The Head, The Heart, and Profit Margins

Image by ElisaRiva from Pixabay

There is a great adage attributed to Jeff Bezos that goes like this:

Your margin is my opportunity.

It is largely suggestive of his approach to scaling Amazon. With perpetual reinvestment, Amazon grew in one primary area (bookselling), developed new technologies to support that area (computing power), spun off those off capabilities into viable services (a’la AWS), operated at low margins to price out competitors, gained through volume, reinvested in even more areas (Prime video), and thus continued the cycle.

So in the Bezos context, “their margins are my opportunity” stands for economies of scale, price wars, efficiencies, and races to a sustainable bottom. Bezos attacks areas where he sees soft margins and wedges Amazon into the space with something cheaper, faster, and eventually (thanks to the reinvestment) better.

But this can work the other way, too. As explained in the book Blue Ocean Strategy, it starts by recognizing the value of low-margin, low-cost ventures versus high-margin, high-cost counterparts. It comes down to either the head or the heart. At the most boiled-down, core essence, every customer chooses with one of these anatomical machines before choosing with the other. As explained by the authors,

Some industries compete principally on price and function largely on calculations of utility; their appeal is rational. Other industries compete largely on feelings; their appeal is emotional.

So to return to Bezos, no one really buys anything from Amazon from a basis of emotion. After all, Amazon is inherently a proving ground for humanity’s ability to delay gratification. I remember the feeling when I first used the service. It was incredibly strange to find myself ordering something sight unseen and with a two-day or occasionally three-day wait time.

People tend to forget that now.

Just as surely as people tend to not realize how many of our purchases fit in this utility-based, low-cost field the authors mention.

The point here is that any coherent business strategy must first recognize what part of the human body they wish to appease: the head or the heart? You can choose one but not the other. Try to do both and you’ll fail just as soon as a competitor enters those waters and cuts you out a’la Bezos.

Aligning Parts With Models

If people weighed every purchase with their heart and emotions, modern day retail would probably look a lot more like its long-lost ancestors. Mom-and-pop stores would be thriving. Business in the brick-and-mortar spaces would be booming. Amazon would be a feeble little thing still eking out a paltry existence.

Why? Because that old model of retail was precisely built to serve the emotional appeal of the classic retail experience, replete with the old school department store environment, the sights and smells and sounds of the mall, the haggling over price, service with a smile, the handshake over the counter, and the careful wrapping of those beautiful purchases in pretty ribbon and paper. As the Kim and Mauborgne write:

Emotionally oriented industries offer many extras that add price without enhancing functionality.

There once was a time when retailers, even grocers, couldn’t imagine another way of doing things. Neither could we, the shoppers. And department stores were always looking for an edge. But solely within that red ocean. So they’d build christmas decorations, add snow machines, provide a Santa experience for the kids. Because they, as classic retailers, had built themselves up to compete solely in that emotional space. And we had built ourselves up to expect nothing but that space. As the authors brilliantly write:

No wonder market research rarely reveals new insights into what attracts customers. Industries have trained customers on what to expect. When surveyed, they echo back: more of the same for less.

Then came Walmart. A new blue ocean is born where access (especially for rural markets), vast selection, and low price at-scale disrupted traditional retail. All the expectations were ignored. People were given something they didn’t even realize they wanted. All shopping, prior to that time, had been either uniquely specialized on emotions of trust and limited access (a’la Sears Roebuck catalog, local grocers) or emotions of status and luxury (a’la department stores).

Walmart didn’t try to top that. It just offered something else, something that would appeal to the head on a pure commodity/utility function for all the purchases where low prices matter more than just about anything else. You never saw luxurious decorations, Santa Claus, or even a food court.

The strategy worked. Copycats followed. Amazon is the latest in a long line. Only this time, the strategy doesn’t require the bricks-and-mortar.

All the same, to borrow from the authors, it’s still “more of the same for less.” Less inconvenience, less cost. Amazon will continue to iterate on this plane. They’ll continue to work and work and work to reduce delivery delays to 1-day instead of 2. Then 2 hours.

Can anyone beat them? At best, Walmart will imitate just as surely as K-Mart imitated them. That’s the only way to go because Amazon’s model is matched as perfectly as the technology will allow to the predominant motivation (i.e., body part) that matters most to customers: their heads. Their brains. Their utility-driven, rational actor that chooses Amazon because waiting is fine if it means convenience or lower price.

So in the consumer market where we must appeal to the head or the heart, it’s fascinating to see a single entity like Amazon doing all this work to corner one half of the divide. For any purchase that is more utility-driven, you’re best served with Amazon on just about all fronts. Clothes, hardware, and haircuts excluded.

But there’s still opportunity, of course. Blue oceans abound in the retail game. Not Amazon’s version of the game but the other version. The part that is squarely planted in the emotional divide.

Hearty Bookstores

We’ve seen a lot of success stories for independent booksellers. Everyone understands that these places are thriving today because they offer something Amazon cannot: the emotional experience of classic retail mixed with the specific tribe-like communion of a specialized store for a specialized interest. Mix in community-building events and clever hybrid concepts and you get miniature blue oceans that continually evolve in ways that Amazon cannot.

Does it make a book cheaper? Of course not. Does it expand the selection? Not at all. If that was the objective, these bookstores would have disappeared long ago. Because that is where Amazon competes — on price and selection.

So they beat Amazon by serving what Amazon can’t: the heart.

It probably feels like a simplistic model. I suppose it is. Choosing the serve the head or the heart is something of a false dichotomy. You can’t go out and create some wildly impactful service, like a bookstore, and charge $1,000 a book.

But you also can’t open up Norm’s Bookstore and just have books on the shelves, limited in number and listed at retail price, and expect people to come in droves.

More importantly, you can’t expect to win by lowering your prices further. You’ll never be reliably cheaper than Amazon. Instead, you have to go in the other direction. You have to make Amazon’s low margin your opportunity to tackle the high margin. That means add-ons, experiences, and other features that address the needs of the heart a’la the classic retail model of old. It means always tacking your course towards ever-greater customer experiences.

How? Well, that’s the tactical part that depends on each industry. And frankly, those tactics seem a lot more fun than what happens over at Amazon with their relentless pursuit for mechanized efficiency. But the strategy piece is the choice in this fork at the middle of the road.

On one side is scale, low price, high volume, low margin service for “the head” or the rational, utility-driven marketplace.

On the other side is short-head, long tail, high price, low volume, high margin service for “the heart” or the emotion-driven marketplace.

An Unavoidable Choice

Every player in every industry eventually crystallizes on one side or the other. Bookstores are just the latest to really understand this. Other industries will follow. It’s been happening with movie theaters for a while. Look no further than Alamo Drafthouse and the fast-following that occurs with Regal Theater’s Cinebarre concept once their more low-end utility-based experience was upended by Netflix and other SVODs.

I could go on and on. The point is that products and services blend towards one destination or the other. Over time, these things serve more and more to one of these ends. Choose your path (the head or the heart) ahead of time, and stick with that choice, and you might have a coherent strategy and a real chance. Otherwise, your margins will be someone else’s opportunity.