Episode IIIB – Amazon and the CEF

February 21, 2009

ChannelAdvisor ChannelAdvisor By ChannelAdvisor
This is Episode 3B in a 4 part series.  Here is the outline for the series:
Episode I – Q408 in-depth analysis – available here with Q+A covered in an addendum (IA) (link)
Episode II – Introducing the ChannelAdvisor Ecommerce Framework (CEF) (link)
Episode III – eBay, Amazon and the CEF (you are here – I have split into to parts A (ebay) and B (amazon) )
Episode IV – How to fix eBay (coming soon)
The CEF looks at ecommerce across five strategic pillars:
1. Selection
2. Value
3. Ease of use
4. Trust
5. Merchandising
Amazon and the CEF
Here is a chart that shows the growth of amazon vs. ecommerce (more detail on this in ep1).  You can clearly see that in mid-06, a big change occurred.  Before that point, Amazon was growing 2-4% slower y/y than ecommerce and then from mid-06 forward, their growth materially accelerated to 20% faster than ecommerce and has kept up that pace for the last two years.  This is a really important point in the recent history to dig into for a second to understand what Amazon did and why it’s working.
In 2006, Amazon really started to execute on two major initiatives that I believe are what has driven their acceleration since that time.
  1. Amazon Prime (launched in 05, but really started consumer adoption in 06) – this is a ‘free/discounted shipping subscription’ where you pay $79 and you get free 2 day shipping on everything or can upgrade to overnight for $3.99
  2. Amazon’s seller business (sometimes called 3P or third-party) – Prior to 2006, Amazon’s seller business was primarily focused on heavier, top internet retailer relationships like their current Target relationship – Amazon provided not only ecommerce, but also fulfilment, call-centre, etc.
The push into the seller business is counter intuitive.  Why would you as a retailer, not only allow, but encourage competitors to essentially I’m told this diagram is how Jeff Bezos got everyone at Amazon to get on board with the diagram.  Internally at Amazon it’s called the Bezos napkin diagram:
At the centre you have the fly-wheel of growth.  Growth goes faster when more consumers (traffic in the diagram) come to the site.  Consumers come to the site for three things – selection, value and customer experience.  By partnering with high-quality sellers, Amazon is able to drive selection at a good level of customer service, increase value, which in turn, drives growth.  Traffic brings sellers, and the wheel goes around faster and faster.  As the wheel turns, Amazon is able to benefit from a lower cost structure which is passed on to consumers in the form of lower prices, and THAT also accelerates the wheel.
To say Amazon ‘gets’ the CEF concepts is an understatement.  In fact they easily have a three year lead in deep thinking around these aspects of ecommerce.  Many people believe that Amazon is doing well simply because of eBay’s mistakes. If you are reading along with our story here, you will recall in the last episode that around February of 06, eBay made a fundamental error that I don’t think they have recovered from.  To be sure, eBay has ‘helped’ Amazon here with their missteps, but I do think most of the credit goes to Amazon and the eBay flubs have just put extra wind in their sails.  Put another way, if I were to guess (you could never know this), eBay is responsible for 2-5% of the 20% growth above ecommerce that Amazon is enjoying.  Amazon is an equal opportunity share-grabber and probably is taking the most from eBay, but others are losing share to Amazon too.
With that bit of foundational background, let’s dig into Amazon and how they rank in the five pillars of the CEF.
1. Selection – excellent execution
Amazon clearly understands the importance of selection in driving not only customer acquisition, but  Amazon has an interesting three pronged strategy that has significantly increased their selection since 2006:
  • Retail business – Some call it the Amazon ‘first party business’, or 1P.  Amazon is first and foremost a retailer. They have teams of people that are organised by category that know the category well and focus on buying products, working with vendors and expanding their selection.
