Amazon's business strategy, revenue model and culture of metrics: a history
I've used Amazon as a case study in my books for nearly 20 years now since I think all types of businesses can learn from their digital business strategy. From startups and small businesses to large international businesses, we can all learn from their focus on the customer, testing market opportunities made available by digital technology and their focus on testing and analysis to improve results.
I aim to keep this case study up-to-date for readers of the books and Smart Insights readers who may be interested. In it we look at Amazon's background, revenue model and sources for the latest business results.
We can also learn from their approach to digital marketing since they use digital marketing efficiently across all customer communications touchpoints in our RACE marketing planning framework:
- Reach: Amazon's initial business growth based on detailed approach to SEO and AdWords targeting millions of keywords.
- Act: Creating a clear simple experiences through testing and learning.
- Convert: Using personalisation to make relevant recommendations and a clear checkout process that many now imitate.
Their focus on customer experience, "Customer Obsession" as they call it is shown by the way they consistently outperform other retailers in their ACSI customer satisfaction rating too. We have our own internal experimentation platform called “Weblab” that we use to evaluate improvements.
A short history of Amazon's growth and business model evolution
So how did Amazon grow to where it is today with turover of $135 billion? Amazon has come a long way since it launched in 1995:
and these offices...
to its current Seattle headquarters:
Amazon performs exceptionally efficiently measured against revenue per visitor, which is one of the key measures for any commercial website, whether it's a media site, search engine, social network or a transactional retailer or offers travel or financial services. Of course profit per user would be quite different due to the significantly lower costs of other .coms like Facebook and Google.
Note: SEC is the Securities and Exchange Commission (SEC) which is a government agency for which companies have to submit an open evaluation of their business models and marketplace conditions.
Amazon.com mission and vision
When it first launched, Amazon’s had a clear and ambitious mission. To offer:
Earth’s biggest selection and to be Earth’s most customer-centric company.
Today, with business users of its Amazon Web Service representing a new type of customer, Amazon says:
this goal continues today, but Amazon’s customers are worldwide now and have grown to include millions of Con-sumers, Sellers, Content Creators, Developers, and Enterprises. Each of these groups has different needs, and we always work to meet those needs, by innovating new solutions to make things easier, faster, better, and more cost-effective.
20 years later, Amazon are still customer-centric, in fact, in the latest Amazon Annual report, Jeff Bezos of Amazon explains what he calls True Customer Obsession :
There are many ways to center a business. You can be competitor focused, you can be product focused, you can be technology focused, you can be business model focused, and there are more. But in my view, obsessive customer fo-cus is by far the most important. Even when they don’t yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf.
Amazon business and revenue model
I recommend anyone studying Amazon checks the latest Amazon revenue and business strategies from their SEC filings / Investor relations. The annual filings to give a great summary of eBay business and revenue models.
A good summary of the latest business model initiatives is always available in the latest Amazon annual report summary. The latest report includes a great vision for Digital Agility (reprinted from 1997 in their latest annual report) showing testing of business models that many businesses don't yet have. Amazon explain:
"We will continue to measure our programs and the effectiveness of our investments analytically, to jettison those that do not provide acceptable returns, and to step up our investment in those that work best. We will continue to learn from both our successes and our failures".
They go on to explain that business models are tested from a long-term perspective, showing the mindset of CEO Jeff Bezos:
We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.
The latest example of innovation in their business model is the launch of Amazon Go, a new kind of store with no checkout required. Boasting a "Just Walk Out Shopping experience",the Amazon Go app users enter the store, take the products they want, and go with no lines and no checkout.
More recently,there have been a range of business model innovations focussed on hardware and new services: Kindle e-readers, Fire Tablet, smartphone and TV, Echo (using the Alexa Artificial Intelligence voice-assistant), grocery delivery, Amazon Fashion and expansion to the business-oriented Amazon Web Services (AWS). Amazon Prime, an annual membership program that includes unlimited free shipping and then involved diversification to a media service with access to unlimited instant streaming of thousands of movies and TV episodes.
AWS is less well-known outside of tech people, but Amazon is still pursuing this cloud service aggressively. In 2011, they introduced 82 new features and services, in 2012, 159 and in 2013: 280.They now have 10 AWS regions around the world, including the East Coast of the U.S., two on the West Coast, Europe, Singapore, Tokyo, Sydney, Brazil, China, and a government-only region called GovCloud.
In their 2008 SEC filing, Amazon describe the vision of their business as to:
“Relentlessly focus on customer experience by offering our customers low prices, convenience, and a wide selection of merchandise.”
The vision is still to Consider how these core marketing messages summarising the Amazon online value proposition are communicated both on-site and through offline communications.
Of course, achieving customer loyalty and repeat purchases has been key to Amazon’s success. Many dot-coms failed because they succeeded in achieving awareness, but not loyalty. Amazon achieved both. In their SEC filing they stress how they seek to achieve this. They say:
"We work to earn repeat purchases by providing easy-to-use functionality, fast and reliable fulfillment, timely customer service, feature-rich content, and a trusted transaction environment.
