The Amazon business model is too big to ignore for equipment manufacturers

Amazon
By Luke Powers, founder of Gearflow.com

The equipment manufacturing industry needs to know that the old rules of customer engagement have changed. The world of e-commerce, Amazon, Google and retail have seemed distant and “next year’s” initiative — until 2020 hit. 

In the past year, we have seen the vertical rocket of tech companies’ share value. Amazon is one the biggest winners with market cap of more than $1 trillion.

Why does that matter for us?  

Amazon has a multitude of business units — all offering the short-term ease of selling on the platform. And it is easy to forget the predatory nature of their model. 

Amazon monitors all the seller and customer data across its channels, giving the company an unfair advantage when deciding which products to offer themselves.

Basically, sellers give Amazon their customer data, so Amazon can decide if they want to compete or not. We don’t need to guess if this is the case — just look at what happened in retail. 

In 1994, Jeff Bezos embarked on a cross-country road trip from New York City to found Amazon.com in Seattle. Bezos later said he chose Seattle for the concentration of publishers near the city and the engineering talent base of Microsoft. 

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The internet was growing rapidly, and Bezos thought the best entry point to pioneer online commerce was book sales. He noticed that books were among the top of mail-in-catalogue sales and reasoned that the internet was a much more efficient way to order.

Amazon launched with more than 1 million book titles — far more than any retail store could stock. Even though the original site was clunky, it gave book enthusiasts far more selection and ease of use than catalogues book stores or libraries ever could.

In the early years, media attention around Amazon focused on the total addressable market of book sales online and Amazon’s mounting losses. The Wall Street Journal even published an infamous article titled “Amazon.bomb” in May 1999 that predicted the imminent demise of the company given competition from book retailers and 1998’s total loss of $125 million on $610 million revenues. These losses, as we now understand with hindsight, were the wise investments in distribution centres and massive infrastructure to enable Amazon to become the world’s general store. Bezos was not interested in competing one-on-one with book retailers, he was looking past them toward a future of dominating online commerce.

However, the world did not see it that way. Traditional bookstores were locked in competition for the best real estate, the best authors to launch their books and hiring the best retail-operations talent. 

Bezos, on the other hand, was interested in large and efficient distribution centres outside urban areas and hiring the best software engineers possible. Every penny earned through Amazon’s operations went back into these two areas of investment.

Ever since Amazon’s inception, Bezos has consistently plowed income back into the business to continue aggressive expansion and keep taxes low. Amazon now has more than 175 fulfillment centers worldwide with more than 150 million square feet. 

At Amazon’s IPO in 1997, Wall Street wanted Amazon to focus on short-term profits so they could evaluate the company against traditional retail businesses. Bezos stood firm and never played by the same rules. 

In his famous 1997 original letter to investors, he stated “we believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position.”

While the worlds of booksellers, record stores and shoe retailers were locked in fierce competition and quarterly profits, Amazon went about their business creating a future by their own rules. Does this sound familiar to today’s construction equipment and parts industry?

The Virtuous Cycle

According to Jeff Wilke, CEO of worldwide consumer at Amazon, Jeff Bezos drew a sketch on a napkin about the self-reinforcing momentum of Amazon’s business. He donned it the “Virtuous Cycle.”

This flywheel will no doubt be studied in MBA classes for at least a generation. However, notice the word “virtuous” in Bezos’ title. 

As you can see, this cycle is self-reinforcing for Amazon — not their sellers. 

As we know, Amazon’s huge bets in distribution centres and the best engineering talent have made them the de facto place to sell online. However, even though the platform is incredibly easy to use, have sellers considered the true long-term cost to their businesses?

In the short term, sellers are happy to be a part of Amazon’s “virtuous” cycle, because they believe it can only produce an upside for them. Amazon did the hard work of engineering a great platform and the cost of running mega and efficient distribution centres — what’s not to like? In fact, they double down on selling on Amazon by purchasing Sponsored Products ads and sending their products to Amazon’s fulfillment centres for Prime shipping (both significantly increasing the cost of doing business on the platform). The Sponsored Products advertising revenue was nearly $5 billion in the fourth quarter or 2019.

As more and more sellers join and compete on the platform, Amazon gathers more and more data on their products. 

MBAs working at Amazon then take this data and strategize on which product segments would be a good fit for Amazon to take advantage of in the future.

Data driven

As we know this is not the only rich set of data Amazon has at their disposal to determine which products to sell themselves. Amazon has grown from an e-commerce retailer into tablets, smarthome devices, cloud computing storage, music streaming, video streaming, photo storage, book streaming service, tv hosting and through other business units and acquisitions. The multitude of these content and data engines is that Amazon products have become integral to our productivity and lifestyles. The aggregate effect gives the retailer tremendous power in manipulating whole industries.

Imagine for a moment if Google had its own e-commerce marketplace and fulfillment centres, and they sold similar products to yours. Pretty intimidating, isn’t it? A Statista report found that Google accounted for 84 per cent of all searches online in January 2020. There’s no way any company could compete with their search engine dominance. 

Now consider that Amazon has double the number of users starting their product searches on their site instead of Google.

There are likely a multitude of factors that have put Amazon so far in front of Google with why consumers start their product searches there. But the most dominant factor is Prime membership loyalty.

In the United States, a whopping 112 million people are Prime members, representing 87.5 per cent of all households. In other words, roughly nine out of 10 American households start their product searches on Amazon three out of four times.

So, if Google is a far second to Amazon on product searches, and the lines between offline and online sales are blurring, how can anyone else compete? It’s time as an industry to band together to form a more compelling platform for contractors.

Luke Powers is the founder and CEO of Gearflow.com, an AEM member company and marketplace built for construction equipment professionals to find the parts and equipment they need from vetted suppliers.

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