  • Seller business – Amazon’s retail business if of a scale that it makes sense for them to focus on the ‘hits’ – top sellers of products that are in the ‘head’ of the long-tail curve.  The seller business is where third parties, 3P’s, help amazon by filling out the long-tail.  Amazon has category managers that work with the retail buyers and understand where they plan to be retail and where they want sellers in the category. They then actively recruit sellers that can fill strategic selection ‘holes’.
  • Product ads – In certain categories when Amazon wants to further augment the selection, they have offsite product advertising with what they call ProductAds.  You’ll frequently see these in categories where there are complex items that are hard to ship.  Furniture is a good category to explore if you want to see ProductAds as seen here:
These three systems give Amazon unprecedented selection in a wide variety of categories.  But it’s important to note there are still many categories that Amazon doesn’t participate in that are multi-billion dollar categories  that amazon doesn’t participate in at all such as:
  • collectibles
  • tickets
  • travel
  • autos
  • real estate
2. Value – driven by scale and seller business
In 2007, Amazon started experimenting with a novel concept.  Prior to then, seller products were listed down a link from the product page in a link called ‘X available new and used’.  The seller listings are ordered from least to most expensive, thus creating a strong incentive for sellers to list their products at the best value possible.
In 2007, Amazon started to experiment with bringing the seller listings up, first listing the top three in a box under the buy button called ‘more buying choices’.  Then in late 2007, Amazon took it two steps further.  The first step was that instead of the buy box ‘disappearing’ leaving the ‘more buying choices’, when Amazon’s retail stock was gone, Amazon would keep the buy box, and the top seller offer (lowest price) would then ‘own the buy box’.
The second step brings us up to where things are today.  Now the lowest price offer from highly rated sellers, even if Amazon offers the product, wins the buy box.  Why am I mentioning this in value?  Well when a product owns the buy box, the seller moves 10-100X from when you don’t own the buy box.  This creates a VERY strong volume incentive for sellers to drive their lowest price possible.  For buyers, this means they don’t have to go to anywhere but one site to find everything they are looking for at the best possible price.
For Amazon this is genius because:
  • It keeps them honest – by allowing ‘competitors’ to compete, Amazon must itself drive the hardest bargains and pass them on to consumers.
  • Amazon is able to manage unit margin – If Amazon’s margin on a product would be too low to be the best price on the internet, they can hold steady and let a seller sell the product.  Once sold out, Amazon can then own the buy box and maintain margin.
  • Buyers feel like they don’t have to shop anywhere else – amazon has already found the best price for them and has even given them a competitor’s best price.  This is a lot like the progressive insurance model and I don’t think a lot of industry folks understand just how powerful this is.  The number one reason for shopping cart abandonment and lack of conversions is price checking.  Buyers don’t feel like they need to price check amazon, because amazon has done it for them.
  • Last but not least, while amazon states they are neutral on the margin between retail and seller businesses, the seller business has got to be extremely lucrative for them.  They don’t have to buy, store, ship the product, just deliver some bits.  Bits are cheap, warehouses aren’t.
Some analysts speculate that while 33% of Amazon’s unit volume is from sellers, a much larger part of their profit is from this line of business.  The seller business allows Amazon to drive value, increase conversions and improves their margins.  It’s a very powerful triple-win for them, but was very risky and counter-intuitive in the beginning.  Most big ideas are.
3. Ease of use – ecommerce leader, always room to improve though
Every aspect of amazon is easy to use.  One-click allows you to checkout, well, with one click.  Amazon stores all of your credit card information and remembers all of your addresses.  The cart is very intuitive and powerful.  Wishlists help you remember things you are interested in to save for later.  The returns centre makes returning products a breeze.  Amazon’s help system is very comprehensive.
There are only two negatives on ease of use I can think of with Amazon:
  1. Front page – The amazon front page has gotten too busy for my tastes.  Above the fold is good, but one scroll below and you have some weird ads and irrelevant recommendations/content (I have something right now about Easter egg baskets through the ages – wha!?)
