It was the best of times for Best Buy and the worst of times for Toys “R” Us in the news this week.

Years ago, analysts expected Best Buy to go the way of Borders, a bookseller disrupted by Amazon’s online magic. Instead, Best Buy has held up well against Amazon. It not only avoided the fate of electronics chains that did go bankrupt (e.g., Radio Shack and Circuit City) it’s a stock we all should have purchased. Toys “R” Us, on the other hand, announced its bankruptcy this week.

Economists love natural experiments, and the Best Buy versus Toys “R” Us comparison offers one for retail markets. Why did Best Buy succeed where Toys “R” Us failed? What lessons can we glean?

The key takeaway: You cannot beat Amazon at its own retail game. You must win at a different game.

Toys “R” Us sold toys, just as Amazon does. Best Buy sells a stellar electronics buying experience, which Amazon does not.

Toys “R” Us could not beat Amazon at selling toys just as Borders could not beat Amazon at selling books. Amazon has mastered supply chain efficiency and effectiveness as well as the online buying experience for most categories. Even in clothes and shoes – categories in which feel and fit count – Amazon can win because of its PRIME subscription in which the marginal cost to ship anything is zero. But what about the return postage for unwanted goods, you might ask? It’s worth the cost of not having to fight mall traffic in many customers’ calculations.

So how did Best Buy survive Amazon? By creating confidence that Best Buy is the best place to buy.

First, Best Buy created acceptable delivery and pricing terms. It improved its delivery efficiency and timing and promised to match Amazon prices. In the past, Best Buy was the showroom where you shopped then clicked on Amazon to buy. Now it’s a showroom where you can confidently get the best value.

Second, it did what Amazon could not do: offer an unmatched customer experience of trying out products and getting advice. Apple figured this out, creating the most profitable retail stores in the US. Best Buy is Apple raised to the power of 100, offering many brands and multiple electronics categories. Best Buy sales representatives are well trained and act in ways that inspire trust. Brand showrooms within the Best Buy store allow manufacturers to present their branded products at their best.

Third, Best Buy reinforced its “best place to buy” promise by beefing up its Geek Squad, the after-sales service support that optimizes the performance of your newly purchased product. Amazon, not so much (meaning not at all).

Best Buy, along with all retail store chains, has a cost structure more expensive than Amazon’s. Brick-and-mortar and sales personnel are not cheap. But Best Buy turned a non-value-added cost for all struggling retailers (including Toys “R” Us) into a value-added cost. The cost creates a terrific in-store experience, not just goods on the shelf. Independent toy stores (like Gepettos in La Jolla, CA and Capitol Kids in Madison, WI) do the same by offering unique products and age-specific toy selection advice from informed sales-personnel.

The basic lessons of economics always shine brightly in the stories of company successes and failures.

• Customers buy on value – benefits less the costs to acquire those benefits. Costs and benefits can be tangible (sales price, time and gas spent going to and from the store) and intangible (risk, frustration with parking).
• It only takes two suppliers with comparable offerings to create price-based competition. The lowest cost competitor will always win in this kind of market.
• If you cannot be the lowest cost supplier, become different. Define your overall offering in a way the lowest price competitor cannot easily match.

Monopolies enable companies to make a ton of money. You can build one by having the lowest cost structure among competitors (Amazon in B2B web-services), securing Intellectual Property (pharmaceutical companies), creating network effects (Google), or creating a hard-to-copy business model that delivers more value than that of your competitors, which is what Best Buy has accomplished.

Creating a value-based monopoly is not easy, nor is keeping one. But building one is job #1 in today’s highly competitive landscape if attractive profit margins are your aim.