By Bobby Miller
“Amazon.com seeks to be Earth’s most customer-centric company,” according to the Alexa website. And it sure looks like Amazon is doing a good job at pursuing this goal. Alexa, a site that provides information on websites, reveals that Amazon is the fifth most visited website in the United States, trailing behind only Google, Facebook, YouTube and Yahoo. In the second quarter of 2012, it sold nearly $13 billion worth of items, according to Businessweek. Not to mention, Amazon’s Kindle is considered the chief e-book reader.
Why so much hype around the website? There are a number of factors, such as the convenience of shopping online, the insanely huge selection and the surprising speed at which items are shipped. This is all meant to put a smile on customers’ faces, which is why the arrow in Amazon’s logo looks like a smile. It even goes from A to Z, representing the website’s huge selection.
But, for most people, the prices are what make Amazon so special. During my college experience, I used the university’s bookstore only as a last resort because I knew I could probably get textbooks on Amazon at half the price—sometimes even cheaper than that. Plus, many people are using brick-and-mortar stores like Best Buy as a means to look at products and then buy them cheaper on Amazon.
The prices are so low, in fact, that most stores have trouble competing with Amazon. Lately, Amazon has almost come off as the Internet’s Wal-Mart, a big company bent on driving smaller ones out of business. While it is certainly true that some companies are floundering thanks to Amazon, others—including small businesses—are actually benefiting from the website. The situation is much more complex than determining whether Amazon is peaceful or predatory and we have to look at the company’s history and how it has affected different industries.
For Amazon, Market Share Outweighs Profits
Ask any random passerby on the street why some people hate Wal-Mart, and they’ll know the reason is that the company’s accused of undermining small businesses that can’t compete with their low prices.
In the business world, there’s a dubious practice known as “predatory pricing.” With this “anti-competitive measure,” as the Investor Words website calls it, a company prices its products incredibly low, to the point that it’s barely making a profit, if any at all. Other businesses, in need of money, cannot lower their prices. Customers flock to the low-priced store, and the other businesses eventually have to close down. At this point, the low-priced store is the only major business in the field or area. With no competition, it now has the monopoly on prices, so it can overcharge to make up for those lost profits. In the long term, this can rake in huge amounts of cash thanks to high market share.
While Wal-Mart has never been legally convicted of predatory pricing, many people associate the business with this practice. At the very least, it’s obvious that low prices make it very difficult to compete with Wal-Mart. But can we accuse Amazon of practicing predatory pricing on a larger scale?
Credit: Mark Nowlin of the Seattle Times
What we can say for sure is that Amazon is willing to sacrifice profit to increase market share, which is placing emphasis on the percentage of the total number of items sold. Despite the fact that Amazon’s revenue has increased drastically from year to year, profits have often bounced up and down, never going very high. In particular, Yahoo Finance reported on July 25 that Amazon’s “profit margins” were 1.09 percent. A company’s profit margins are highest when their revenue vastly outweighs their costs.
It is surprising, then, that other retail companies are doing much better than Amazon in this field. Kohl’s and Target have profit margins of 5.93 and 4.15 percent, respectively. So, their margins are about four to six times higher than that of Amazon. Interestingly enough, Wal-Mart was also surprisingly low at 3.52 percent. On the other hand, companies such as Apple and Microsoft had profit margins of 27.13 and 23.03 percent, respectively.
We can see how Amazon prioritizes market share over profits by looking at its top selling product, the $200 Kindle Fire. According to the T3 website, Amazon loses nearly $10 on every Fire sold. Although the company can cover these costs by using the tablet to encourage people to buy their other products, the strategy is clear: get a foot in on market share and hope for the best. By pricing so far below the competition—such as the iPad 3, selling at $500—Amazon wants to reel in as many customers as possible.
Ultimately, with as much as Amazon sells, it can obviously make more of a profit if it wanted to. But, for right now, the company believes that market share is more important than increased profits.
Low Prices: A Way to Undermine Traditional Publishers?
