Do you remember when gas stations offered auto repair and maintenance services and teenage male employees filled your gas tank without an extra charge? Then you remember the corner gas price wars in which two gas stations located opposite one another on a busy street corner used penny differences in the price of a gallon of gas to lure drivers to their shop. I always drove to the gas station with the cutest boys. My parents shopped price.
Can the Amazon Business Model Retain Its Lead?
Walmart and Amazon are engaged in the same war today. The first battlefield is best selling books, where the two on-line retailers are losing money for each “Top 10 List” hardcover book they sell and ship to customers. But the war will be waged on a much larger battlefield – leadership of on-line retailing, the consumer channel with the fastest growth rate.
Walmart started the price war and vows to win it. Why? Amazon is the giant standing in Walmart’s way of retaining its dominance. If Walmart does not gain on-line market share, steady growth in online shopping will weaken Walmart’s overall retail market share.
How did Amazon put the world’s most powerful retailer on the defense? Copying what Walmart did to Sears, Amazon built a business where Walmart was weak—online. Distribution efficiency, Walmart’s historic core competency, is easier to come by these days. And, at least in books, Amazon has buying power advantages over suppliers, an asset Walmart regularly deploys against other discount retail chains. Furthermore, without stores, Amazon has a cost advantage. Add in Amazon’s friendly service, and it’s not hard to explain why Amazon is well over twice as big as Walmart on-line.
Here’s the key business model question: Are Amazon and Walmart’s value promises and underlying advantages different enough for customers to select one over another on factors other than price? Amazon’s recent decision to offer its customers one annual shipping fee for all purchases (thereby creating switching costs) suggests not.
I’m betting on Amazon. It has taken a mass-customization approach by developing software that recommends books to its customers, an approach that could be deployed into other categories. Its culture is more conducive to innovation than Walmart’s. And suppliers would love an alternative channel after decades of Walmart’s relentless drive to lower supplier’s profits and prices.
I’m also betting that the on-line retail channel will over time end up with a far more fragmented competitive set than we see at present. There is just too much information. Retailers who end up selling “everything” on the web, as Amazon and Walmart aim to do, will lose share to niche companies that bring benefits the giants cannot.
Every industry has its own version of the corner gas price war – maturing categories with increasingly similar competitors making price the determinant of who offers customers the greatest value. If you can’t be your industry’s Walmart or Amazon, avoid becoming its Sears. Create a business model in which you offer benefits the giants overlook because of their size or can’t copy lest they lose their mass-market customers.
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For insight on business model innovation and business model strategy, read my recently released book, Beyond Price.
Publishers and small local sellers are probably going to be the big losers here as the competition continues to distort the pricing structure for the industry. I’ve been in – and had clients caught in – this bind (plastic containers and plush are two examples) and it quickly becomes a question of who has the financial resources to last the longest. Usually when retailers play this game though, there is an assumption that the loss leader is paid for by other purchases made during the visit. I’m not sure how well that is going to work in the online ecosystem, although the addition of a ‘shipping club’ could be a real way to enhance customer loyalty.
Amazon’s continued push into non-book merchandise is looking to be a very smart move to defend against attacks such as this.
.-= Fred H Schlegel´s last blog ..Death To Hard Drives =-.
Deep pockets is the name of the game. And the only winner will likely be the consumer of top-selling books who purchase on-line. Walmart has blown over many competitors, but they may have met their match with Amazon owing to its indifference over share price to build long term value. Personally, I am betting on the case that the independent book sellers have filed arguing against being able to sell things at a loss just to gain market share.
Here’s my two cents. The real catalyst, the event that will put the whole book industry in upheaval, is when there is a way to view text on a screen that is as comfortable and portable as reading a book. When that happens, Amazon has the digital expertise to capitalize. Does Walmart? Walmart needs to start changing its model now to be less reliant on store traffic if it wants to play long term in the “book” business.
.-= Brad Shorr´s last blog ..Use Trade Shows to Boost SEO =-.
Brad, I think your insight holds for beyond the “book” business, as Amazon is challenging Walmart in a number of categories. And it’s not just Amazon. In Madison, a start-up by a serial entrepreneur (who succeeded in selling all his start-ups at a great price) is challenging Walmart in dried goods, http://www.alice.com And the largest growing source of web sales (once you subtract Amazon) are the manufacturers themselves. But Walmart’s problem isn’t just stores and websites. There is an entire language and art of dealing with people on the web that Amazon has mastered and Walmart I sense has yet to discover.