Key features of our websites include editorial and customer reviews; manufacturer product information; Web pages tailored to individual preferences, such as recommendations and notifications; 1-Click® technology; secure payment systems; image uploads; searching on our websites as well as the Internet; browsing; and the ability to view selected interior pages and citations, and search the entire contents of many of the books we offer with our “Look Inside the Book” and “Search Inside the Book” features. Our community of online customers also creates feature-rich content, including product reviews, online recommendation lists, wish lists, buying guides, and wedding and baby registries."
In practice, as is the practice for many online retailers, the lowest prices are for the most popular products, with less popular products commanding higher prices and a greater margin for Amazon.
Free shipping offers are used to encourage increase in basket size since customers have to spend over a certain amount to receive free shipping. The level at which free-shipping is set is critical to profitability and Amazon has changed it as competition has changed and for promotional reasons.
Amazon communicate the fulfillment promise in several ways including presentation of latest inventory availability information, delivery date estimates, and options for expedited delivery, as well as delivery shipment notifications and update facilities.
This focus on customer has translated to excellence in service with the 2004 American Customer Satisfaction Index giving Amazon.com a score of 88 which was at the time, the highest customer satisfaction score ever recorded in any service industry, online or offline.
Round (2004) notes that Amazon focuses on customer satisfaction metrics. Each site is closely monitored with standard service availability monitoring (for example, using Keynote or Mercury Interactive) site availability and download speed. Interestingly it also monitors per minute site revenue upper/lower bounds – Round describes an alarm system rather like a power plant where if revenue on a site falls below $10,000 per minute, alarms go off! There are also internal performance service-level-agreements for web services where T% of the time, different pages must return in X seconds.
The importance of technology and an increased focus on Artificial Intelligence and Machine Learning
According to founder and CEO, Jeff Bezos, technology is very important to supporting this focus on the customer. In their 2010 Annual Report (Amazon, 2011) he said:
“Look inside a current textbook on software architecture, and you’ll find few patterns that we don’t apply at Amazon. We use high-performance transactions systems, complex rendering and object caching, workflow and queuing systems, business intelligence and data analytics, machine learning and pattern recognition, neural networks and probabilistic decision making, and a wide variety of other techniques.
And while many of our systems are based on the latest in computer science research, this often hasn’t been sufficient: our architects and engineers have had to advance research in directions that no academic had yet taken. Many of the problems we face have no textbook solutions, and so we — happily — invent new approaches”… All the effort we put into technology might not matter that much if we kept technology off to the side in some sort of R&D department, but we don’t take that approach. Technology infuses all of our teams, all of our processes, our decision-making, and our approach to innovation in each of our businesses. It is deeply integrated into everything we do”.
The quote shows how applying new technologies is used to give Amazon a competitive edge. A good recent example of this is providing the infrastructure to deliver the Kindle “Whispersync” update to ebook readers. Amazon reported in 2011 that Amazon.com is now selling more Kindle books than paperback books. For every 100 paperback books Amazon has sold, the Company sold 115 Kindle books. Kindle apps are now available on Apple iOS, Android devices and on PCs as part of a “Buy Once, Read Anywhere” proposition which Amazon has developed.
Some of the more recent applications of AI at Amazon are highly visible, for example, the Amazon Echo assistant and technology in the Amazon Go convenience store that uses machine vision to eliminate checkout lines.
In their 2017 report, they describe the increased use of machine learning and AI ‘behind the scenes’ at Amazon:
"much of what we do with machine learning happens beneath the surface. Machine learning drives our algorithms for demand forecasting, product search ranking, product and deals recommendations, merchandising placements, fraud detection, translations, and much more. Though less visible, much of the impact of machine learning will be of this type – quietly but meaningfully improving core operations".
Amazon defines what it refers to as three consumer sets customers, seller customers and developer customers.
There are over 76 million customer accounts, but just 1.3 million active seller customers in it’s marketplaces and Amazon is seeking to increase this. Amazon is unusual for a retailer in that it identifies “developer customers” who use its Amazon Web Services, which provides access to technology infrastructure such as hosting that developers can use to develop their own web services.
Members are also encouraged to join a loyalty programme, Amazon Prime, a fee-based membership program in which members receive free or discounted express shipping, in the United States, the United Kingdom, Germany and Japan.
In its 2017 SEC filing Amazon describes the environment for our products and services as ‘intensely competitive’. It views its main current and potential competitors as:
- 1) online, offline, and multichannel retailers, publishers, vendors, distributors, manufacturers, and producers of the products we offer and sell to consumers and businesses;
- (2) publishers, producers, and distributors of physical, digital, and interactive media of all types and all distribution channels;
- (3) web search engines, comparison shopping websites, social networks, web portals, and other online and app-based means of discovering, using, or acquiring goods and services, either directly or in collaboration with other retailers;
- (4) companies that provide e-commerce services, including website development, advertising, fulfillment, customer service, and payment processing;
- (5) companies that provide fulfillment and logistics services for themselves or for third parties, whether online or offline;
- (6) companies that provide information technology services or products, including on- premises or cloud-based infrastructure and other services; and
- (7) companies that design, manufacture, market, or sell consumer electronics, telecommunication, and electronic devices.
