Amazon’s Ecosystem, How it Attracts and Retains Customers
Imagine buying photo storage located in the cloud from the same retailer you buy your favourite Calvin Klein jeans from. Sounds like an odd pairing doesn’t it? You don’t need to use your imagination. If you are an Amazon Prime member you can do this with the click of a button.
Amazon Prime launched in 2005 and at that time it was simply a delivery membership that offered unlimited two day shipping. But since then Prime has morphed into something much bigger, an ecosystem. It isn’t quite as powerful as Apple’s ecosystem but it is growing with no signs of stopping.
So why does it make sense for a retailer to sell photo storage or develop critically acclaimed TV shows and movies? Let’s call it next generation customer acquisition and retention. Traditionally when retailers think about how to attract and retain customers they put things on sale, partner with other retailers to find similar customers or offer customers points for their loyalty. But Amazon like Apple looks at these activities in an entirely different way.
Most of us are tethered to our phones taking and sharing photos on a constant basis. As apps like Instagram grow the need for photo storage will only increase in the future. Amazon’s CEO, Jeff Bezos once said: “I do get asked, quite frequently ‘what’s gonna change in the next 10 years?’ I rarely get asked, and it’s probably more important — and I encourage you to think about this — is the question, what’s not going to change? The answer to that question can allow you to organize your activities. You can work on those things with the confidence to know that all the energy you put into them today is still going to pay dividends in the years to come.”
In 10 years we are still going to need somewhere to store our photos. Offering free unlimited photo storage as part of a Prime membership is something that is easy to gloss over but once a customer starts using the service that customer becomes stickier. Like most people when you decide to store something important in a safe place you like to keep it there. No one likes the hassle of moving their files around. While Gap is thinking about its next sale Amazon is sleeping better at night knowing that it’s already got you locked in.
Then there is Prime Video. If it was 2010 and someone told you Amazon was developing a TV and movie streaming service you might have started laughing. But it is not 2010 its 2021. All it took was Netflix and a pandemic to convince even the last holdouts that streaming is the present and the future. Prime Video may not be Netflix but its catalogue is growing thanks to an estimated $6 billion Amazon spent on video content in 2019 alone.
Like photo storage, Prime Video is another way to lock customers in but it’s also a more high profile way of attracting new customers. You may not be an Amazon customer but what if you really want to watch the Sopranos? Or Jack Ryan? Or RuPaul’s Drag Race? Then sign up for Amazon Prime. It’s a novel way of thinking about marketing and customer acquisition. Amazon has found that the more videos customers watch on Prime Video the more likely they are to renew their Prime membership. It is estimated that at least a third of Prime members are active users of Prime Video. “Internationally, the number of Prime members who stream Prime Video grew by more than 80% year over year in the third quarter [of 2020], and international customers more than doubled the hours of content they watched on Prime Video compared to last year, said Brian Olsavsky, Amazon’s Chief Financial Officer.
And then there is music. If someone told you that Macy’s owned your music streaming service wouldn’t you think that was strange? Well Amazon thought providing customers with music streaming services was the right move and now Amazon music has 55 million music subscribers. Music streaming services are also sticky. Then of course, Amazon Music integrates seamlessly with Alexa enabled home devices like the Echo, with the Echo becoming another reason to stay within Amazon’s ecosystem once you are in it.
Of course there is fast and free shipping. This perk gets the most attention and for good reason. There are many more features of Prime, too many to list. But all together in Amazon’s relatively short 26 year history it has managed to build a very large, differentiated and hard to copy moat around itself. Its moat extends well beyond its logistics business and no other retailer has created anything similar. Even Walmart, the largest retailer in the world only launched its own delivery subscription, Walmart + in September of last year but it pales in comparison to Prime, so much so it shouldn’t be compared to it.
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So how is Amazon able to get so far ahead of the competition? How is it able to see what others cannot see, years in advance? It’s not luck. It comes down to Amazon’s approach to innovation. Here are three quotes from Bezos himself that provide insight into how Amazon thinks differently.
"We innovate by starting with the customer and working backwards. That becomes the touchstone for how we invent." When thinking about customer needs most retailers think about a singular need like a new mom needs to have comfortable clothing while she is out for a walk with her new child. But Amazon will look at that new mom and think she needs comfy clothing but she probably would love to have easy access music that will put her baby to sleep and she’s going to need somewhere to store all of those pictures she’s taking for the gram.
When you shift from thinking about I just sell product A to how can I really improve the lives of my customers, everything changes. Apple uses this approach. In 2012 you didn’t think you needed a computer on your wrist but in 2021 you realize it’s hard to live without an Apple Watch. Thinking “out of the box” is often about reframing what you do. Once you start thinking more broadly about your customer’s needs and how you can serve those needs even if you can’t meet those needs today you are more likely to think about new and interesting opportunities.
“If you decide that you’re going to do only the things you know are going to work, you’re going to leave a lot of opportunity on the table.” When Amazon was first thinking about creating Echo, a device that speaks to you, there had to be someone in the room who thought what a ridiculous idea (whether they said it out loud or not). But Amazon decided to move forward and it worked.
If you look at department stores you will notice there aren’t too many examples of department stores that have piloted big ideas to save their business. They all seem to be doing different versions of the same thing. A new private brand is always being launched or a new store within a store concept is heralded as the next big thing. But to have big success you need to big failures. That is a hard pill to swallow but anyone that has had above average success knows this. Do you remember the Fire smartphone Amazon launched in 2014? Neither do I. Amazon is not Apple but at least it tried.
“If you're watching your competitors, you're unlikely to invent a bunch of stuff on your own.” When Bezos said this, he was probably thinking about all of the competitors who spend all of their time trying to copy Amazon. It’s hard to beat someone who is better than you at the thing you want to emulate. Big box retailers like Target have done a commendable job of focusing on their own assets. They know that they can leverage their store networks in a way Amazon can’t. This approach brought these retailers great success in 2020.
Most retailers can’t fully grasp the full power of Amazon’s ecosystem yet because they are still trying to keep up with Amazon’s logistics prowess. But what retailers should really be thinking about is how do I create something valuable and unique that serves as my own moat.