January 18, 2017

Competing With Amazon

Recall our eight pricing tiers (you might have 38, that's fine, there's no right/wrong answer to this)?
  1. Full Price.
  2. Liquidations.
  3. Specials.
  4. Rewards.
  5. Shipping Promotions.
  6. Promotions.
  7. Inconsistent Pricing.
  8. Lies.$
Here's a question I frequently receive from companies competing with Amazon.
  • "How do I compete with Amazon?"
Good question!

Amazon largely combined product depth with (1) (3) (4), with low prices being core to (1). Better yet, they use multiple sellers of the same item to drive down price ... the sellers may all leverage (1) as a strategy, but then the customer sees a very low price for (1), which accomplishes the same tactic that an individual brand leverages with (6).

Therein lies the problem. We cannot compete with Amazon because we don't run a marketplace where competition drives down the apparent "full price" of an item.

We see the impact of this tactic in Amazon Prime. Amazon can sell at full price (1) albeit a low price because of marketplace factors (in many cases), which drives down the price, allowing Amazon to charge for shipping (Amazon Prime), which acts as a reverse of (5), a "(-5)" if you will. But the net of (1) and (5) and fast shipping and a broad merchandise assortment trumps anything we (as an individual brand) can do.

In other words, we pay $100ish up front for Amazon Prime, then we order 50 times a year yielding $2 for shipping. When we buy a widget ...
  • We pay $49.99 for the Widget.
  • We pay $2.00 for Shipping.
  • We get the item in two days.
  • Cost of goods is $30.
  • Amazon might make $12 after factoring in a $10 shipping cost (49.99 - 30 + 2 - 10).
Now, our individual brand is selling the widget for $60 with a $30 cost of goods. And we used to charge $15 for shipping that cost us $10. So we used to make (60 - 30 + 15 - 10) = $35 on this item.

So we run a 20% off promotion in order to "compete" with Amazon. $48 - $30 + $15 - $10 = $23 profit per item. We need a 52% increase in unit volume to overcome the loss in profit.

But shipping isn't competitive either. So we offer 20% off plus free shipping. $48 - $30 + $0 - $10 = $8. We're making $8 per item, meaning we have to sell 338% more items to overcome the loss in profit. Well, that ain't happening, is it?

Worse, we're at 20% off plus free shipping, so we've destroyed our ability to sell at full price. We broke our promise and we lost money in the process.

So the secret to competing with Amazon isn't to compete with Amazon, because you can't compete with Amazon. You have to do something fundamentally different.

You could outsource commodity items to Amazon and let them take 30% off the top (which is not fundamentally different than a 30% ad-to-sales ratio). You become a supplier to Amazon, a vendor if you will.

Or you could move into rewards (4) and create compelling programs that enable you to give benefits that the customer does not receive from Amazon.

This is why I consistently speak about creating a Unique Point of View that results in Low Cost Customer Acquisition Programs. We have to do stuff that is outside the realm of Amazon, stuff that allows us to charge a premium. And I realize this is risky stuff that is not likely to work. But Amazon is using the Tier strategy above to lock you out of subsequent business from customers. So you have to do something different, something outside of the Tiers outlined above.