It believes the main competitive factors in its market segments include "selection, price, availability, convenience, information, discovery, brand recognition, personalized services, accessibility, customer service, reliability, speed of fulfillment, ease of use, and ability to adapt to changing conditions, as well as our customers’ overall experience and trust in transactions with us and facilitated by us on behalf of third-party sellers".
For services offered to business and individual sellers, additional competitive factors include the quality of our services and tools, their ability to generate sales for third parties we serve, and the speed of performance for our services.
From Auctions to marketplaces
Amazon auctions (known as zShops) were launched in March 1999, in large part as a response to the success of eBay. They were promoted heavily from the home page, category pages and individual product pages. Despite this, a year after its launch it had only achieved a 3.2% share of the online auction compared to 58% for eBay and it only declined from this point.
Today, competitive prices of products are available through third-party sellers in the ‘Amazon Marketplace’ which are integrated within the standard product listings. The strategy to offer such an auction facility was initially driven by the need to compete with eBay, but now the strategy has been adjusted such that Amazon describe it as part of the approach of low-pricing.
Although it might be thought that Amazon would lose out on enabling its merchants to sell products at lower prices, in fact Amazon makes greater margin on these sales since merchants are charged a commission on each sale and it is the merchant who bears the cost of storing inventory and fulfilling the product to customers. As with eBay, Amazon is just facilitating the exchange of bits and bytes between buyers and sellers without the need to distribute physical products.
Amazon Media sales
You may have noticed that unlike some retailers, Amazon displays relevant Google text ads and banner ads from brands. This seems in conflict with the strategy of focus on experience since it leads to a more cluttered store. However in 2011 Amazon revealed that worldwide media sales accounted for approximately 17% of revenue!
Amazon does not reveal much about its marketing approach in its annual reports, but there seems to be a focus on online marketing channels. Amazon (2011) states “we direct customers to our websites primarily through a number of targeted online marketing channels, such as our Associates program, sponsored search, portal advertising, email marketing campaigns, and other initiatives”. These other initiatives may include outdoor and TV advertising, but they are not mentioned specifically. In this statement they also highlight the importance of customer loyalty tools. They say: “while costs associated with free shipping are not included in marketing expense, we view free shipping offers and Amazon Prime as effective worldwide marketing tools, and intend to continue offering them indefinitely”.
How ‘The Culture of Metrics’ started
A common theme in Amazon’s development is the drive to use a measured approach to all aspects of the business, beyond the finance. Marcus (2004) describes an occasion at a corporate ‘boot-camp’ in January 1997 when Amazon CEO Jeff Bezos ‘saw the light’. ‘At Amazon, we will have a Culture of Metrics’, he said while addressing his senior staff. He went on to explain how web-based business gave Amazon an ‘amazing window into human behaviour’. Marcus says: ‘Gone were the fuzzy approximations of focus groups, the anecdotal fudging and smoke blowing from the marketing department.
A company like Amazon could (and did) record every move a visitor made, every last click and twitch of the mouse. As the data piled up into virtual heaps, hummocks and mountain ranges, you could draw all sorts of conclusions about their chimerical nature, the consumer. In this sense, Amazon was not merely a store, but an immense repository of facts. All we needed were the right equations to plug into them’.
James Marcus then goes on to give a fascinating insight into a breakout group discussion of how Amazon could better use measures to improve its performance. Marcus was in the Bezos group, brainstorming customer-centric metrics. Marcus (2004) summarises the dialogue, led by Bezos:
"First, we figure out which things we’d like to measure on the site", he said.
"For example, let’s say we want a metric for customer enjoyment. How could we calculate that?"
"There was silence. Then somebody ventured: "How much time each customer spends on the site?"
"Not specific enough", Jeff said.
"How about the average number of minutes each customer spends on the site per session" someone else suggested. "If that goes up, they’re having a blast".
"But how do we factor in purchase?" I [Marcus] said feeling proud of myself.
"Is that a measure of enjoyment"?
"I think we need to consider frequency of visits, too", said a dark-haired woman I didn’t recognise.
“Lot of folks are still accessing the web with those creepy-crawly modems. Four short visits from them might be just as good as one visit from a guy with a T-1. Maybe better’.
"Good point", Jeff said. "And anyway, enjoyment is just the start. In the end, we should be measuring customer ecstasy"
It is interesting that Amazon was having this debate in about the elements of RFM analysis (described in Chapter 6 of Internet Marketing), 1997, after already having achieved $16 million of revenue in the previous year. Of course, this is a miniscule amount compared with today’s billions of dollar turnover. The important point was that this was the start of a focus on metrics which can be seen through the description of Matt Pounds work later in this case study.
Experiments and more experiments!
