Amazon: a case study on the retail serial killer

What the heck is going on over there at Amazon and what should we be learning?

I suppose any company serving roughly 300 million customers and doing $135 billion in revenue is worthwhile to look at and understand (as well as one could understand a company such as Amazon). Amazon has exploded from a nothing startup in a garage 20 years ago to the world’s foremost commerce giant alongside Walmart and Alibaba with very few companies able to compete on the scale of Amazon. They have come through and singlehandedly wiped out billions of dollars in retail companies value while increasing their own value by the same or more. Amazon has decimated the industry standard for shipping speeds at all eCommerce companies. They have created an ecosystem which, for a very reasonable yearly fee, provides enough value for customers to prefer Amazon as the starting point for almost 1 out of every 3 purchases online in the US. Beyond this, they have automated entire multi-million sq. ft. warehouses operating with more than 45,000 robots to distribute goods. Amazon introduced the largest cloud computing service in the world, owning roughly 30% of that entire market, and only growing faster and faster. Beyond this, Amazon has one of the largest content distribution networks in the world. So, there’s a lot to understand behind the behemoth “commerce” company, far more than could really be observed in one single post. Here I am actually going to be focused in on their eCommerce operations, more specifically what is controlling the product selection for each person, and how Amazon delivers an end-to-end personalized, efficient buying experience. Sound good? Let’s dive in.

More to Amazon.com than you think

I’ve just pointed out a few things behind Amazon that you probably already knew about but may have overlooked. Now, specifically, the Amazon website and the products listed there have an incredible amount of “things” happening behind the scenes. First of all, most products shown to you are actually very personalized to you. Also, of course, there is a ton of different content delivery networks happening from the site itself. All the Prime movies, books, and TV shows available are contained on the backend of their site, and again it is all personalized to you. What some people may not know is about the wide range of services and products Amazon offers beyond its commerce platform.

Amazon Web Services is the leader in cloud storage and computational power. Amazon has their drone program, which one might argue has the most potential at succeeding on a large scale. Amazon robotics is a whole division dedicated to the automation of warehouses, automation of product movement, labeling, and last mile delivery. Behind the scenes of each of these are the various components that are supporting their massive volume of transactions happening, entire business units dedicated to keeping each business unit up and running. As you can see with the graph below, Amazon is hiring in multiple different key business units, and a huge amount of hiring is happening within their cloud services division.

Beyond this, you have some of the hardware divisions Amazon runs like Kindle and Alexa and the entire ecosystems guiding this whole part of the business. Each of these devices is really nothing more than a way to sell more products by having each product at your fingertips at all times. In addition, Amazon has created their own Android app store to power their Kindle devices, which also leads us to their apps available within Alexa, that automate what someone can do with their voice right in the comfort of your home. If you switch over to the new side of Amazon, the physical delivery of products, they have recently decided to purchase Whole Foods, and they began rolling out what accounts for at least 11 bookstores so far throughout the US. Beyond this, they have set up a network of cubbies to deliver product to, which people can come back and pick up at their convenience. Their ecosystem really doesn’t seem to end. Each month it seems they are entering a new business, like last month when they announced Amazon wardrobe which will allow you to have a box full of clothes delivered, which you only pay for the clothes you like. The lesson here is to continue to innovate, and sometimes the level of innovation requires going outside of the core market to reach the target. Here, I mean that controlling the device you buy through, means controlling how and where they buy from.

This chart is also crucial in seeing just how much investment is being put into their computing side of things, specifically with relation to AI, AI-as-a-service, and Alexa as a voice interface platform. For this full report from CB Insights, click here.

Amazon Recommendation Engine

One of the smartest functions behind Amazon, and perhaps one of the biggest features to make Amazon a success was their genius use of automatically recommending products after a purchase, and according to what other people had purchased after or in relation to their current purchase. Being able to do this correctly requires an awful lot of data, which Amazon has accumulated. One key point is that you need to start accumulating data right from the beginning to make sense of it all over time. Carrying the entire purchase history from one customer’s lifetime is massively valuable in anticipating in their next moves.

