Amazon's Path To Profitability
Amazon has a reputation for running its retail business in two ways: offering the lowest price out there and not worrying about making a profit. Neither one of these is true any more. And the consequences loom large for competitors.
The e-commerce giant, which reports holiday earnings results on Thursday afternoon, has evolved from the early days of just hawking books and movies at profit-zapping low prices. Now it has a more calculated strategy of charging the lowest prices on the Internet for only selected items, while charging more for the rest of its products. That could mean trouble for the growing number of retailers killing themselves to meet or beat Amazon's prices.
For example, on Cyber Monday, compared to more than 15 competitors, Amazon offered the lowest prices on only 59 percent of movies, music, and games. But out of the products featured on its self-reported "best-selling product list," 91 percent were offered at the lowest price or within 1 percent of the lowest price, according to pricing analytics firm 360pi.
While Amazon still holds the perception of being a price leader, on any given day, category or product, that's no longer the case, according to 360pi's Jenn Markey. Instead, just like the lazy office worker who's figured out how to do the bare minimum to keep his job, Amazon has figured out how to do just enough promotion to convince shoppers to trust the website, without taking such a hit on its profit margins.
Another profit-saving tactic has been to use its growing number of marketplace vendors to essentially outsource the selling of highly-commoditized, price-sensitive products such as electronics and toys. Unlike other retailers, Amazon encourages its third-party sellers to compete with it on price -- offering similar products for less than Amazon itself.
That way, Amazon can populate its website with its own products, such as the Kindle or Echo, which are nearly impossible to price-match because they aren't available anywhere else. That lets marketplace vendors compete with the rest of the industry on price as they try to sell generic cell phone accessories and computers. As long as the sale is made on Amazon, it still comes out looking like the price leader, regardless of which company actually delivers the product to the end customer.
It's no mistake that the categories with the most e-commerce penetration -- books, media, electronics, and computers -- are the ones where Amazon now essentially outsources to third-party vendors. There's little profit to be made in that game now.
It's the small but growing categories -- pet supplies, musical instruments, automotive, appliances and home goods -- that Amazon's competitors should really worry about. That's where Amazon is looking for future growth. And just like it took over the market for books, games, and electronics, it plans to do the same for these.
As Gadfly's Shira Ovide and I wrote during the holiday shopping season last year, Walmart and Target may be cranking up the profit-eating online discounts to battle Amazon for web shoppers, but Amazon is playing the long game: It's focused on convincing shoppers to sign up for Amazon Prime, its $99 membership program that comes with perks such as free two-day shipping and video streaming.
As the ranks of Amazon's prime membership grow -- it hit 54 million members in December, according to Consumer Intelligence Retail Partners -- it's getting tougher for Amazon to attract new customers. And due to the added promotions and incentives for Prime members, the average amount those highly-coveted shoppers spend is declining a bit -- to $1,100 per year by the of December, down from $1,200 per year from the year before, according to CIRP.
But Amazon's CFO recently told analysts it was "investing very heavily in our Prime platform." And by the looks of this past holiday season, Prime is only becoming more important to Amazon.
The company hammered hard on shipping incentives and extra discounts for prime members during the holidays. Perhaps more telling is that it also offered exclusive products available for purchase only by Prime members. For instance, more than 3 percent of Amazon's toys and games category consisted of products available only to Prime members, according to 360pi.
While the rest of the retail industry is still fighting a price war with Amazon, it seems Amazon is already moving on to the next war.
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Shelly Banjo in New York at firstname.lastname@example.org
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