Can Amazon.com Inc. (AMZN, Financial) really promise both outstanding customer service and low prices at the same time? Amazon founder and CEO Jeff Bezos says, “One of our most exciting peculiarities is poorly understood.” In the company’s 2002 letter to shareholders, he expanded on this seeming contradiction.
“People see that we’re determined to offer both world-leading customer experience and the lowest possible prices, but to some this dual goal seems paradoxical if not downright quixotic,” he said. Of course, Bezos had an explanation at the ready: That was the case for traditional retailers, but not for online stores like his.
From a pricing perspective, he argues Amazon transforms much of its customer experience into mainly a fixed expense. Enhanced customer service, such as selection, production information and personalized recommendations, are technology-based. This means they are included in the one-time costs incurred when new features are added. Pay for the software engineering and coding upfront, making them a fixed expense, and you can coast along from there.
On the other hand, customer service in a traditional retailer is staff-based: better customer service requires more staff, which requires more variable cost. Conventional middle-market retailers are always trying to find a balance between quality of service and those variable costs. In fact, many companies define themselves with that balance. Ross Stores (ROST, Financial), for example, discounts regular prices by 20% to 50% (and up to 70% at dd’s Discount); for that sort of discount, their shoppers are willing to forego service.
Bezos cites a couple of examples from the recently-closed fiscal year:
- Delivered a record number of units to customers.
- Delivered best-ever customer experience, based on a 13% improvement in contacts per order.
- Cycle time, which is the average duration to process an order, improved by 17%.
- The highest-ever score on the American Customer Satisfaction Index.
While improving those customer metrics, Amazon also cut prices in several areas, including the elimination of shipping fees on orders of $25 or more (with Free Super Shipping).
He also points out that unlike most traditional retailers, they do not discount products for a limited time, but aim to offer low prices every day, across the entire product line.
Bezos said all this emphasis on both customer service and low prices improved key financial metrics in 2002:
- Net sales increased 26%.
- Unit sales grew 34%.
- Free cash flow—what the company considers its most important measure—improved over the previous year by $305 million.
He sums up by saying, “In short, what's good for customers is good for shareholders.”
Writing for Smart Insights, Dave Chaffey says testing and experimentation play a significant role in both customer experience and low prices. This involves not only trying out new ideas, but also using tools such as A/B testing (and likely multivariate testing as well); A/B testing involves a comparison of one variable (does the blue button get as many clicks as the red button?), while multivariate testing involves comparing the performance of two or more variables at the same time (red button versus blue button and “Buy Now” versus “Add to Cart”).
This type of testing is known as process improvement. It can begin with relatively big gains; over time, the gains get smaller, but if there are enough of them they can make a material difference. Even a small change, when used across literally millions of pages, can have a huge impact. The cost of such tests tends to be minimal, especially when spread across thousands or millions of responses. Again, this involves upfront costs and becomes a fixed cost.
Another company that succeeded with ongoing improvements based on data is Danaher Corp. (DNR), which got its start in the manufacturing sector by buying underperforming companies and rehabilitating them. The means of rehabilitation is called the Danaher Business System. It is based on Lean Manufacturing and Kaizen strategies, in which data is analyzed to understand problems and develop solutions.
In this vein, Brad Tuttle of Time.com writes, “In lieu of profits on book sales, the business plan was this: 'After collecting data on millions of customers, Amazon could figure out how to sell everything else dirt cheap on the Internet.'” Amazon is helped in this exercise by its third-party partners, individual merchants and big retailers alike. Bezos and company can see the data they are generating on the sales side, as well as copy successful partners.
The title of Tuttle’s article is “The Reason You First Started Shopping at Amazon Is Disappearing,” which highlights a growing suspicion among consumers that Amazon no longer has the best prices in every situation. Citing research from Boomerang Commerce, he writes, “While the e-commerce giant tended to have the cheapest prices on the most popular items, prices for many other goods were far higher than what shoppers might find at Walmart and other retailers.” The Amazon strategy, he argues, is to create the perception of lowest prices on popular items so customers will think all prices are the lowest.
ProPublica did research on Amazon pricing in 2016 and concluded, in many cases, that the lowest price wasn’t always the one that went into the “buy box” (the box on the right side of the page that shows a default buy suggestion). In response, an Amazon spokesman said “buy box” choices were not based solely on price, but also accounted for product selection, customer service and free delivery.
Whether that was true in 2002, when this letter was written, is unknown, but the issue may reflect a not-uncommon strategy change among companies that enter the market with a low-cost competitive advantage. McDonald’s (MCD, Financial) managed to do it, but it has hurt other companies that allowed their prices to creep up without distinguishing themselves on some other front.
Summing up, consumers and investors in 2018 may be less surprised about getting both customer service and low prices than they were in 2002. Still, resolving that seeming conflict, with technology, was a major accomplishment for Bezos.
He proved it was possible to transcend “exciting peculiarities” such as this one with vision, a focused strategy and the effective implementation of technology.
Bezos took that even further by aligning the interests of customers and shareholders in a new and productive way.
Disclosure: I do not own shares in any of the companies listed, and do not expect to buy any in the next 72 hours. I do list books for sale on Amazon.com and other online book retailers.
