Amazon and its Love for Low Prices

All of us use Amazon. Brian Dumaine’s book Bezonomics (titled after its founder and ex-CEO, Jeff Bezos) gives an awesome overview of how the company operates. Bezos truly believes that a key factor about Amazon is:

“We are genuinely customer-centric… (unlike other companies that) are focussed on the competitor, rather than the customer.”

Of course, customer satisfaction is a moving target. Because customers are “divinely discontent”. No wonder then Bezos has insisted on having a Day 1 mentality, to act with the same enthusiasm and fear like it is the first day of the job/company. At an all-hands, he was asked would Day 2 would be like. His answer says it all:

“Day 2 is stasis. Followed by irrelevance, followed by excruciating, painful decline, followed by death.”

In fact, just a few years back, he said something hard to imagine today:

“Amazon is not too big to fail… One day, Amazon will fail. Amazon will go bankrupt. If you look at large companies, their life spans tend to be thirty-plus years, not a hundred-plus years.”

 

No surprise then that the man doesn’t sit on his laurels:

“Yesterday’s ‘wow’ quickly becomes today’s ‘ordinary’.”

Therefore, Bezos doesn’t think about R&D as being separate from the business. Rather, R&D is the business. Even maintaining Amazon’s services and products, its server farms, and its website is not just keeping them running, but to find ways to improve or find newer, better ways to do things!

“Everyone is expected to innovate – not just a handful of scientists in white lab coats.”

 

It’s easy to be cynical of such talk. After all, doesn’t every company and manager say these things? True, but Bezos (and thus Amazon) believes in the flywheel metaphor. What’s that? It’s a metaphor for a virtuous cycle:

Amazon lowers prices à attracts more buyers à attracts more sellers to the site à more revenue for Amazon à economies of scale à allows for driving down prices further à cycle repeats.

 

At Amazon, Bezos insisted that all new ideas and features need to prove how they fit into the flywheel. I’ll show how some products/features fit into the flywheel.

 

Take Amazon Prime. By giving “free” shipping for an annual fee, it tempts you to buy more. Hey, there are no additional shipping costs. I’ve already paid the annual fees, so why not use what I paid for? In short, it “changed the shopping habits of its customers”. In addition, with Prime, you get free e-books (limited, but they’re there), which tempts you to the Kindle and then more e-books.

 

How about Alexa? You can ask “her” for prices, reviews, and shopping info (in addition to anything else). As you get comfortable talking to a machine, it doesn’t feel odd to find Alexa as the voice assistant inside more and more appliances in your home. So now you can centrally control them, via Alexa, of course. Turn on the speakers by voice. Forgot to switch off the lights? Want to switch on the geyser as you get close to home? Just tell Alexa via the app. As all this becomes normal, no prizes for guessing where you’re likely to buy those gadgets from. Aside from all this, who knows what other opportunities will come in future as Alexa’s voice recognition and AI gets better…

 

Of course, there’s a downside to this obsessive focus on lower prices. Amazon pays low wages to its warehouse workers, and its delivery boys. Worse, even those low paying jobs are at risk as Amazon is well and truly into robotics (to move goods in those warehouses at even lower prices than those warehouse workers) and into drones (to deliver goods at even lower prices. And for even quicker delivery). And that’s without even getting into small shops and businesses that close down as they can’t compete at those prices. Why then doesn’t Amazon get terrible press (yet), the way say Facebook does? Because there are far, far more customers who benefit from those low prices…

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