Amazon have created their own internal experimentation platform called a “Weblab” that they use to evaluate improvements to our websites and products. In 2013, they ran 1,976 Weblabs worldwide, up from 1,092 in 2012, and 546 in 2011. Now many companies use AB testing, but this shows the scale of testing at Amazon.
One example of how these are applied is a new feature called “Ask an owner”. From a product page, customers can ask any question related to the product, Amazon then route these questions to owners of the product who answer.
From human to software-based recommendations
Amazon has developed internal tools to support this ‘Culture of Metrics’. Marcus (2004) describes how the ‘Creator Metrics’ tool shows content creators how well their product listings and product copy are working. For each content editor such as Marcus, it retrieves all recently posted documents including articles, interviews, booklists and features. For each one it then gives a conversion rate to sale plus the number of page views, adds (added to basket) and repels (content requested, but the back button then used). In time, the work of editorial reviewers such as Marcus was marginalised since Amazon found that the majority of visitors used the search tools rather than read editorial and they responded to the personalised recommendations as the matching technology improved (Marcus likens early recommendations techniques to ‘going shopping with the village idiot’).
Experimentation and testing at Amazon
The ‘Culture of Metrics’ also led to a test-driven approach to improving results at Amazon. Matt Round, speaking at E-metrics 2004 when he was director of personalisation at Amazon describes the philosophy as ‘Data Trumps Intuitions’. He explained how Amazon used to have a lot of arguments about which content and promotion should go on the all important home page or category pages. He described how every category VP wanted top-center and how the Friday meetings about placements for next week were getting ‘too long, too loud, and lacked performance data’.
But today ‘automation replaces intuitions’ and real-time experimentation tests are always run to answer these questions since actual consumer behaviour is the best way to decide upon tactics.
Marcus (2004) also notes that Amazon has a culture of experiments of which A/B tests are key components. Examples where A/B tests are used include new home page design, moving features around the page, different algorithms for recommendations, changing search relevance rankings. These involve testing a new treatment against a previous control for a limited time of a few days or a week. The system will randomly show one or more treatments to visitors and measure a range of parameters such as units sold and revenue by category (and total), session time, session length, etc. The new features will usually be launched if the desired metrics are statistically significantly better. Statistical tests are a challenge though as distributions are not normal (they have a large mass at zero for example of no purchase) There are other challenges since multiple A/B tests are running every day and A/B tests may overlap and so conflict. There are also longer-term effects where some features are ‘cool’ for the first two weeks and the opposite effect where changing navigation may degrade performance temporarily. Amazon also finds that as its users evolve in their online experience the way they act online has changed. This means that Amazon has to constantly test and evolve its features.
It follows that the Amazon technology infrastructure must readily support this culture of experimentation and this can be difficult to achieved with standardised content management. Amazon has achieved its competitive advantage through developing its technology internally and with a significant investment in this which may not be available to other organisations without the right focus on the online channels.
As Amazon explains in SEC (2005) ‘using primarily our own proprietary technologies, as well as technology licensed from third parties, we have implemented numerous features and functionality that simplify and improve the customer shopping experience, enable third parties to sell on our platform, and facilitate our fulfillment and customer service operations. Our current strategy is to focus our development efforts on continuous innovation by creating and enhancing the specialized, proprietary software that is unique to our business, and to license or acquire commercially-developed technology for other applications where available and appropriate. We continually invest in several areas of technology, including our seller platform; A9.com, our wholly-owned subsidiary focused on search technology on www.A9.com and other Amazon sites; web services; and digital initiatives.’
Round (2004) describes the technology approach as ‘distributed development and deployment’. Pages such as the home page have a number of content ‘pods’ or ‘slots’ which call web services for features. This makes it relatively easy to change the content in these pods and even change the location of the pods on-screen. Amazon uses a flowable or fluid page design unlike many sites which enables it to make the most of real-estate on-screen.
Technology also supports more standard e-retail facilities. SEC (2005) states: ‘We use a set of applications for accepting and validating customer orders, placing and tracking orders with suppliers, managing and assigning inventory to customer orders, and ensuring proper shipment of products to customers. Our transaction-processing systems handle millions of items, a number of different status inquiries, multiple shipping addresses, gift-wrapping requests, and multiple shipment methods. These systems allow the customer to choose whether to receive single or several shipments based on availability and to track the progress of each order. These applications also manage the process of accepting, authorizing, and charging customer credit cards.’
Data Driven Automation
Round (2004) said that ‘Data is king at Amazon’. He gave many examples of data driven automation including customer channel preferences; managing the way content is displayed to different user types such as new releases and top-sellers, merchandising and recommendation (showing related products and promotions) and also advertising through paid search (automatic ad generation and bidding).
The automated search advertising and bidding system for paid search has had a big impact at Amazon. Sponsored links initially done by humans, but this was unsustainable due to range of products at Amazon. The automated programme generates keywords, writes ad creative, determines best landing page, manages bids, measure conversion rates, profit per converted visitor and updates bids. Again the problem of volume is there, Matt Round described how the book ‘How to Make Love Like a Porn Star’ by Jenna Jameson received tens of thousands of clicks from pornography-related searches, but few actually purchased the book. So the update cycle must be quick to avoid large losses.