Of course, these facts do not prove that Jeff Bezos, Amazon’s chairman and CEO, is scheming to wipe out other businesses and take over the market. However, some people seem convinced that the company is doing exactly that in the world of publishing. Traditional publishing companies seem to be on the defensive.
For instance, the Educational Development Corporation, or EDC, a publisher of children’s books, decided to remove its entire catalogue of 1,800 books from Amazon. According to the Digital Trends website, this move may cost the corporation $1.5 million in annual sales. So why separate from Amazon? Randall White, chief executive of EDC, stated that, “Amazon is squeezing everyone out of business. I don’t like that. They’re a predator. We’re better off without them.”
Randall White of the Educational Development Corporation
The Independent Publishers Group, or IPG, was also displeased with Amazon, so they removed almost 5,000 of their e-books from the site. “Amazon wants the price of books to be very, very low—lower than the publishing community can support,” Curt Matthews, chief executive of IPG, said in a New York Times interview. “Making a book is still a craft industry. Books need to be edited, to be publicized. Someone needs to say this is good and this is not. If there is not enough money to support the whole chain, the system will break down.”
And if traditional publishing does break down, who will be there to sell books? Amazon will be since it controls how books are sold and, to some extent, what they’re read on. The New York Times reported that Amazon already controls about 60 percent of the e-book market. So, even now, publishers must accept that the blessing of convenient e-book sales come with the curse that Amazon controls the prices and can change its terms at any time. Some people—such as J.B. Dickey, the owner of the Seattle Mystery Bookshop—believe that an environment dominated by self-publishing on Amazon would ruin “the expertise of the book industry.” It would become an industry full of unprofessional, unedited books.
However, maybe Amazon is not the one that needs to change. Maybe it’s the traditional publishers that need to reevaluate what they’re up to. The fact of the matter is that times change. People want low prices and convenience, so the Internet is becoming more and more popular. Forrester Research, a market research firm, estimated that Americans spent $200 billion online in 2011. By 2016, this number may reach $327 billion, a 63.5 percent increase. The music industry suffered until it decided to work with the Internet rather than against it, and perhaps book publishers need to do the same. They need to find ways to cut extraneous costs so that they can give the people what they want—books at low prices.
And it’s not as though, this is a sacrifice for authors. In an article by novelist Jessica Park, “How Amazon Saved My Life,” she explains that she enjoys self-publishing through Amazon far more than catering to traditional publishers. With self-publishing, she can take more creative risks, sell at affordable prices and, ironically enough, actually make more money than with a New York publishing house calling the shots. And so, the authors make more money and the readers save more money. That doesn’t sound like a bad deal to me.
It’s Almost Always Cheaper at Amazon
However, brick-and-mortar stores aren’t happy with Amazon either. Five years ago, if you had told me that Best Buy would soon be struggling to make a profit I would not have believed you. But that’s exactly the case now that Amazon is encouraging people to look around in brick-and-mortar stores for items and then go home and purchase them online. There’s even an app for that. Price Check lets you scan the barcode of a physical item to see how much it costs on Amazon and, in the process, you can save a few extra bucks for going to the trouble of scanning the item. Aside from taking a purchase away from another store, it allows Amazon to keep tabs on how much competitors are charging.
Since the app’s release in 2011, it has received some backlash from small business owners. Danny Sullivan, editor-in-chief of Search Engine Land and a former member of Amazon’s affiliate program, is upset that Bezos suddenly terminated its affiliate programs in California to avoid taxation. “That’s a pretty nice business to have, isn’t it? Merchants who invest in real stores effectively serve as your stores, too,” said Sullivan in an open letter to Amazon. And, of course, even larger chains such as Best Buy and Target are displeased with Amazon’s tactics.
Jeff Bezos, CEO of Amazon
One reason Amazon can be so confident in its prices is the fact that, in most states, the majority of products purchased directly from the company are not taxed. This dates back to Quill Corp. v. North Dakota, a Supreme Court ruling in 1992 that stated a company only needs to collect sales taxes from customers that live in states where the company resides. So, as long as Amazon doesn’t have a warehouse in your state, you don’t have to pay sales taxes. This means that, at minimum, brick-and-mortar stores need to put up with an 8.25 percent tax that Amazon does not.
