In 1994, Jeff Bezos started Amazon.com with the purpose to create the biggest bookstore in the world. He decided to make significant changes in retailing and implement all innovations in the sphere of e-commerce. Later, Amazon expanded its assortment and began selling DVDs, software, games, audiobooks, and other electronics (Leonard, 2016). Today, one can find almost everything on Amazon. It is also the largest internet company by market capitalization and total sales. But it came a long way to take the leading position.
The Key to Success
Since its establishment, Amazon has managed to surpass all online retail companies. Certainly, it has its own unique strategy that helped it achieve such high results. Thus, the best known operating strategy of Amazon is its relentless focus on customers. A peculiar characteristic of this strategy is that Amazon plans backward by starting with thinking about the product’s press release and ending with the initial steps in promoting the products. The strategy of beginning with the end keeps the personnel focused on the final goal (Kotler, Keller, Brady, Goodman, & Hansen, 2016).
In general, the core idea of this strategy is to lower prices, as they lead to more customers’ visits. If there are more customers, the volume of sales increases and attracts more third-party sellers who pay commission to the site. This allows the company to receive more from fixed costs such as the servers and fulfillment centers that are needed to operate the website. Eventually, such efficiency enables lowering prices further (Kotler et al., 2016). Of course, starting implementing this strategy requires a significant amount of effort, but once it is started, it becomes much easier to maintain it.
Amazon’s Pricing Strategy
The main point of Amazon’s pricing strategy is to lower prices until they become the lowest among all the company’s competitors and for as many products as possible. First of all, the company takes a categorical perspective, namely, it implements different pricing strategies in different product categories. Thus, the same products may be cheaper in one category and more expensive in another. For example, the most popular Amazon categories are electronics, books, and games. In these categories, their prices are the cheapest ones among all the company’s competitors, whereas in less favorable categories, for instance, automotive spares, it has the most expensive prices (Saji & Harikumar, 2014).
Additionally, Amazon keeps an eye on its biggest competitors. The company is more competitive than one of the most successful retailers in the industry, being nearly 12% cheaper than Target and surpassing Toys R Us by approximately 16%. In the most popular categories, the difference between Amazon’s prices and its competitors is even bigger.
However, the biggest of Amazon’s competitor is Walmart. Certainly, Amazon cannot beat Walmart’s prices in all the categories (Leonard, 2016). Still, the company manages to provide lower prices than Walmart in its most popular categories.
Differentiation and Positioning
According to Michael Porter, an American economist, there are two business strategies used by companies, namely, the differentiation strategy and the cost leadership strategy. The former is when the services or products offer certain unique attributes that are valued by consumers and that they perceive to be different or better from similar products of the competitors. The latter means the provision of the lowest operation cost in a particular industry (Ritala, Golnam, & Wegmann, 2014). The mixture of these strategies is theoretically considered to be the most efficient but practically is very difficult to implement.
Thus, in terms of Amazon, its core strategy is more cost leadership in comparison to other online retailers. The company possesses high processing capability and many warehousing facilities, which makes it the economy of scale and provides cost advantages. However, the company’s service is slightly differentiated, thereby Amazon a hybrid but not a distinct one. Amazon is also focused on customer feedback, which brings loyalty and encourages consumers to buy more products from Amazon (Leonard, 2016).
The Future of Amazon
In 2017, the company announced its determination to purchase Whole Foods Market for nearly $14 billion by 2018. This acquisition will significantly strengthen the company’s position in the sphere of food retail, thereby making it possible for the company to compete and even surpass Walmart in this sphere (Saji & Harikumar, 2014).
In general, the company will continue placing a big focus on applying innovative technologies, maintaining its customer service, and improving their pricing strategies (Ritala et al., 2014). Additionally, Amazon is planning to maintain its dominance in its most popular categories, develop its other categories to match the same level and extend its assortment further.
One more strategy that Amazon is determined to implement is to become the leader in the shipping industry. The company has recently announced that it is planning to implement a one-day delivery for light-weight products and regions close to its warehouses using drones. In addition, it is planning to continue using drone technology to deliver its products.
Thus, Amazon is the most successful online retailer in the world. It started operating in 1994 and, for such a short period, achieved significant results. In the beginning, it was meant for selling only books while now it has an enormous variety of different products and is a leader in some of its categories. The key to Amazon’s success is its pricing strategy which is unique and based on the mixture of the two strategies, namely, the differentiation and the cost leadership strategy. The future of Amazon is very promising, as it will continue using its successful strategies and will focus on customer service and innovative technologies, which is now more important than ever.
Kotler, P., Keller, K. L., Brady, M., Goodman, M., & Hansen, T. (2016). Marketing management. London, UK: Pearson Education Ltd.
Leonard, D. (2016). Amazon has been great for UPS and FedEx; now it’s taking their airfreight business. Transport Topics, 31(4), 28-30.
Ritala, P., Golnam, A., & Wegmann, A. (2014). Coopetition-based business models: The case of Amazon.com. Industrial Marketing Management, 43(2), 236-249.
Saji, T. G., & Harikumar, S. (2014). Assessing profit potential of Indian information technology industry: An application of Michael Porter model. Productivity, 54(4), 350-384.