Week 2: Data Empire — Amazon
NYCU GMBA Class note
Strategy 101
What’s strategy?
The action that leads to reach long term goal. It’s about define the battle field and how to win the game.
Here are some important questions:
Why enter the market?
How big is the TAM(Total addressable market)? and define the battle field
Who we are fighting for?
Big guys, many small guys, no one, why?
How to win?
How to measure (by what tools), Finance statement, How to allocate, Any unfair advantage?, Fight alone/Joint force, How to keep winnig? (War never stops)
Basic tools for case analysis
SWOT
For instance, substitution changes the rule of the market, ex. Tesla changing the rules of the car market.
Income statement
Gross profit matter the most. For retailers gross profit may decrease significantly as the scale of the business grow due to the icrease of the operating expense. For software company like Netflix, the gross profit can remain around ~90% since the operating expense doesn’t increase linearly, it would only slightly increase the demand of streaming and maintaining.
Balance sheet
Current asset: Anything can turn into cash, inventory/accounts recievable
Long term asset: Plants and equipments
Liabilities and stockholder equity:current/long term liabilities
What CEO do? Make a bigger balance sheet. Share price increase, means generating more cash.
Platform Ecosystem
Two-side platforms connect producers and consumers, platforms function as the place to allocate all the demands.
Unit economics
Customer acquisition cost(CAC): the cost to get a single customer
Customer lifetime value(LTV): the “margin” of single customer contributes to the platform
All companies should aim for higher LTV with lower CAC.
A good platform should make LTV>3*CAC.
Economic Moat 護城河
The defensive asset of company, high LTV for software company, Elon Musk for Tesla.
the wider the economic moat, the larger and more sustainable the competitive advantage of a firm.
What is an Economic Moat?
Amazon
1. What drove Amazon’s early success?
Before Amazon, it’s a difficult and complicated process to sale books. Books need to go through publisher, distributor, wholesaler and reader. There’s a fatal problem of this process: high return rate of the book, which waste money, time ,and space for the publisher and wholesaler.
1994 Amazon take the first step in Seattle based in the following reasons:
- Seattle is the tech cluster then
- Lack of sales tax
- Close to the biggest wholesaler in the US
The useful platform makes people like Amazon a lot, it is also convenient to checking reviews on the website.
1997 getting public
The share price was 18USD per share, and the total value of the company was 438M. Amazon sold 148M but 29M were loses. Then Amazon issued 1.25B of bond. Amazon went with the trend of the Internet luckliy.
1998
New service, more expansion Canada germany
Acquire imdb, become the leading role
1999
shipping and stocking made by the seller
2000
heavy investment:distribution center and customer services
2. What are the advantages and risks of opening your retail platform to third parties?
Advantage:
1.easy to startup
2.potential to access to global market
3.reduce cost(fixed&variable both)
4.minimal investment, maximum output
5.sell anything
6.revenue
Risk:
1.competing with other retails platform
2.consumer trust ex. delivery
3.logistics
Between:
acquisition other companies and startups
non control(quality of the goods)
finding right partners
3. What is the logic of Amazon Prime? Kindle Fire? Fire Phone? Amazon content development? AWS?
1. Amazon prime
subscription
free shipping is the key feature (79%)
key driver to success: increase the LTV two times higher than non subscriber
It’s important for users starting searching on platform
Prime day: changing the shopping culture in US
also service for seller(AMS)
2. Kindle
access to buy movie, ebook
“get more done with one device”
3. Firephone 2014
cause of failure: overprice
pricing policy narrow down the range of the customer
4. amazon web services(AWS)
low cost storage
making high profit rate comparing to other services
4. What do you think Amazon will look like 10 years from now?
Amazon already create an ecosystem and customers data matter most. It needs infrastructure for working with data.
- volume: product quality
- velocity:backend,usage frequency
- *versatility:number of different way to collect data
Find best solution for the service
Try to attract the best product to use the platform and becoming the center of the data. From AWS marketplace, Amazon can learns customer’s need and trying to predict their behavior.
The next step of Amazon will be building a data empire through data mining stream:
1. physical
collection of biometric data, track 100% human activity ex.Alexa collecting the voice
2. digital
data-driven apps:track 100% of their digital footprint
5. If you were a traditional retailer, how would you respond to the threat from Amazon?
Here are some possible strategies to applied:
- Speed and convenience: traditional store in the smaller cities still gets advantage of convenience, even the Amazon prime free shipping takes two days.
- In-store services: enhance the shopping experience
- Go beyond commodities: not competing on price directly
- Be flexible to the payment: customer shopping point for discount
- Build the relationship with customer: become the center of the community, holding workshop or bookclub, building a physical ecosystem
- Go online: eCommerce, combine online and offline, providing online customer services
Overview
Why Amazon starts with selling books?
- Book is a standard product, which means it doesn’t require to try on.
- Flywheel effect by getting users’ data
- Prime member increase the LTV(Lifetime Value)
People usually end up with the multichannel strategy. Many people using Amazon as the platform to make first contact with their potential customer, collecting data ,and accumulating reputation.
For instance, the user of AMS(Amazon Marketing Service) may need to pay up to 25~30% price of the product for using AMS. However, this price may still lower than the CAC.
Amazon go way much further than retailing. Does it pick up too many war? Where is the battle field?
Possible solution: Amazon wants to competing with other “ecosystem”