However, Amazon is convinced that, even without the sales tax advantage, it can still offer better prices to its customers. For that reason, it plans to build a greater number of warehouses across the United States. This is a huge turnaround for a company that, in the past, vehemently opposed most efforts to tax it. Tom Szkutak, Amazon’s chief financial officer, told Businessweek that the company is safe with this new strategy because it already does over half of its business in areas where it must collect a sales tax or something much like it, such as Europe’s value-added tax. Besides, with more warehouses, it can deliver products more quickly at a lower cost to the company.
Even with expanding warehouses to more states, and more customers being taxed in the process, Amazon should have little trouble maintaining competitive prices. To experiment, I compared Amazon’s prices on random items with those of their competitors. A new copy of a book, for instance, costs $11.48 at Amazon and $12.48 if it were taxed at the minimum U.S. rate, but $16.99 at my local Barnes & Noble, which is about $18.39 at the minimum tax. Since I can get free shipping from Amazon, I can save about $6 to $7, which can add up fast for avid readers.
The DVD I looked up sold for $16.76 at Amazon and, although it can be found for a few dollars less at other stores online, the price difference, in some cases, more than made up for the shipping costs. It was available for $19.99 in all the brick-and-mortar stores around me, including Best Buy and Toys R Us, and that price does not factor in the tax. So, these companies that have long relied on brick-and-mortar stores are obviously having some trouble keeping up with Amazon’s prices.
On a random CD, it was interesting to find that companies such as Barnes & Noble offered it online at a lower base price than Amazon, but they lost that advantage when shipping and taxes were taken into account. And by offering it at $11.88, Amazon just barely squeaked ahead of my local Best Buys pricing of $11.99.
So, while Amazon might face notable competition from online companies like Buy.com after being taxed, brick-and-mortar stores will still have trouble offering similar prices.
How Other Businesses Can Adapt
Does this mean Amazon is like Wal-Mart, viciously shooting down small businesses? In some ways, that may seem to be the case, but Amazon is actually helping small companies in a number of ways. Many businesses, some smaller than others, sell through Amazon rather than beg people to come to their stores. The Amazon Marketplace, which allows them to do this, is growing fast, according to the Startups website. As the site reported, the Marketplace accounted for “more than 30 percent of the company’s total unit sales in the fourth quarter of 2010.” The Marketplace can easily be accessed for any item by looking below the listed price.
By using Amazon rather than fighting against it, companies will be able to reach a wide variety of consumers and save money by not having to maintain brick-and-mortar stores. With the money saved, some companies are able to charge lower prices than Amazon, even when shipping rates and sales taxes are accounted for. The Marketplace is easy for both consumers and companies to use. In addition, people are more likely to trust a small business when its transactions are being monitored by a company like Amazon.
Besides, it’s not Amazon’s fault that people like the convenience of shopping online. It’s just a sign of the times. You can either swim against the current or swim with it—you can’t change which direction it’s going.
But what about the bigger companies like Best Buy and Target that want to maintain brick-and-mortar stores in addition to an online presence? Well, they have to offer products that Amazon cannot. Having good customer service in person can go a long way toward building customer loyalty. People have criticized Best Buy’s service for a long time, so it shouldn’t be too surprising that customers shamelessly use their stores as showrooms. If helped out by a nice, informed employee, though, the customer may understand the benefits of supporting such a business. Plus, brick-and-mortar stores can try to offer a nice atmosphere to draw people in.
Overall, Amazon has taken over certain markets, which obviously must come at the expense of other companies—that’s how business works. However, this does not prove that the company is sitting back with a sinister grin on its face. It’s a sign that Amazon is able to adapt to the times while other businesses, particularly traditional publishers, are not. While some of its efforts—such as the Price Check app—may be questionable, Amazon has done what it set out to do. And that is, to make a consumer-friendly company.
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