Can you Make Up in Volume What You Give Away in Margin?
Amazon’s sales are down. Earnings fell short of expectations. And looks like the story in the first quarter will be much the same.
No sooner than hearing this, investors gobbled up shares, which made the stock jump close to 10 percent after trading hours.
Sales down, profits down, stock up? Has Alice gone through the Looking-Glass again?
The analysts are basing their optimism for the future on the margin increase and the promise that they will continue to improve.
Amazon has, of course, built something extraordinary, not the least of which is a customer service ethos that continually overdelivers to the delight and current loyalty of its customer base. I am, full disclosure, one of them. A recidivist.
But I worry that they haven’t learned the lessons from cataloguers of yesteryear. Free shipping and big discounts can hook your customers. They are drugs that create a single-minded, short-term focus for customers that detract from Amazon’s real value. By nature, it’s a losing proposition.
Can Amazon consistently grow margin by selling below it? Not likely. Can you make up in volume what you give away in margin? Not likely, either. History teaches us that no one is invulnerable.
The lesson, I think, is in a different news story — Google’s decision to start creating You Tube channels that are subscription only. We know — from the New York Times to HBO to Netflix — if the right content is there, the customers will pay to be there. It’s all about the value exchange.
I’m rooting for Amazon. It’s already got a loyal customer base. Let’s remember that they were the innovators who used customer data to create suggested purchases for their customers — a technique that’s been replicated just about everywhere online. They just need to continue to give them reasons to believe that aren’t just about cost.
Managing Partner at Dynamic Loop Capital
11 年Nice post David. I think that it's also important to cosnider that investors are keen to Amazon moving to new areas where margin are more lucritive. Their new moves into advertising is astonishing. If succesful, the lower margins from product sales can be offset by them leveraging the data in advertising. It worked quite well for Google which makes $0 margin on search, but make up for it through advertising.
Strategy | Brand Marketing
11 年Very interesting. But I also think that with PRIME they have done more than just give them a financial inducement with free shipping. It's not that the shipping can be free but that it can also be expedited (2-day) so the customer gets the immediate gratification of receiving their purchase at the (almost) time of purchase. I believe you are right in that what they continue to do right is to continue to DELIGHT their customer. But I think the shipping in their case is not just about something free, it is something (with PRIME) that continues to "deepen" emotional loyalty (as a friend of ours would say)
Owner at Daniel R Embody JR CPA
11 年In my profession, the answer is NO. The tax client you gain by price cutting you will probably lose the same way. I deliver a quality service at a realistic price.
Associate Director Moody's Analytics
11 年I'm not a stock market guru, but perhaps investors are buying on the bad news thinking that the pendulum will swing back the other way. I am experienced with e-Commerce, and have seen the effects of privately held companies getting caught up in a price war. They both end up spinning their wheels for a very low margin, and those profits get eaten up by utility bills, taxes, etc. Sooner or later, one side wins the battle, and raises the profit margin back up, after the competition disappears.