There is also an automated email measurement and optimization system. The campaign calendar used to be manually managed with relatively weak measurement and it was costly to schedule and use. A new system:
- Automatically optimizes content to improve customer experience
- Avoids sending an e-mail campaign that has low clickthrough or high unsubscribe rate
- Includes inbox management (avoid sending multiple emails/week)
- Has growing library of automated email programs covering new releases and recommendations
But there are challenges if promotions are too successful if inventory isn’t available.
Customers Who Bought X…, also bought Y is Amazon’s signature feature. Round (2004) describes how Amazon relies on acquiring and then crunching a massive amount of data. Every purchase, every page viewed and every search is recorded. So there are now to new version, customers who shopped for X also shopped for… and Customers who searched for X also bought… They also have a system codenamed ‘Goldbox’ which is a cross-sell and awareness raising tool. Items are discounted to encourage purchases in new categories!
See the original more detailed PDF article on Amazon personalisation / recommendation collaborative filtering system.
He also describes the challenge of techniques for sifting patterns from noise (sensitivity filtering) and clothing and toy catalogues change frequently so recommendations become out of date. The main challenges though are the massive data size arising from millions of customers, millions of items and recommendations made in real time.
Amazon Partnership strategy
As Amazon grew, its share price growth enabled partnership or acquisition with a range of companies in different sectors. Marcus (2004) describes how Amazon partnered with Drugstore.com (pharmacy), Living.com (furniture), Pets.com (pet supplies), Wineshopper.com (wines), HomeGrocer.com (groceries), Sothebys.com (auctions) and Kozmo.com (urban home delivery). In most cases, Amazon purchased an equity stake in these partners, so that it would share in their prosperity. It also charged them fees for placements on the Amazon site to promote and drive traffic to their sites. Similarly, Amazon charged publishers for prime-position to promote books on its site which caused an initial hue-and-cry, but this abated when it was realised that paying for prominent placements was widespread in traditional booksellers and supermarkets. Many of these new online companies failed in 1999 and 2000, but Amazon had covered the potential for growth and was not pulled down by these partners, even though for some such as Pets.com it had an investment of 50%.
Analysts sometimes refer to ‘Amazoning a sector’ meaning that one company becomes dominant in an online sector such as book retail such that it becomes very difficult for others to achieve market share. In addition to developing, communicating and delivering a very strong proposition, Amazon has been able to consolidate its strength in different sectors through its partnership arrangements and through using technology to facilitate product promotion and distribution via these partnerships. The Amazon retail platform enables other retailers to sell products online using the Amazon user interface and infrastructure through their ‘Syndicated Stores’ programme.
For example, in the UK, Waterstones (www.waterstones.co.uk) is one of the largest traditional bookstores. It found competition with online so expensive and challenging, that eventually it entered a partnership arrangement where Amazon markets and distributes its books online in return for a commission online. Similarly, in the US, Borders a large book retailer uses the Amazon merchant platform for distributing its products.
Toy retailer Toys R’ Us have a similar arrangement. Such partnerships help Amazon extends its reach into the customer-base of other suppliers, and of course, customers who buy in one category such as books can be encouraged to purchase into other areas such as clothing or electronics.
Another form of partnership referred to above is the Amazon Marketplace which enables Amazon customers and other retailers to sell their new and used books and other goods alongside the regular retail listings. A similar partnership approach is the Amazon ‘[email protected]’ program which enables third party merchants (typically larger than those who sell via the Amazon Marketplace) to sell their products via Amazon. Amazon earn fees either through fixed fees or sales commissions per-unit. This arrangement can help customers who get a wider choice of products from a range of suppliers with the convenience of purchasing them through a single checkout process.
Finally, Amazon has also facilitated formation of partnerships with smaller companies through its affiliates programme. Internet legend records that Jeff Bezos, the creator of Amazon was chatting to someone at a cocktail party who wanted to sell books about divorce via her web site. Subsequently, Amazon.com launched its Associates Program in July 1996 and it is still going strong. Googling http://www.google.com/search?q=www.amazon.com+-site%3Awww.amazon.com for sites that link to the US site, shows over 4 million pages, many of which will be affiliates. Amazon does not use an affiliate network which would take commissions from sale, but thanks to the strength of its brand has developed its own affiliate programme. Amazon has created a tiered performance-based incentives to encourage affiliates to sell more Amazon products.
Amazon Marketing communications
In their SEC filings Amazon state that the aims of their communications strategy are (unsurprisingly) to:
- Increase customer traffic to our websites
- Create awareness of our products and services
- Promote repeat purchases
- Develop incremental product and service revenue opportunities
- Strengthen and broaden the Amazon.com brand name.
Amazon also believe that their most effective marketing communications are a consequence of their focus on continuously improving the customer experience. This then creates word-of-mouth promotion which is effective in acquiring new customers and may also encourage repeat customer visits.
