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Is Amazon’s Flywheel Strategy Future-Proof? Nancy Rademaker - April 20, 2021

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One of Amazon’s greatest strengths is that its strategy looks so extremely simple. If you offer great choice and low prices, customer experience is augmented, resulting in more traffic. This growth enables you to cut costs and attracts even more sellers to the platform, offering yet a wider selection and lower price.

The robust online platform fueled by latest technologies has been the #1 driver for the successful implementation of their strategy. Being “customer-obsessed” has proven to be a winning attitude to grow traffic exponentially. Yet the company is increasingly being viewed as monopolistic and primarily focused on its own growth versus that of its sellers. The big question is “will the flywheel continue to fly?”

In this ‘flywheel strategy’, growth is fueled by two important drivers: the sellers and the CX component. The next three paragraphs will discuss seller acquisition, seller retention, and augmenting the customer experience.

Bringing more sellers to the platform

Amazon is aiming to become the “everything store”. The expansion drive is huge, having developed from an online bookstore to a competitor in nearly every aspect of retail. And the hunger to sell nearly anything in the long run is unstoppable. From groceries, to medicine, to plants, to name just a few.

The much talked about acquisition of Whole Foods in 2017 not only expanded their range of products to include groceries, it also provided them with a stronger offline footprint and extension of their delivery network.

The acquisition of PillPack a year later was the first step in getting a foothold in the healthcare space. This is reinforced by leveraging the technology of its voice assistant Alexa, offering opportunities to monitor medical adherence, to allow patients to document their current state themselves and to even detect possible health conditions. With regards to the latter, a patent was filed to detect coughs or sniffs and suggest medicine or food to take in.

2018 also saw the launch of the Amazon Plants Store. Despite being somewhat a niche sector, gardening means big business. And Amazon has the huge logistic infrastructure with both their 140 fulfilment centers and their Whole Foods offline grocery chain to compete with the traditional home and garden stores.

Sellers Retention

But it is not just about adding sellers by expanding the physical products, it is as much about expanding the financial services Amazon offers to ensure they retain sellers on their platform. The company has entered the space of business loans, particularly to small businesses. Of course, they have got the data (on revenue, sales, inventory, and customer service) AND the algorithms to allow them to accurately predict whether their merchants will be able to pay them back within 12 months. And because it is data-driven, it is fast: approval is within 24 hours, much faster than with any traditional lending company. Next to that, interest rates are reportedly low, and repayment is made convenient for merchants, with Amazon just taking a percentage of generated revenue on the platform.

Payments is another area for Amazon to improve the sellers’ stickiness to their platform. Amazon Pay simplifies the payment process on the merchant’s side and offers a cheaper alternative with smaller fees compared to most credit card payments. The company does not need to make money out of the transactions, it is first and foremost another reinforcing tool to retain partners in their ecosystem. And it ensures customers’ stickiness as well of course, offering a better experience by allowing for a more convenient and speedy option to pay for their goods.

Augmenting the Customer Experience

As is being demonstrated by the flywheel, the customer experience is primarily being driven by a wide selection of products combined with low prices. However, being the customer-obsessed company Amazon claims to be involves more than that. Continuous improvements on convenience fuel the traffic. Technology plays a major role here, with data and AI at the forefront, enabling predictions on customer needs and customer behavior. But adding new services is equally crucial in augmenting the experience. Next to simplifying payment through Amazon Pay as discussed in the previous paragraph, adding insurance to products they are selling through Amazon Protect is equally contributing here. It basically just required a small change in their User Experience design, allowing customers to add the insurance through a single click.

Looking Ahead

There are some comments here I would like to leave you with.

Firstly, although Amazon has an unmatched logistical infrastructure and a huge offline footprint for an online company, delivery costs may be rising too high, making it hard to keep up to their delivery promises. They may need to increase their offline presence to ensure last mile delivery or making sure this can be adequately done through technology, e.g. with drone deliveries.

Secondly, recent add-ons of large brands to the platform may result in smaller businesses being outrun by their competition. It remains to be seen whose side – the bigger brands or the smaller businesses – Amazon is going to take.

Thirdly, offering an ever-growing selection makes competition harder. It truly is a Winner Takes All situation. The flywheel is working at its best and with an ever-increasing number of sellers, Amazon can continue to charge them more to appear high on the list when products are being searched for. Adding to that, Alexa, like any voice assistant, will act as a gatekeeper for the Amazon platform. Any customer question on what product to buy provides an Amazon-favored result. According to many, Amazon is primarily focused on its own growth instead of their partners’, bringing to life Bezos’s statement that “your margin is my opportunity”. In that respect, it is much more of an empire than a true ecosystem. Being perceived as a monopolist by the outside world might be a threat to their future growth should businesses and brands back away. It remains to be seen if other platform giants, like AliBaba, will offer fierce competition. For one thing, AliBaba claims to offer this true ecosystem focused on partners’ growth.

Nancy Rademaker
Nancy Rademaker

With over 20 years of experience in IT and training, Nancy has always and above all passionately focused upon people: how technology influences their behaviour, how it helps them...