According to a Fortune magazine article on Amazon published in 2012 “Judging by Amazon’s success, the recommendation system works. The company reported a 29% sales increase to $12.89 billion during its second fiscal quarter, up from $9.9 billion from a year earlier.” Looking at the success of Amazon then, and looking at the current success of Amazon, it’s clear to see the impact their recommendation engine, dubbed “item-to-item collaborative filtering” is capable of. The current numbers for the first quarter of 2017 is $35.71 billion in revenue compared to $29.1 billion a year ago. This jump of 18.51% y/y growth for a company this size in incredible. So, is it the recommendation engine that’s doing it?

If you look at almost every single high-quality, good brand website today, it will be providing you with feedback according to the way you use that website. This is because people are far better at making decisions based on a limited but relevant choice set. It’s easy for a Prime user to watch this title that was similar to another one they just watched, or for me to grab these jeans with that top because 1,054 other people did the same thing. So, while many retailers and eCommerce merchants are beginning to have this system in place, it’s not been fully utilized to the extent Amazon has it operated. With Epic Commerce, this level of sorting products based on user behavior, and cross coordination of the product with what other customers have purchased is all easily incorporated. The full capability comes when you can utilize and create logic based systems with multiple steps, to continually drive more customer conversions based on product selection for specific product segments.

Here is a look at how a recommendation system, aided by AI works to deliver more relevant products based on each customer event. This is slightly technical, and it may be different in some ways from one to the next, but generally, this is how it will work.

Furthermore, the same Fortune article went on to mention the intelligent use of emails and email segmentation based on the same degree of specificity as the product selection stating “Amazon also doles out recommendations to users via email. Whereas the website recommendation process is more automated, [the emails] remains to this day a large manual component.” This automation of both the products and the emails is crucial, something we included within Epic Commerce enables any commerce operator, much the same as Amazon to drill down and deliver the right products for the right events. Later on in the article, the same Amazon employee mentioned: “[The] lesser known fact is that the company employs a survival-of-the-fittest-type revenue and mail metric to prioritize the Amazon mail ecosystem.” She also states “It’s pretty cool. Basically, if a customer qualifies for both a Books email and a Video Games email, the email with a higher average revenue-per-mail-sent will win out.” This method is a great way to use the logic component contained within Epic Commerce where you can drill down to choose right targeting logic based on data for which emails a person should be added to, then segmenting those lists, with intelligent product selection, to increase conversions. Along the way in this process, at Amazon, they have introduced a magic program entitled Prime.

Amazon Prime Brilliance

How do you get millions of people buying more all the time? You introduce them to a program where they not only feel good about buying, but they feel forced to buy to get their values worth. Amazon’s Prime membership is a pure value driven perception model that works extremely well. The success of Amazon Prime has led to more than 79 million Prime accounts in the US alone according to Inc magazine. With this staggering success, a critical look at what is included in Prime, how it operates and separates itself on the site, and how it keeps customers coming back.

If you broke Prime down into its components you would find 22 separate benefits provided through your $10.99 subscription per month average price of Prime. I have to admit I felt kind of guilty putting this little image together but I do think it’s important to realize what is working, where you might want to steer clear of, and what you might be able to leverage in your own system to sell more.

As you can see, the benefits are quite wide ranging but cover the gamut of your needs. Let’s break each section down to see how/if it makes sense to incorporate, the largest one being free shipping and two-day shipping speeds. Now, hopefully, no one plans to copy this exact strategy, as I think they’ll be in the dust. However, there are some lessons we can learn here in terms of accessing your best customers in areas they consider really crucial. Clearly, delivery speed is a big one, so while it may be more expensive, the repeat purchases are worthwhile to incorporate this strategy. You can do this with an API like EasyPost which will select the appropriate carrier, and negotiate the rates for 2-day. Based on your own volume, and your own negotiations with shipping carriers, you may be able to figure out a good value for offering comparable speed in shipping. Below is a section dedicated to Amazons push for faster delivery in much the same ways Google has pushed for faster internet. In both cases faster=more=better.