As well as this Marcus (2004) describes how Amazon used the personalisation enabled through technology to reach out to a difficult to reach market which Bezos originally called ‘the hard middle’. Bezos’s view was that it was easy to reach 10 people (you called them on the phone) or the ten million people who bought the most popular products (you placed a superbowl ad), but more difficult to reach those in between. The search facilities in the search engine and on the Amazon site, together with its product recommendation features meant that Amazon could connect its products with the interests of these people.
Online advertising techniques include paid search marketing, interactive ads on portals, e-mail campaigns and search engine optimisation. These are automated as far as possible as described earlier in the case study. As previously mentioned, the affiliate programme is also important in driving visitors to Amazon and Amazon offers a wide range of methods of linking to its site to help improve conversion.
For example, affiliates can use straight text links leading direct to a product page and they also offer a range of dynamic banners which feature different content such as books about Internet marketing or a search box.
Amazon also use cooperative advertising arrangements, better known as ‘contra-deals’ with some vendors and other third parties. For example, a print advertisement in 2005 for a particular product such as a wireless router with a free wireless laptop card promotion will feature a specific Amazon URL in the ad. In product fulfilment packs, Amazon may include a leaflet for a non-competing online company such as Figleaves.com (lingerie) or Expedia (travel). In return, Amazon leaflets may be included in customer communications from the partner brands.
Our Associates program directs customers to our websites by enabling independent websites to make millions of products available to their audiences with fulfillment performed by us or third parties. We pay commissions to hundreds of thousands of participants in our Associates program when their customer referrals result in product sales.
In addition, we offer everyday free shipping options worldwide and recently announced Amazon.com Prime in the U.S., our first membership program in which members receive free two-day shipping and discounted overnight shipping. Although marketing expenses do not include the costs of our free shipping or promotional offers, we view such offers as effective marketing tools.
Marcus, J. (2004) Amazonia. Five years at the epicentre of the dot-com juggernaut, The New Press, New York, NY.
Round, M. (2004) Presentation to E-metrics, London, May 2005. www.emetrics.org.
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Every company has their own supply chain in order to sort or produce goods. However, the company needs to manage supply chain to maximize its highest benefits. By having effective supply chain management, the company can ensure that the right product or service will be available at the time to the right place and at the right price (Kamal 2007). Amazon is one of the companies that have best supply chain practices in order to respond high level of responsiveness for the customers. Thereby, this paper explains about Amazon Company, analysis of Amazon’s supply chain, recommendations and barriers to implement will be discussed.
Amazon is an American commerce company based in Seattle, Washington, USA. The company used to be only a bookstore, but now it diversified into difference type of products. The goal of Amazon is to provide one stop shop experience where the customer can find everything on Amazon as earth’s biggest selection (Warman 2012). Amazon operates as a pure internet retailers that does not have retail store at all while the delivery will be done through Amazon’s networks of distribution centres. This operation makes the company is able to provide wider range of goods and lower cost of products with high quality. Moreover, it is also increase customer satisfaction as it supports customer convenience.
An effective supply chain strategy makes the company is able to respond high level of responsiveness. Amazon balances between cost of distributions and level of services by having the efficient distribution centres and multi-tier inventory networks.
However, there is a competition from substitution brands that provided the same service as Amazon, which are eBay and Walmart. Currently, eฺBay is pushing shipping fee to the seller in order to reduce cost for the buyers while Walmart introduced free shipping to the customers but buyers have to pick up the item at the store (Amazon strategies 2010).
ANALYSIS OF AMAZON SUPPLY CHAIN
Most of the companies need successful supply chain management to create sustainable competitive advantages. There are various benefits from having an effective supply chain management such as inventory reduction, delivery service improvement and shorter product life cycles (Fawcett et al 2008). This part provides the scenario of Amazon’s supply chain strategy, how Amazon manages in wider context, factors influencing its supply chain, and strategic and operational implications will be evaluated.
Supply chain strategy of Amazon
According to Chopra and Meindl (2007), supply chain strategy and competitive strategy should have aligned goals. Amazon has identified their customers as highly responsiveness. In order to respond with high uncertainty demand and availability of products, the four main components drive the outcome of Amazon are having several distribution centres as a storage facilities, multi-tier inventory management, highly efficiency transportation and implement information systems to provide real time information within its supply chain. All of these factors explain how both strategies of Amazon are fit together and that makes Amazon’s supply chain successful.
