of their parts, which brings us to:
2. Amazon Success Factor: Price
Because the price is such an important part of a consumer’s experience, their aim is to have the lowest price on the internet. And, they are succeeding. The Buy Box fosters competition within the platform to keep it low.
What is the Buy Box?
Despite hosting a variety of sellers, Amazon has succeeded in having a tidy user interface:
Each unique product has only one product page despite representing several listings.
When a user clicks “buy” they are selecting to purchase from the seller who has won the “Buy Box” (red). As you can imagine, winning the Buy Box puts you at a significant sales advantage, winning 85% of the sales for that item.
You can find the remaining sellers competing for the other 15% when you click the link below the Buy Box (blue).
So, how do sellers “win” the Buy Box?
The particulars are proprietary, but we know the ultimate win is based on three factors in roughly this order:
- Delivery Speed
Since having a comparatively low price is one of the most important aspects of winning the Buy Box, without competitive pricing your products won’t sell.
Beyond a low price, few things delight online consumers more than getting what they want quickly.
3. Amazon Success Factor: Delivery
Creating a consistent and reliable shopping experience which is second-to-none means making sure the product is delivered quickly as often as possible. This is a pain point for many businesses.
A business may have little (or no) infrastructure in place to make this possible, whether they are accustomed to selling only in large shipments B2B, or a very small business operating from their own home B2C.
Despite these diverse circumstances, most users will not make the distinction between items “sold by Amazon” and “marketplace purchases”. That means if Amazon wants a consistent result, this shipping strategy must also be applied to seller products.
This is known as FBA, or Fulfillment by Amazon. Taking on the storing, picking, packing and shipping allows Amazon to control the quality of consumers’ delivery experience while offering an elegant solution to their sellers who would otherwise struggle to deliver according to Amazon’s rigorous standards.
This means that Amazon can be sure that it is done right – that means quickly and accurately – as often as possible. Opting in means your products are eligible for free shipping and Prime.
What is Amazon Prime?
Amazon Prime is a simple idea that is very difficult to implement: A subscription model with 2-day free shipping on selected products. It is currently available in the United States, the United Kingdom, Germany, Austria, India, Japan, Italy, Spain and France.
Amazon’s logic is that the quicker the products arrive the happier customers will be. This certainly seems to be true. Prime is a coveted status for sellers because it increases the likelihood of landing the Buy Box – and the lion’s share of sales.
How can Amazon deliver so quickly?
The answer is complicated, but what you need to know is that Amazon has one of the most advanced fulfillment networks in the world, resulting from:
- Advanced logistics
- Innovative technology, powered by Amazon Robotics
- 175 fulfillment centres worldwide operating 24 hours
The truth is that the best in the world is too low a bar for Amazon. Currently, the company is making significant investments in new technologies including AI to improve upon this already impressive system which surpasses that of long standing logistics and shipping companies.
Sellers should know it is possible to qualify for Prime without FBA, called Seller fulfilled Prime. But meeting Amazon’s stringent standards will be a tall order for most.
Try as they might, this is one success metric that is not easily replicated by competitors.
Conclusion: Why is Amazon So Successful
Amazon succeeded in building a consumer paradise. They charge much less and promise much more than other stores and platforms: The best selection by combining a retail business with a marketplace business, the best price by using the “buybox”, and the quickest delivery by offering FBA to their sellers. The success strategy “flywheel” means that the more successful Amazon is the more successful they are likely to become.
With a current market share of 50% in the United States and growing, this E-Commerce behemoth isn’t going anywhere any time soon. So what does this mean for Amazon’s sellers and vendors?
As Amazon becomes a more and more significant source of online sales, your brand should be positioned to grow in tandem. Understand Amazon’s capacity to evolve, since they are at once a platform, seller, and brand.
Think of Amazon as your – extremely competitive – friend and remember that your potential to succeed is dependent on your ability to provide value in relation to their most important success metric: pleasing the customer.