Insights - The Achilles heel of Amazon's Business Model.

The Achilles heel of Amazon's Business Model.

by Dr. Thomas Papanikolaou on December 14, 2015

Without a doubt, Amazon epitomizes the online retail store. Based on a globally uniform logistics and delivery platform, Amazon has managed to build a captivating online shopping and social experience, and generate 10's of billions of revenue per year. Looking at The Technology behind the Evolution of Shopping Amazon seems to possess the full enabling technology stack, highly scalable through its cloud-based execution model. In terms of user experience, it is still optimising and simplifying the instant buying process, further accelerating a shift in the way people buy.

It is in this relentless optimisation where the Achilles heel of Amazon's Business Model can be found.

Let us contrast and compare the shopping experience before and after Amazon's introduction of Social Commerce, as enabled by the Internet.

  1. Before Amazon, buying a consumer product in a retail shop included talking with friends to get information and listen to their recommendations, going to one or more shops to get more information (in some cases: expert advice) and touch and feel the product, and finally purchase the product from one of the shops visited. A physical retail experience, with a mandatory face-to-face social aspect.
  2. After Amazon, consumers would check the Internet to get upfront information and Amazon to read recommendations from people that were almost always strangers to them. They would still visit one or more shops that had the product in display to touch and feel the product, but would return to Amazon and buy online at the best possible price. An online retail experience, with a supporting social aspect.

In the world after Amazon, small and medium businesses lost out / closed down, as they carried the cost for displaying the product (location and people expenditure) but did not earn a share of the revenue when it was purchased online. Amazon won.

Large businesses reacted by going online, trying to regain the pole position in the online product search, and hoping to recapture the consumer with the best possible price. A heavy investment that showed some early success. The author believes that in the longer-term Amazon will win here as well, due to substantially lower operating costs.

But can Amazon's online retail model grow in a world without physical retail?

To answer this question, think of a wedding ring, a musical instrument, a bike, a lamp, a chair, a camera, ... or anything that has to do with a a special moment in life, a personal preference, a hobby, .... It would be fair to claim that touching and feeling any such product before purchase is an integral, even mandatory, part of the consumer buying process.

Therefore, assuming existing technology and Amazon's current approach to market, the answer is that Amazon needs physical retail to flourish in order for Amazon to grow. Physical retail covers the missing and necessary ingredient in Amazon's online business model.

This dependency on the physical retail experience, is the Achilles heel of the Amazon's Business Model. Amazon cannot currently move full speed with its business model execution without more physical retail businesses closing down, and creating a discontinuity in user experience. In other words, the more successful Amazon is, the less physical retail there is, and the more consumers will hesitate to buy something they have never seen and touched before. In that context, it is not surprising news that Amazon is opening its first physical bookstore . Expect more such physical shops in more product categories to come.

CREDITS & REFERENCES

For the avoidance of doubt, Neos Chronos are not affiliated with, and have no financial interest in any of the companies mentioned in this article. All names and trademarks mentioned herein are the property of their respective owners. Please observe the Neos Chronos Terms of Use.

  1. Wikipedia: Achilles heel
  2. Amazon: Website
  3. The Guardian: Amazon is opening its first physical bookstore

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