The advantage of outsourcing is to help the company to focus on its core activities and cost savings (Bucki N.D.). Amazon is one of the companies that need to gain those benefits from inventory outsourcing. However, there is another side of outsourcing deals as well. Chandra (2008) argued that the company should not outsource even it was not their core activities when the demand level is increasing. The company is able to optimize the service if the stock is owned and managed efficiently. So Amazon decided to outsource only some part of its inventory in order to mitigate risks and optimize services. The products that are frequently purchased or popular were keeping and managing in-house while other products are stocked by distributors. The products will be shipped after Amazon has requested. The company acted as a trans-shipment centre (ICMR India 2003). It was a right decision for Amazon and the company is able to reduce the cost of holding large amount of inventory while the customer service is better as it shipped faster. Managing the supply chain with its wider context and organization context
Price differentiated customers
Dispatch and delivery options were used to divide customers into each category based on responsiveness because difference customers need difference service levels and difference prices. Amazon has provided many types of deliveries in difference costs such as free super saver delivery, one-day delivery, First-class delivery and etc (Amazon 2013). Each type of delivery reflects how fast the delivery is. It means if the customer needs very high responsiveness, get the products by tomorrow, the buyers are willing to pay more. So Amazon divided customer segments to match with its distribution systems and inventory strategy in order to control cost and service level. The company also received increased flexibility (Duran et al 2006). Moreover, there is a membership programme called Amazon prime. It provides unlimited one-day delivery for one year and it costs 49GBP. Once the buyers are member of prime, buyers will get discount if the buyers want to get express or evening delivery. The members will also able to borrow kindle books for free (Amazon prime 2013).
Amazon has started with pull systems. There is no inventory, no warehouse and no overhead. The company acts as a middleman who taking the orders and it will be filled by Ingram book group (Simchi-levi et al 2007). When the time has passed, the growth of the company has forced Amazon to hold some inventory in order to respond customer needs by having several distribution centres. So the strategy has changed to push-pull. The inventory is hold using a push strategy while orders are shipped using a pull strategy. The decoupling point of Amazon is distribution centres. However, some of slow items are still used pure pull strategy as there is no inventory. By having several distribution centres, the holding cost for Amazon is increased as well.
The inventory network of Amazon is multi-tier inventory management. This will help the company plans and offers real time optimization service that allows Amazon to have minimal amount of inventory needs to achieve its service level (One network N.D.). By having this network, Amazon is able to offer nearly unlimited selection. Nonetheless, the problem is each tier treats separately while not concerns about inventory of another echelon. Then bullwhip effect occurs which is inventory holding higher in each tier because there is no sharing information across the tier (Lee 2003).
Amazon’s multi-tier inventory is composed of three tiers. The first tier is Amazon distribution centre. The inventory will be aggregated in distribution centres, which enables the company to hold fewer inventories. The second tier is wholesaler and partner DCs. If the products are not available from Amazon’s DC, the company will use IT systems to search for this product in partner inventories in order to assign which party will be responsible for this order. By doing this, the customer service will be high as there is no stock out experiences. Lastly, publishers, manufacturers, vendors and third-party sellers are included in third tiers. All these parties help the company to fulfill unlimited selection of goods offer in Amazon (Chiles and Dau 2005).
Factors influencing Amazon’s supply chain configuration now and future
Amazon provided many choices of delivery to balance cost of transportation and level of service. The company does not have large scale to contact full truckload. So the company provides free shipping in order to achieve longer lead-time of transportation. This will help company able to reduce cost and achieve economy of scale (Robinson 2010). However, the company is provided highly responsiveness options as well, which is cost company a lot. Even though the customers are willing to pay higher price to get the products faster, it should not cost anything from Amazon but it is not like that. Amazon cannot utilize its highest benefits of its transportation systems. That is why the company needs to design its supply chain networks to minimize the costs.
The challenge of Amazon is to make decision which internal warehouse or external partnership should be the one who responsible for this customer order. Once the order has been places via website, customer is expected to get products on time. Finding the lowest solution in short period of time is the hardest things when there are many items located in difference places and it needs to deliver in single delivery. So, the company decided to implement technology such as warehouse management systems to get real time and single view of inventory for effective sourcing (RedPrairie N.D.).
Evaluate strategic and operational implications
Supply chain network
Amazon operates eight distribution centres within United Kingdom (UK), which are Rugeley, Hemel Hempstead, Marston gate, Doncaster, Petreborough, Dunfermline, Gourock and Swansea. Locations are selected base on distance to markets, Close to transportation mode such as Motorway and main rail link, Airport and river (Amazon Location 2013). According to Melendez (2013), several DC would help the company provides quicker deliver, lower transportation costs and easy access.
Furthermore, sometimes transportation hubs, also known as injection points, were used to reduce the cost of transportation in high customer demand areas. The products will be shipped from DC to transportation hubs with full truckload. Then the inbound trucks will be unloaded the packages and load into outbound trucks which runs by a smaller carrier partners such as UPS, DPD and Hermes (Amazon Carriers 2013; Chiles and Dau 2005).