In some of the other categories, for most major retailers they are not going to start offering streaming services, so benefits like this within a Prime type program will need to come from alternate sources. Yes, part of the allure of Prime is their varied offerings, but if you are able to coordinate the right one for your business, those same options are available to keep customers coming back. Here are a few ways I could see this working:

• A retailer offers an automated weekly box of your top 10 most purchased items from their grocery store with free shipping for only $19.99
• A clothing brand offers up gym partnerships, monthly clothing box, and free shipping over $30 for $24.99/month
• Home appliance stores offer up a service contract for quarterly updates, or simply offering a leasing program at a fixed tier per month for a set of appliances.
• A luxury marketplace offering a transport to receive items in person for a fixed monthly amount.

If your store, marketplace or eCommerce shop is planning to offer a Prime like version, you may want to consider how you will leverage this audience, and how the program works to benefit your regular product set. It will certainly not make a whole lot of sense to offer quite complex of a package for your customers, however even in the shipping case, you actually might be surprised what you can line up for a reasonable fee to ship at comparable speeds. Think outside the box to see what companies you might collaborate with, which subscription aspects you could easily incorporate and deliver, and what you might want to do to reign in customers more and more frequently.

Amazons in your home

A key component to Amazon’s current and future trajectory will be getting into the regular consumers home. They already have a route there, which makes it ever more important to have a method of getting you to purchase. The push for a while now to get Kindle tablets that are cheap and effective as a reader tablet has really only been done to push more digital content. This was one of the first moves taken to have a more physical presence in the hands of their customers. Turns out it worked pretty well for tablets, initially because of their ink display on the first earliest models. This led to an Amazon phone, which failed, but eventually led to the idea of Amazon Echo. This unique model took what Google and Apple were already doing with voice control, but applied it to a simple unit that sits on the counter and accepts voice commands for music, timers, recipes, books, add items to shopping lists, add products to buy on Amazon, and more. The “and more” part is referring to the more than 10,000 skills for Alexa, the voice control algorithm.

It turns out having these units in someone’s home is an absolutely genius way of spreading your products and capabilities around. Alexa will, for instance, automatically set up a subscription to dog food, which is ordered automatically on the 12th of the month. Forget one-click checkout, its now a matter of saying it when the thought hits, and yes this does improve the conversion ratio :-) Beyond this, Amazon has taken the step to create “buttons” which connect directly with your chosen brand. These buttons can be placed in convenient spots where the thought comes into your head to reorder. When you push the button, via Wifi your message is sent to Amazon as a purchase on your account. The point here is to become the standard at the point in which you decide to order something for yourself or your home. So far it works. It works for Amazon because of their massive inventory selection. This may not be your inventory level, so how can you benefit from being in the home?

Somewhere in or around the home, you’re product or product set has a fit. It makes sense to make it as easy as possible to buy. That being said, what if you have a product that isn’t purchased a lot, what do you do? In this case, there could be a few options. One would be to very simply include in your app or website, a reminder alarm to repurchase at the customer chosen the time. Got customers whose jeans wear out or new styles are a must, announce the first clothing ordering service, or turn it into a whole program and customize a look/style for this person, and enable them to get a new piece whenever they push your “outfit order” button. Heck, for some it may even be worthwhile to create an Alexa skill or a dash button. Sometimes the enemy can become your friend if you’re careful in your approach. So, while it may seem outside the cards, this type of program or “on-click” reorder can be implemented for a few thousand, maybe less depending on your own infrastructure to deal with. Reach out to a specialist@orkiv.com with your own consideration and let’s see what can be done for your business. Beyond the in-home reach, there is a tight price war going on, so let’s see how Amazon has battled this, and what you might be able to learn.

Low margin, frequent purchases

One of the critical things to note about Amazon is that for the longest time they were not profitable, and only in the last few years have they made a good profit. But, this is mostly due to the fact that even though they may not be making a huge profit on any one item, they are making a small profit on millions or, billions of items. Much of this success can be credited to their effort of increasing the purchase frequency of their customers, rather than targeting for margin or acquisition of customers. Prime plays directly into this by offering those customers an easy way to keep purchasing. Everything from a pen to a pencil skirt can be purchased quickly so customers have not to worry about when they order, they just do.

