The Amazon Effect

I’ve spent a considerable amount of time in the United States re-connecting with the tech scene and understanding the current trends inside and outside of e-commerce. The first trend that comes to mind is what I dub “The Amazon Effect.” This refers to the way Amazon lessens the competitiveness of pureplay retailers when it comes to the big brand items it already stocks. The Amazon Effect is similar to the impact Walmart has had on the offline economy. If you conduct a price comparison search for a well-known product it is likely that Amazon offers that product for the lowest price or within 5% of the lowest price. Amazon is also competitive when it comes to well known brands. Many major brands utilise the Amazon Marketplace to sell directly to consumers, undercutting their other channels because of the direct margins they are making.

For example if you are looking for a Canon EOS 60D digital SLR camera, then chances are the Amazon will offer the lowest price, and if they are not the lowest price, the Amazon brand makes up this difference by being the most trusted online retailer on the Internet. If you are an Amazon Prime subscriber, then you will want to buy from Amazon in any case.Customers generally value price, but they also value trust and they know that Amazon will deliver on time without the risk associated with buying from eBay or an unknown website.

In 2010 Amazon generated revenues of $US 18.7 billion North America. Total North American e-commerce revenue was $170 billion. This means that Amazon accounted for over 10% of all North American online retail revenue in 2010. In 2009, Amazon accounted for 8.6% of online revenue. In 2010 total North American e-commerce revenue grew 14% while Amazon’s 2010 revenue growth was 40%. The pie is growing, but Amazon’s market share of that pie is growing almost three times faster. The Amazon Effect is clear, and this is why their stock is trading at all time highs of $217 and 94x P/E. Jeff Bezos is well known for his long term thinking, and the results of his strategy are coming to fruition.

So as an online retailer, how do you overcome the The Amazon Effect?

There are two options.

Sell products online that aren’t available on Amazon
You don’t want to be shipping Canon EOS cameras unless the stock is sitting on your shelf in a retailer store and the web is part of a larger multi-channel strategy. The most extreme example of this is the Etsy marketplace where participants sell products that they have designed and handmade themselves. These kinds of products are not available on Amazon and probably never will be. They don’t have UPC codes, they are not mass-produced and they are shipped directly by their sellers and not warehoused by Etsy. Products that can be optimised present a similar example. Amazon offers some customisation options but websites such as Cafe Press, Zazzle, Shoes of Prey and Lind Golf have all differentiated themselves this way.

Create your own brand and establish a multi-channel strategy so that you own your product and control pricing and distribution.
Apple is an ideal example of this. The tech giant not only designs and manufactures its own products, but has based its multichannel strategy on selling directly to customers – via the internet, through flagship stores, big box retailers and the Amazon Marketplace. Following a similar model gives retailers the benefit of offering something unique, owning the customer through direct sales, making high direct sale margins and controlling where product is sold, how it is marketed and how it is priced. Other examples include Ugg Australia, AussieBum and The Pet Loo.

There are advantages and disadvantages to all of these suggestions, however, over time I believe “The Amazon Effect” will continue to take its toll on online retailers who don’t operate in a niche or offer customers a strong point of difference.

4 thoughts on “The Amazon Effect

  1. a third option is to create a unique shopping experience like Zappos does — because of their WOW service, customers will buy from them even though their products are available elsewhere, often for a lower price — throughout retail history, customers have shown their willingness to pay a premium for a remarkable shopping experience — it’s no different in today’s online retail environment — denise lee yohn

  2. This has always been the case – you are either big and generic and compete on price, or you are niche and/or offer a unique experience, like Denise said. However, even in Amazon’s main area – books – there are successfull online competiors in Australia, such as Booktopia.

  3. There are businesses that successfully compete even with Amazon, eg Booktopia

    • Kel
    • 9th February

    Amazon own Zappos don’t they?


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