Amazon sellers regularly find themselves seeking information, data, experiences and study done on the most effective methods for running and growing a brand using the marketplace as a platform. There is no shortage of that information, but due to Amazon’s black-box style of running things, we often find a lot of conjecture and speculation intermingled with the data.
While theories abound in every direction about how Amazon works and what causes them to make some of the decisions they make, there seems to be an underlying and agreed upon theme; the primary motivation is making money.
You see this in just about any Facebook post or article where a thought leader is sharing wisdom about how to grow your Amazon business. One bit of advice that gets spread around often is “if it makes Amazon money, they like it.” This is typically the justification for taking (or not taking) certain actions. The line of thinking is, if it makes Amazon money, they’ll probably be ok with you doing it.
The converse also appears to be an accepted truth; that if it DOESN’T make Amazon money, they won’t be happy, or will scrutinize the activity with more fervor.
This conclusion comes from an honest enough place. I mean, Amazon is a business, and logic prevails that a business’ primary goal is to profit and grow. The problem with this particular diagnosis, however, is that it is shortsighted. It doesn’t take into account Amazon’s philosophy, past behavior and vision at all.
Customer-centric focus has always been what sets Amazon apart from the rest of the industry
So, I am here to make a bold statement. This is for those of you that use your perception of Amazon’s objectives as a gauge for business activities to engage in. I do NOT believe that Amazon’s primary goal is to make money from the sale of items on its platform. I do NOT think this motivates Amazon, in any way, to make decisions.
And here’s why….
Letter to Shareholders
Every year Jeff Bezos famously pens a letter to Amazon shareholders that is packed full of business wisdom. For two decades now Jeff has imparted upon his trusted investors the vision he has for Amazon as a whole. And every year there has been a recurring theme.
Obsess over customers.
Customer-centric focus has always been what sets Amazon apart from the rest of the industry. However, that is only part of this puzzle. In one of his meeting letters he also states his goal is to “build culture, take risk and focus on the long term.”
That last part is the one you should really pay attention to. Focus on the long term.
Amazon is in this game for the long haul. Bezos makes no effort to hide this. He blatantly states that he is willing to forego short term profits for long term growth.
In fact, an international Business Times piece points out that “The company barely ekes out a profit, spends a fortune on expansion and free shipping and is famously opaque about its business operations.”
To drive the point home about foregoing short term profits, in two decades Amazon has barely made any profit at all.
In 2008 the company’s net profit margin was 2.8%, in 2011 it was 0.6%. In 2012 Amazon lost $274 million, and in 2014 the marketplace was down $41 million.
Price to earnings ratio is an indicator that investors look at to determine if a stock is a good investment. Basically, it is the dollar amount an investor can expect to invest in order to earn $1 of a company’s earnings. Without going into the finer points of financial analysis, just know that an average P/E ratio is 20 to 25. Obviously, this means the lower the number the better.
Ebay’s is 25.
Walmart is a staggeringly low 2!
Amazon’s P/E ratio is a whopping 550.
To recap, this means that Amazon’s primary focus is customers. To such a degree that prices remain low despite better judgement. In fact, according to Mr. Bezos, “we do price elasticity studies. And every time the math tells us to raise prices.”
Yet they don’t. This is simply “because doing so would erode trust. And that erosion of trust would cost us much more in the long term.” (Interview with CBS Charlie Rose)
Aside from customer obsession, Amazon is also focused on long term growth. That is why profits are typically reinvested into more fulfillment centers, and Kindle Fire’s are sold AT COST!
Amazon’s Bid for World Domination
Meanwhile, Amazon also invests in TONS of other projects. For starters, their cloud computing platform, AWS, provides cloud services to the likes Netflix and even the CIA.
Also, Audible, Createspace, Twitch, Goodreads, Woot, IMBd, Zappos, Whole Foods, and a host of other projects we’ve never heard of are all owned by Amazon.
This is on top of the rapid growth of the actual marketplace. In fact, Amazon is poised to take HALF of the entire e-commerce market share. In 2017 they reached 43%!
That means, half of all ecommerce sales are happening on Amazon.
And finally, Amazon also appears to be taking aim at Google. Their efforts to make A9 one of the most robust search engine algorithms makes it clear Amazon’s rumored goal to surpass the search giant is a consideration.
Let’s unpack all that.
Amazon seems to have a clear goal to own the ecommerce landscape, dominate search, create the happiest customers in the world and provide as many services as possible to them.
To accomplish all that, what would Amazon really need to double down on?
Profits from the sale of products on their platform? I don’t think so.
The evidence is clear that profits is an afterthought, and Amazon is not interested in nickel and diming their customers. They want market penetration at the deepest levels. They want more units moved, more eyeballs on pages, more memberships, more searches.
I do NOT believe that Amazon’s primary goal is to make money from the sale of items on its platform. I do NOT think this motivates Amazon, in any way, to make decisions.
What Does This Mean for Third Party Sellers?
This means, if you are trying to dissect Amazon’s intentions in order to create a business philosophy that helps you sleep at night, you need to reconsider the shortsighted view many “experts” have laid out for you.
If your guiding principles are that “this will make Amazon more money” you could still end up making wrong decisions. Instead, shift your focus to “this will make Amazon’s customers happy” and you’ll be on a much better track.
In the end, running a business is about taking calculated risks and creative problem solving, so perhaps Amazon’s motivations don’t factor in decisions at all. Nonetheless it may be helpful to have some idea of what the marketplace’s intentions are.