Moreover, Amazon adopted drop shipment approach. The order will be picked, packed in Amazon package and delivered by supply chain partners, which are manufacturer, wholesaler and third parties. By doing this, the company is able to survive from its huge losses but it caused negative effects as well. It is about 33 percent of Amazon’s single orders are multiple products. Nonetheless, it needs to pool specific goods from difference location and ships the collective goods as one delivery, which takes time and causes a delay that leads to customer dissatisfied. (Pilai and Dutta 2004)
The most difficult factor of transportation is to gain efficiency due to large numbers of small order from customers, so the company cannot gain advantage of the scale at all. Amazon used transportation hub to reduce the cost of transportation. The hub is acted as a cross docking to transfer goods to last-mile delivery. Amazon will aggregate the demand and ship it to transit hub together in order to achieve less than truckload or full truckload. Nevertheless, it needs to accumulate in term of region zone. So it takes longer time to complete this strategy. Hence, the company has introduced difference delivery option such as free super saver delivery in order to get longer lead times/ available to promise day. By doing this, Amazon is able to achieve economy of scale which is lower its cost and the customer satisfaction stays on acceptable level. However, sometimes goods are not available to the customer on time because the time spent on accumulate took longer than it should be and when the demand is high (Amazon 2013; Chiles and Dau 2005; Robinson 2010; Barzeski 2009).
As Amazon does not have a storefront, so it needs to provide the perfect visual store experience to compensate the touch of products. The company utilizes from its own technology innovations to differentiate itself from other e-commerce. The innovation includes A9 and one click ordering. The former aspect is a subsidiary company, which provides product search engines and search inside the books whereas the latter aspect is used to speed up ordering process, and introduce product recommendations, which determine customer interest from previous purchases (A9 2013; Curtis 2013).
Amazon also needs an innovation to support back-end supply chain integration and execution. The company have advance warehouse management systems to support order sourcing, labour management, load balancing, process alternative and supplier collaboration. All these factors make an efficient process to support multi-tier inventory of Amazon (Chiles and Dau 2005). Besides, Amazon has been critiqued about unbearable working conditions, mandatory overtime and using human as a robot which is pushing workers to physical limit. Employees within its DC walked more than 15 miles a day to look for products and every move has checked by computers. Therefore, the company decided to use Kiva robot to deliver shelves stocked with merchandise to DC workers instead of workers to walk around and find products. There are 1,400 kiva robots in three DC. By having these robots, Amazon can improve productivity and reduce cost up to 50 percent annually in area of warehouse efficiencies (Soper 2011; Kaiser 2013). Nevertheless, this robot costs Amazon large amount of money. It is more cost effective if Amazon just hires human workers. Is it worthwhile to invest for? Wagstaff (2012) argued that the benefit of this investment for Amazon is outweighed. The company will have better publicity, improve reputation about ethical and avoid lawsuits.
In addition, Amazon also launched prime air, also known as drones, which is able to delivery goods to customers within 30 minutes after buyers place the orders. The process of prime air starts from packages pass on a conveyor belt and drone will lift it off with the package and go straight to customer’s address. However, this innovation has not allowed to use nowadays. The fastest possible will be around 2015 (BBC 2013).
The problem is Amazon depends on courier such as UPS and FedEx too much in order to reduce the cost of transportation and make it efficient. Recently, this courier causes negative reputation for Amazon that cannot deliver the products on time when the demand is high and the customer satisfaction is decreased (Jayakumar 2013). Hence, the company should run its transportation with their private fleet in last-mile delivery because responsiveness is a crucial factor for Amazon. According to Hirsch (2010), the benefits from using private fleet is not only better customer service and greater visibility but also hold 100 % control of driver for safety, enhance branding and no driver shortage during high season/demand. Besides, private fleet will become a true competitive differentiate point as it is a connection point to customers (Schulz 2010).
Furthermore, bullwhip effect is another issues. This issue happened because there is lacking of integration along the supply chain. The current stage of Amazon and its supply chain partner is cooperation. So the company should raise the relationship to be coordination with its suppliers or become the best scenario which is collaboration. Besides, all companies along supply chain should share their information and communication in order to reduce barriers, reduce excess inventory and enhance business synergy (Cao and Zhang 2010).
BARRIERS TO IMPLEMENT RECOMMENDATIONS
As the writer’s recommendations, the obstacle to implement this suggestion are fluctuate demand and highly investment. Because of demand uncertainty, the company cannot know for sure what exactly amount of goods must be deliver for this area in this month. So the private fleet might not worth the cost of investment. Moreover, there is highly investment on private fleet. The cost of truck is expensive but it can be lease instead of buy to reduce the cost of maintenance as well. The cost of workers and training are another factors. The company needs to train driver to drive with manner. Lastly, the company needs to check on mile-drive and fuel every day in order to prevent fraud which takes time a lot. When the problem happened, the driver might have an excuse not to responsible for the problem. So many companies have decided to install GPS to track each driver but it costs large amount of money as well (Lynch 2007; Liccardi 2013).
Supply chain management plays a crucial role on Amazon’s successful. The company’s primary goal is to offer one stop service that customers can find everything on Amazon’s website and it will deliver it to buyer place within a promise time. In order to do this, the company needs to have cooperated with partner to do multi-tier inventory systems to provide nearly unlimited goods. Moreover, it needs an effective distribution networks to deliver merchandise to the customer on time. All of these are reflect the main strategy of Amazon to provide high responsiveness to the customers.