Is Price the Only Strategy?
For anyone not familiar with Greek mythology, Achilles was the famous warrior of the Trojan War. He was invulnerable except for his heel.
Amazon seems to have the perfect strategy. Early on the company decided to focus on capturing customers with the LOWEST POSSIBLE PRICE. Sounds like a worthy goal, right?
From the customer standpoint, we all love it. And in the 20 years of Amazon’s existence, millions of customers have rewarded Amazon with their loyalty for picking this strategy. Estimates vary, stating that between 70% and 90% of American consumers shop on Amazon. Amazon’s stock price is in the stratosphere and shows no signs of slowing down. Everything appears to be perfect.
But is it really?
Any basic business class teaches you that retailing (or almost any business) boils down to the following three things:
- Traffic – Having the people with ability to spend money on products they are looking for.
- Price – Asking the price people are willing to pay.
- Availability – Having the product people want.
Amazon's Price Paradox: A Double-Edged Sword
Amazon has the resources to drive any traffic it wants.
Amazon has the technology to beat any price on the internet in the matter of seconds.
Amazon has been working on building relationships with both brands and resellers on feeding more and more products into its ecosystem.
On the surface, everything seems to be in order. But upon closer examination, a contradiction emerges.
Amazon wants to execute on its vision of having the lowest price on everything it sells. Amazon has shown willingness to execute on this vision at any cost – going back to the days of offering new paperback releases at $9.99 (below its wholesale purchase cost) just to capture the market.
Customers have rewarded Amazon for this, but the same can not be said about brands. Brands that have sold to Amazon have seen their brand equity erode and get damaged when Amazon would discount the products to move them. And brands control availability. You can have the lowest price and the customer willing to pay it, but if you do not have the products to sell – you will sell absolutely 0. And the brands are starting to catch on to this.
The internet is the greatest commercial equalizer of our times.
Amazon may be able to drive the customer to its site, but the moment the customer does not see the product there, he or she will turn to Google and find it on a different marketplace, like Walmart,com, Jet.com, Ebay.com or on a specialty retail site, like Gritr Outdoors. Brands may even have their own site with logistical support system behind it. As long as the product is in the pipeline and it is ready for quick delivery to customer – the brand will sell the same amount of product as it would if it had access to Amazon.
This creates a dilemma for Amazon. If it wants to get in good graces with the brands – it has to deliver on its promise to abide by MAP (or minimum advertised price) no matter what, but this will go against its vision of delivering the lowest price on the web. They will simply become just a “me too” retailer. Knowing Jeff Bezos and his approach to building the company (read The Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone) the likelihood of this outcome is about as certain as predicting the sunrise. And it may simply be too late.
More and more brands realize that in the age of eCommerce, old rules that governed retailing no longer apply. Consumers have power through their wallets. Brands have power by the virtue of being product creators. Retailers are no longer isolated by their brick walls and can not amass power through inventory buying. The ones that will prosper in this new landscape are the ones that will successfully position themselves to carry out brand’s distribution strategy to the end consumers.
So while lowest price strategy may have been the winning card for retailing in the past, it may be turn out to be an Achilles heel for Amazon. Only time will tell.