You want your customers to order when they want to order. It reminds me of an episode of [insert sense of humor please] How I Met Your Mother where Barney buys a converted van calling it the “shag wagon” because he realized if he could cut down the time between the bar and his bed, his odds improved, so he would park the van directly behind the bar and thus lowering the time. The same goes for customers, you want them to be able to purchase quickly, when they want, where they want, how they want etc. So, if this means you need to give them a button to stick on their dresser that they can order your clothing from by clicking it, so be it. The whole point of many of the in-home elements is to increase the purchase frequency.

By focusing on the customer’s experience and how frequently they are purchasing from you, inherently you are increasing the loyalty and lifetime value, so all measures should be taken to improve your purchase frequency. This very idea of the increased purchase frequency is also why Amazon has gained so much value in their stock. Investors realize a stock is bought primarily when the expectation of future cash flows will outpace the current value of the stock being represented, thus, anytime we increase frequency, we increase revenues faster and provide more necessary cash flow to keep going even if the margin is super low. One powerful example of this in action is the example of a loss leader, which many retailers will do. Amazon, however, has exacerbated this rule with most of their hardware devices. They will sell their devices as “loss-leaders” because they are sold at cost or below, but they realize in order to have this device you need an Amazon account, and you pretty much always will be entering your Credit Card to use it, so, with that they offer a barrage of highly personalized items and means to purchase them. Over a short period of time the amount of content you purchase outweighs their loss and then some on the hardware they sold to you.

Interesting Amazon Factoids

• Amazon operates 90 different business units, many of which are of relation to their eCommerce business and the respective units in Europe, UK, and recently the Middle East.
• Amazon Dash buttons: 250
• Amazon net income Q4 2016 $744 million
• Amazon owns 10% of the North American Retail Market. Office Depot, Apple, Walmart, and Staples own another 10% leaving 1000+ retailers to fight over the remaining 80%
• Initially, Jeff Bezos was going to name the company Cadabra after AbracadabraI. Another contender was relentless.com which still forwards to Amazon.com
• In the early days, and still to this day, Amazon uses doors as desk and sawed off 2x4’s for legs
• The company is entirely different from most tech companies, offering no subsidized food, vending machines without light bulbs, and new hires receive a backpack with a power adapter, laptop dock, and training materials, which they are asked to return if they resign
• Jeff Bezos is set to become the richest man in the world
• Amazon spent $7.233 billion in 2016 on its international marketing efforts

Amazon shipping speeds past the competition

One of the most important aspects of the entire Amazon ecosystem has been their rapid improvement in shipping speeds. This has led to an amazing competitive advantage by drastically increasing consumers expectation of shipping speeds. With their shipping advantage, it further plays into the Amazon ecosystem since they become nearly as competitive as brick and mortar with far more efficient and cost-effective distribution methods. Not only have they cut regular shipping speeds and made them free for Prime customers, but they have done even better in many cities with Prime Now and Amazon Fresh going out within 2-hours and 1 day respectively. In another effort to speed up shipping in bigger cities, Amazon has also taken the bold step of adding its own fleet within many of these cities. For instance, in Boston, an Amazon delivery truck is as common as a FedEx or UPS truck!

Shipping speeds have proven to be an important factor in the customer’s eyes. Amazon noted this and has invested billions into improving their own infrastructure to deal with the massive volume of shipments being made. All that has come down to an overall improvement in the entire supply chain. With that effort, Amazon introduced the marketplace back in 2000 which has grown to roughly 49% of its business as of current times. Their infrastructure is a massive enabling factor for vendors who are selling through Amazon as they can now rely on Amazon to store their product, present eyeballs on their products, facilitate the sales of a product, and to ship it out on time to your customers. It presents a strong option for any brand with their own product.