  2. Search Engine – The Amazon search engine is powerful, but occasionally, I have to help it help me.  Usually when I’m searching for a non-book item, it can get off track and show too many books or dump me in there.  Also with my Kindle, I sometimes have a hard time forcing it to show me Kindle only items.  Some categories don’t have a category-centric search that would be helpful like shoes for example.
4. Trust – a-to-z – they brand it AND make it easy to find and use.
This is an easy one, Amazon backs you up 100%.  They call it the a-to-z guarantee and it really works.  You can call and get a human on the phone easily.  They help you.  If it’s a seller business, they steer you through the seller’s process and if that doesn’t work. They still make you whole.
There are never any shenanigans with Amazon.  Their emails are useful so I don’t opt-out.  If I do opt-out, they don’t email me.  They ship stuff when they are say they will.  It arrives well packaged with a smile on it.
You can trust Amazon – period.
5. Merchandising – they set the bar that all others try to reach
Wow, I could go on and on here.  Amazon’s merchandising is spectacular.  The recommendation engine is wonderful and I personally purchase 2-3 things a month off of recos alone.  There are some great social merchandising elements that Amazon has too.  The reviews, the lists, the ‘frequently bought with X’ upsells, product tags, tell a friend, submit a video, phew the list is too long to detail here.
If you want to learn more about Amazon and social, here’s a cool screen shot and blog post on the topic that goes into more detail than I have room for here.
Is Amazon beatable?
I realise that reading this you might be left with the thought that Amazon is unbeatable.  They have that flywheel spinning faster and faster.  eBay’s in a death spiral.  Walmart.com and others aren’t at near the scale Amazon is.  So, yes, Amazon does have a considerable advantage.  However, they are ‘beatable’.  If you recall in episode II when I introduced the CEF, I showed Zappos and how they have really grabbed the shoe category and out customer serviced’ and ‘selectioned’ (yes I just made that word up) Amazon and have done well.  There are plenty of other companies out there doing this such as:
  • Newegg – Over 1B in GMV from the computer/ce category – focusing on the enthusiast/hobbiest as a core, and branching out from there.
  • social/customised sites – CustomInk, Zazzle,  BustedTees are making major growth in the areas of customization and social ecommerce.  Amazon does very little in this category.
  • sporting goods vertical – The GSI family of sporting goods sites (fogdog, sportsauthority, dicks) are all doing very well by leveraging a common infrastructure across three brands – two of which tie to
  • B+M – bestbuy – Bestbuy.com is a major force in ecommerce thanks to their tightly integrated on and offline presences.
  • B+M – JCpenney – Believe it or not, JCP is doing very well online. They’ve managed to bring their demographic from the offline world to the online world and keep them loyal to the brand.
That’s a short list.  If you are an Amazon fan, the good news is that while Amazon is beatable, it’s only by a select few that have some interesting angles (brick and mortar) and vertical focus (zappos/newegg).  As far as being the best ‘ecommerce department store’ with the broadest offering across 20 macro categories, yes I do think right now Amazon has a near insurmountable lead.
They aren’t perfect though. This holiday I was shopping for some Dora items and noticed this glitch.
Amazon was recommending this $95 item with $12 shipping over their own $20+free product.  See, here you have real proof that Amazon isn’t perfect.  But this is probably the first in thousands of products I’ve looked at on Amazon to have any kind of error.  So in a way, it’s darn impressive.  Think about how many weird things you’ve seen on eBay for comparison.  The Amazon Dora glitch was fixed the next day.
Amazon’s relentless focus on value and selection along with their innovations around shipping and handling cost reductions, ease of use and merchandising built on the foundation of trust from the a-to-z guarantee have given them the most enviable position in ecommerce.
In fact, I think eBay’s current strategy to ‘amazonize’ eBay is a deathtrap – but we’ll get to that in the next and final episode shortly.  Thanks for coming along on the journey so far and keep those comments coming, I’ll follow-up episode 4 with a post that addresses some frequently asked questions I’m seeing.
SeekingAlpha disclosure – I am long google and amazon