How Amazon made CEO Jeff Bezos the world's richest man!
Brands have become more important online than they exist in the physical world. This is proven right, as the word "Amazon" no longer picture the largest and most powerful river or the world's largest rainforest.
Brand is the image that consumers have in mind. The name Amazon (just like googling) has associated itself for online shopping. Brand is the unique characteristics that have been developed all the time in order to differentiate actual products from the competitors. Amazon’s vast selection of products and the low prices prominently embedded into their branding, differentiating itself from other competitors.
Amazon is one of the well-known success stories in the history. It started the business not by setting a brand identity - it started by setting a brand’s purpose. Amazon claims to be the “Earth's most customer-centric company”. Amazon’s vision is to “build a place where people can come to find anything they might want to buy online”. Purpose-driven companies tend to make more money, have more engaged employees and more loyal customers. Amazon is able to maintain its image as an organization that will always care about its customers. Its purpose includes the sales to be “at the lowest possible prices” with razor sharp profits.
The Brand “Amazon”
Amazon is now worth close to three times its biggest brick-and-mortar equivalent Walmart, where 10 years back, it was only one fourth of the value. Main differentiator between them is not about online or in-store as we will find out in the next sections. Walmart held on to the world’s most valuable retail brand until 2013, when Amazon overtook. Amazon has become percent in every touchpoint in customers daily activities, while Walmart continued the same set of interactions.
The more a customer interacts with a brand, the greater the emotional connection is.
The Home Depot is no longer a formidable competitor to compare with Amazon or even Walmart. But the comparison between 2008 and 2018 provides a benchmark on how average growth of a company such as The Home Depot and gives an indication as to the market growth.
Today, tech companies occupy the top five of the world’s best brands. Amazon received the World's Most Valuable Brands in 2017 by: Forbes and World's Most Admired Companies in 2018 By: Fortune. Amazon rated 62nd place in 2007 raised its ranking to No 5 by 2017 in Interbrand.
The strength and value of the Amazon brand gives it stakeholder permission to extend relentlessly into new sectors and geographies. All evidence suggests that the amazing Amazon brand is going to continue growing indefinitely and exponentially - David Haigh, CEO, Brand Finance
Amazon and eBay dominated web shopping for a while but Amazon’s growth has not been easy match for eBay. With the rapid change in the ecommerce sector in China, Alibaba is also gaining ground rapidly. Alibaba is clearly more profitable than Amazon, mainly due to the difference of strategies between the two companies. Alibaba's shares gained 64% in the past year and close to 150% over the from 2016, while Amazon’s shares gained 70% during past year and 120% from 2016 making both companies neck and neck.
In 2013, Alibaba handled $240 billion in sales, double the size of Amazon and more than quadruple the size of eBay. While Amazon is much more innovative, Alibaba has a huge growth potential due to its origin. Amazon has recognized the cost of trying to penetrate the Chinese markets and hence they have for now opted out of China and focused on other regions - and doing well.
On the other hand, Alibaba has a firm grip on its home region and looking to expand slowly into other regions. It is predicted by 2020 China’s ecommerce market to be larger than US, UK, Japan, Germany and France combined. This gives Alibaba a huge growth potential outgrowing Amazon.
Creativity, Innovation and Diversification
Amazon's every move to a new sector resulted in new innovations, existing products made way to new projects and products. For example, when Echo smart speaker was introduced and the Fire Phone phased out gracefully. This is where Amazon’s strategy differs from other giants like Google, Microsoft and Apple. While the latter is predominantly focused on a set of technologies, services and products making them predictable – relying on a single platform.
Amazon on the other hand, never “stayed in its line”. Can you imagine how absurd it would sound if Google start selling garments, Microsoft selling grocery items or Apple starts delivering fast food? On the other hand, Amazon continued its experiments in furniture in 2004, cloud solutions in 2007, consumer goods in 2008, electronic accessories in 2009 and even diapers 2014. Latest twist from Amazon, where the acquisition of Whole Foods and in early 2018 opened an Amazon Go grocery store in Seattle. Amazon is predictably unpredictable. It’s never ending expansion in to new businesses have brought its brand to the top in Global 500 by Brand Finance in 2018.
Amazon is only having one voice across varied mediums and is creating one consistent brand identity across different platforms. It ensures that each interaction with a product or a service, enhances the next. It continues to expand and increasing the touchpoints with everyday consumer enhancing the brand loyalty.
Public Opinion
Surveys show 81% of US citizens have a positive impression of Amazon. Prime example is when, President Trump has been criticising Amazon over its use of the United States Postal Service. Postal Service has been bleeding money for some time, but Amazon has been its main income generator. When given the choice between President Trump and Amazon, it has been said the clear choice would be Amazon.
The Attitude
“ If we can keep our competitors focused on us while we stay focused on the customer, ultimately we’ll turn out all right” - Jeff Bezos
Offering the widest possible range of products, with new innovations, scaling from small to large rapidly. In doing so they are exploiting affiliate products and services well. Above time line shows the usage of existing tools and platforms to be the basis of new creations. Amazon has the advantage of cross selling its products across the different platforms. Continuous rapid growth and keeping the momentum.
Customer obsession is the key differentiator between Amazon and its competitors. It users set of customer-friendly applications and services to ensure customer is happy. Low affordable pricing strategy with razor sharp margins. Company is focusing on growth and not worry too much on profits.
Brand Suffered during 2014-2015
Amazon's brand took a dip in 2014-2015. So, did the other company financial KPIs. As the reason for slow decline, the strategy was criticized over aggressive product differentiation and said Amazon has over stretched itself logistically.
