Amazon, Customer Expectations, and the Opportunity for Startups

By: Dan Cahana (Wharton ‘19)

Since its beginnings as online bookseller, Amazon has prided itself on an obsessive focus on customer experience. In his first annual letter to shareholders in 1997 (which he went on to attach to every subsequent letter) Jeff Bezos included a section titled Obsess Over Customers. In his most recent letter, he wrote, “One thing I love about customers is that they are divinely discontent. Their expectations are never static — they go up.” Ben Thompson focused on this point in a post last May, where he wrote that constantly increasing customer expectations protect companies like Amazon and Apple from disruption. In his words, this “makes for a tremendous business opportunity: if your company is predicated on delivering the best possible experience for consumers, then your company will never achieve its goal.”

But what happens when Amazon is no longer beating entrenched incumbents on customer experience, but rather setting the bar for the rest of the industry? Today, Amazon and Apple are the two largest companies in the world, and their obsession with customers forces everyone else to keep up. Take delivery as an example. Customers increasingly expect the sort of free and fast shipping Amazon consistently provides, and for smaller e-commerce sites, a lack of shipping options leads to cart abandonment, and a poor delivery experience is disastrous for customer loyalty. This is a serious problem for small competitors. If they don’t offer free two-day shipping, they risk losing ground to Amazon. If they do, they risk losing money, and without a large logistics network, two-day delivery options simply aren’t profitable for most SMBs. Therein, lies an opportunity for startups.

Arming SMBs

SMBs struggling to meet elevated customer expectations is by no means a new phenomenon. Previous examples of expectation shifts though, have often catalyzed market opportunities for SMB-focused startups. Though payment by credit card was initially only offered by large retailers, as customers began to expect to be able to pay with credit everywhere they shopped, even a farmer’s market stand, new solutions were needed, fueling the growth of next-generation POS systems like Square. As customers increasingly found information about businesses online, and large companies increasingly spent money designing clean, easy to use websites, customers began to expect even smaller businesses to offer the same experience. Designing these sites, however, was well outside of most SMBs’ budgets, catalyzing the growth of companies like Wix and Squarespace.

It’s reasonable then to assume that an obsessive focus on customers by the largest companies in the world will increase the rate at which these sorts of opportunities for startups arise. Delivery is one problem that remains unsolved, and could be attacked with an innovative software or services approach. Billing and invoicing and customer support are two more areas that come to mind where SMBs don’t yet have the tools to compete with the experiences offered by big companies. Rather than seeing those shortcomings as signs that Amazon will kill small business, they can be seen as massive market opportunities for new entrants.

Bringing Customer Obsession to New Industries

Elevated customer expectations can give rise to other opportunities for startups to succeed — ones that don’t involve aiding the businesses competing with Amazon. Despite the trillion-dollar valuations, Amazon and Apple only touch a handful of industries, and applying their customer-centric approach to other, more antiquated markets, can allow startups to take advantage of rising customer expectations to compete with incumbents. This is particularly true in industries where customers have long felt that incumbents don’t have their best interests at heart.

This can be seen in the increasing number of “tech-enabled” solutions entering markets like insurance and pharmacies. Though often branded as incorporating the latest technological innovations, the real common thread between these companies is a renewed focus on the customer. Oscar Health and Lemonade, for example, brag about solving a misalignment of incentives in the insurance space, and making it faster and easier for customers to buy policies and file claims, while Capsule’s recent “#capsulecares” marketing campaign tries to frame the online pharmacy as something closer to a good friend.

The success of these companies is a great sign for startups — they reflect the willingness of customers to switch away from established competitors for the expectation of a better user experience. And completely reorganizing an established company to focus on the customer is an awful lot harder than starting a new company with customer-centricity as a core tenant.

The Role of Student-Founded Startups

Where do student-founded startups play into this? Millennials are the biggest power-users of big-tech products, and have had their expectations set by those companies to a larger extent than previous generations. College students then, are best positioned to help SMBs meet their own expectations, and to build new, customer-obsessed companies that cater to their peers.

Dan Cahana is a senior studying Finance and Entrepreneurship. He has previously worked in growth equity at General Atlantic, where he will be returning after graduation, at Twine Labs (a WeissFund-backed company!) and at Jerusalem Venture Partners, and early-stage VC firm in Israel. His hobbies include tennis, travel, and optimistically predicting Eagles Super Bowls. Feel free to reach him at dcahana@wharton.upenn.edu

WeissFund is dedicated to funding, promoting, cultivating, and supporting student entrepreneurship in the UPenn community. Working on a startup? Interested in partnering? Want to get involved? Drop us a line at apply.innovationfund@gmail.com.