In addition, Amazon has over 49,000 robots working for them in their warehouses doing everything from labeling to pallet handling to picking product. This impressive display of automated workforce has certainly helped Amazon to make the Prime economics work in their favor, if even on a very fine line. As Jeff Bezos famously said “A lot of people ask me what things will change at Amazon in the next 10 years, but I almost never get the question of what will stay the same at Amazon in the next 10 years… And I submit to you that that second question is the better of the two — because you can build a business strategy around the things that are stable in time. In our retail business, we know customers want low prices, and I know that’s true 10 years from now. They want fast shipping, they want vast selection. It’s impossible to imagine a future 10 years from now and a customer comes up and says ‘Jeff I love Amazon; I just wish prices were a little higher.’”

For a look at negotiating and funding your own 2-day shipping effort, look into one of the native integrations within Epic Commerce, called EasyPost which will utilize over 30 shipping providers, enabling bulk rates, international, and one-hour via Postmates or Favor. In other cases, you may be able to work a joint shipping contract with another complimentary retailer which you both go in on one shipping account to get a bulk rate cheaper than the competition. There are other ways to subsidize this cost as well, one might be setting up several, smaller warehouses which are right outside the larger cities and territories you find particularly attractive.

Amazon has better technology

This is the fundamental truth of Amazon. While they are seen as a giant retail company, the business is entirely focused on technology, only so far as it enhances the customer’s experience. From the way the site loads to the products that are packed together, to the suggestions being made, Amazon has technology playing a role in all aspects of the customer experience. For this reason, AWS, the web services division of Amazon has the most job openings. Their investment into AI and AI-as-a-service represents an enormous market in an already fast-growing area. This all comes back to enhance their own offerings as AI controls more and more of the products we see available on Amazon, related directly to our purchases. Amazon knows that faster purchases and lower prices are at the heart of what customers expect, and you can bet they plan to deliver.

One of the most aggressive moves from Amazon may come from the futuristic drones and distribution hubs they plan to use to sling out thousands of products even faster around the country and the world. In another area, Amazon invests into the robots doing their packaging to see if they can package and get products out the door faster. All these activities are being advanced by their own in-house technology. This technology is unlikely to be commercially available for companies anytime, so it becomes an internal discussion you must have with your team or boss, to invest in the right technology that will move your business forward. If you sit around and wait, you will be within the sights of the Amazon serial killer. Want to start somewhere, you can start at the recommendations and engagement strategy Amazon has come to rely on. Their recommendations system and the pairing of appropriate products is certainly something that can be done, yet rarely are there efficient systems out there to do it (though Epic Commerce is a breed among us that can).This recommendation system is paired by emails and notifications that go out at relevant times according to purchases I have made, automatically enticing me to buy. These things, while rudimentary to Amazon shoppers, are hard to come by.

Looking at buttons, drones, and distribution tech is a hard thing to consider when everything else is going to shit, but perhaps it’s the look you need to take. If you aren’t investing in and considering options, there’s a good chance you won’t be around to see the future of retail. Technology doesn’t have to be a challenge, it simply requires a small understanding of what is possible before you realize it is all achievable.

Riding the wave or drowning

There have actually been some remarkable advances in retail technology, the wave if you will. But, so many are drowning underneath it’s hard to tell where the wave leaves off and the stack of retail corpses leaves off. This sad but unfortunate truth leaves only one path forward which is through more technology, more collaboration with retail partners, more shared systems and an overall easier buying experience for customers. It is weird to me that the only crazy retail ideas from large-scale retailers are coming from Amazon. Where the heck are the rest of the retailers, and why are they not investing in their own new systems, updated AI based commerce systems and more customer-friendly experiences that ignite growth? I sure do hope you aren’t drowning, but if your up on the wave, make sure to keep carving, keep innovating and keep trying things out. Technology is your friend, treat it as such with the consumer experience in mind and you’ve got a solid wave to keep riding.

Amazon is a beast of a company for most to wrap their head around, myself included. It can seem like there is no end in sight, but if you want to keep your retail company prosperous into the nex gen of commerce reach out to a specialist@orkiv.com or check out Epic Commerce for a way to leverage all the underlying technological pieces of Amazon within your business.

If you enjoyed the write up a share or like goes a long way. If you’ve got a comment, I always love a good conversation. Enjoy, carpe diem!