Amazon kept on expanding its workforce and it began to experience pressure to pay higher wages. Overworking its existing workers is a result, when a company expands too rapidly. Policy of forcing warehouse workers to work unpaid overtime, Amazon was quick enough to rectify the issues and recovers in 2016, but the progress was slow as the lack of cooperation from Amazon towards the reporters. Amazon learned how it should work with the media, not allowing the media to work against it.
Not all projects Amazon kicked off when smoothly. Amazon is continuously trying a lot of new ideas and some of them don't always pay out. On the other hand, company attitude forced tough deadlines and its ambition to succeed ensured project continuity even though the failure was imminent. For instance, Amazon Destinations was launched as a travel website that was expanded to 35 cities within four months. However, 6 months down the line, Amazon did not find the right friction and decided to close the website.
One of Amazon's biggest projects, The Fire Phone which was an attempt to get into lucrative smartphone business, didn’t go well. Amazon first released its smartphone in 2014, but it just didn’t compete well with iPhones and Androids. Amazon priced the products incredibly low – at marked down the price of the product to 99 cents at one point and it still couldn’t put them back in to the competition.
Another thing to notice is Amazon's ability to shut down projects without drawing much attention. In 2014 and 2015 all many projects were closed abruptly, mostly due to lack of resources and time during the planning stage – blindly expanding faster than the company can handle. Failing dozen of large projects during couple of years, didn’t help Amazon’s strategy with keeping low margins and rapid expansion, resulting in a dip in Financial and Branding statistics.
Jeff Bezos Embraces Failure
" If you think Fire Phone is a big failure, we're working on much bigger failures right now" - Jeff Bezos
Company attitude towards failure has been amazing and it adopts the approach that size of your mistakes needs to grow along with the company. You need to make "big, noticeable" mistakes to learn and adopt faster.
Amazon Auctions, didn't work out very well. However, the experience of Amazon gathered from launching Amazon Auctions was used to introduce a new product called zShops, which also miserably failed. Instead of giving up, Amazon used both these project experience and launched Amazon Marketplace, which now accounts for over 38% of the total products sold. What at first looked like a massive flop has now become an enormous success.
Financial Stats
Advertising and marketing spend of Amazon in 2017 is way more than Walmart, Best Buy, Target, Home Depot, Kroger and Costco combined.
In 2017, Amazon became the fastest company ever to reach $170+ billion in annual sales. However, Amazon is spending enormous amounts lengths of time on things that don’t make money. Amazon spent a 7.2 billion on shipping costs in 2016. This is especially due to shipping of small parcels to worldwide. Focusing on long-term customer loyalty over short-term profits.
In 2008 if you put $100 in amazon shares it would be worth more than $20,000 as of June 2018, making it one of the most successful stock stories from the market over this period.
The above diagram provides insights on the Revenue growth over the years while profits remains on average horizontal along the x axis.
Financial stats show Amazon is not exactly a cash cow. However, if they stop the massive investments for the growth, Amazon’s net income and cash flow will increase. Currently operating cash flow is not healthy and unsustainable for a long period. Cash flow and Net Profits stats are like a company with very low to no growth. Given the amount invested for the growth of the company, Amazon is doing just fine as a market leader.
In conclusion, company has a good brand value and shows a excellent revenue growth over time, but its cash flow and profits aren't quite what they seem.
Lessons from Amazon
1. Rapid Vertical Expansion - From books Amazon moved into more verticals. Every new vertical brings new growth acceleration. Plotting which verticals to move into is a difficult decision, Amazon has been making such decisions year after year with a pin point accuracy. They have been calculating the numbers not only to select what to invest in, but to right time to do so. In addition, it makes sure it has the sourcing power to supply high demands and ensure focus on the existing markets are continued without diluting the services. While doing this it's quick to evaluate where there is untapped potential and capitalize on it.
2. King of Innovation – Throughout the past Amazon has been a revolutionary innovator. Its success is also largely stems from its innovative technologies and practices. Survey done by The Boston Consulting Group, Amazon ranked the 4th place last year. Latest research done by Drucker Institute in 2018, Amazon even beats Google in innovation. Most of the companies’ innovations end up staying as just a good idea in the higher-level meetings. Google has been more innovative than many companies but Amazon has been able to do better by making the most out of their employees in a short span of time.
3. Improving Purchase Values - Amazon constantly improves the purchase values and number of transactions by use of different strategies. It has included a recommendation section in its website, suggesting customer to buy combined packages allowing lucrative discounts. Through Amazon Prime, they have improved single purchase values by offering free shipping for purchases above defined limit. Today customers biggest pain point is shipping costs. All these aids in promoting impulsive behaviour of humans, improving the revenue of the company.
4. Driving Repeat Purchase Behaviour - Amazon Prime is not a loyalty program, it an excellent strategy where customers pay to be in a privilege group. It received sufficient marketing so that general perceive it to be of high value to the extent that they are even ready to pay a fee to be a part of it. This provides the buy-in from the customers, which differentiate it from the loyalty programs. It boosts the self-esteem – refer to the Maslow's hierarchy of needs above and not buying is now perceived as a penalty promoting repeat purchase behaviour.
5. Customer Obsession – Amazon offers its customers a world class service. Its staff, tools and set of products all focus in delivering highest possible service. All its platforms are designed such that it serves their customers in the fastest and best possible way. For example, Amazon acquired Zappos not due to its profitability, but understanding its customer service capabilities of the employees. From personal experience Amazon will send you a replacement for a lost package immediately without even investigating if the customer is at fault most of the time.
“ Customers are loyal to us until somebody else offers them a better service” - Jeff Bezos