Amazon is big. It accounts for 43% of all online sales and has a market cap of close to 1 trillion USD$.
What are the reasons behind the size of Amazon and where it is heading ? This is what we will attempt to tell you in this article.
This article however is not about how Amazon values the consumer and tries with all it's resources to give you more for less. This article will be about the real mechanics that lead to Amazon being so big and invincible.
Here are the key designs that made Amazon the most valuable company in the World.
In order to able to capture such a significant market share in the online retailing business, Amazon needed to expand fast. The faster it expanded in the markets for different products and the more "territory" it gained, the less would be available to it's competitors, and the key thing that allowed Amazon to expand at the needed pace was the Marketplace.
The Marketplace is where, on Amazon, sellers and buyers meet. In other words it is the thing that enables us or you to set up an account on Amazon and start selling products that we thing would turn us a profit. This simple idea, gave Amazon some advantages:
While Amazon was expanding, no action was taken by the major offline retailers to stop it. For them the online retail business was accounting for only 1,2,3,4,5,6 ...% of the total retail sales. And when Amazon got enormous and the big retail guys woke up, it was already quite late to act.
All the information present in this article was taken from the book "The Four: The hidden DNA of Amazon, Apple, Facebook, and Google" by Scott Galloway.
What are the reasons behind the size of Amazon and where it is heading ? This is what we will attempt to tell you in this article.
This article however is not about how Amazon values the consumer and tries with all it's resources to give you more for less. This article will be about the real mechanics that lead to Amazon being so big and invincible.
Here are the key designs that made Amazon the most valuable company in the World.
1) The Marketplace
The Marketplace is where, on Amazon, sellers and buyers meet. In other words it is the thing that enables us or you to set up an account on Amazon and start selling products that we thing would turn us a profit. This simple idea, gave Amazon some advantages:
It rid Amazon of the classical constraints associated with expansion
The idea of the marketplace, enabled Amazon to list new products on it's site, without actually having to build warehouses, employ people to manage the warehouses or buy the products. That saved a lot of time and money for Amazon, and enabled it to provide quite a variety of products for their costumers.
With more sellers comes more traffic
As more sellers joined Amazon, it became increasingly popular. Just think about it. Why do you shop on Amazon? Probably because you know that on Amazon you will be able to find the things that you are searching for. And why is that possible? Well because there are many sellers on Amazon enabling it to list infinite numbers of products. So the more products are listed on Amazon, the greater their traffic, quite logical right?
With greater traffic come more sellers
As Amazon's traffic expanded, on the other hand, more and more sellers were attracted to set up their shop with Amazon. Imagine, at the beginning there were two options, either a seller creates his own site and drives traffic to it or he/she sets up an Amazon account and benefits from their build-in traffic. The choice was not that obvious at the beginning when Amazon had relatively little traffic, however as Amazon's traffic became larger and larger, this offer was becoming irrefutable. The result was that the potential competition to Amazon, turned into partners.
This is the power of the "platform" that Amazon was able to build.
This is the power of the "platform" that Amazon was able to build.
As we can see, with this quite simple idea, Amazon was able, with no funds or real physical expansion, to be everywhere, dominating nearly every market in the online retail business. Other businesses such as Uber and Airbnb are using the same strategies, but are they as powerful as Amazon?
However there is more to Amazon's success than simply The Marketplace.
An increasingly important factor in Amazon's success was:
2)The ignorance of the big retail guys
3)Amazon does not stop
After having captured the online retail market, Amazon is turning it's direction towards the offline retail world, that's after gaining unlimited funds for investment.
With projects such as Amazon go stores, Amazon is using it's enormous capital and influence to capture the offline retail market. And how does it do that?
By investing numerous funds in the creation of an "employeeless" shop, the innovation being protected by patents, it gives Amazon a step ahead the other retailers, having lower costs for the maintenance and running of their shops, which enables Amazon to offer their products at a very very low price, which eventually will drive out all of the competition.
Despite innovations in the physical markets, Amazon also invests heavily in the development of "employeeless" warehouses which it as well has patents for. What effect does this have?
Effectively the same, it gives Amazon an enormous cost advantage, which enables it to drive down prices, and drive out competition.
What do the patents enable?
The patents Amazon has makes sure that no other competitor, for the next 20 years at least, will be able to copy Amazon's innovations, making it the only company with such technology.
Will regulators stop Amazon and should Amazon be allowed to have such power? Tell us what you think in the comments, we would love to have a nice discussion with you.
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All the information present in this article was taken from the book "The Four: The hidden DNA of Amazon, Apple, Facebook, and Google" by Scott Galloway.