April 2015

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Miura Keys – Rise

Amazon Prime – A smart strategy

I spend some thoughts on Amazon Prime this morning, after this headline caught my attention “Amazon to continue heavy investment in Prime despite losses”. What is the objective and purpose of Prime? What is the strategic motivation to invest in a service labeled as a “loss maker”?

From my view Amazon Prime creates value on different fronts for Amazon:

  1. Customer lock-in effect: A customer pays $99/year to get free 48h express shipping for all orders. Why should a customer buy offline or order from another shop if he enjoys express shipping by default from Amazon as a Prime subscriber. Ok, offline shopping is not a perfect substitute for online shopping, but the instant character of express shipping is an important factor in the competition with high street shops. 
  2. Business model transformation: From a one-time transaction model to a subscription based model. Amazon is transforming it’s business model into a subscription based-model – razor/razorblade model. The razor (Prime) sells on a loss, while the razorblades (Products) are sold on a – hopeful – healthy margin. Amazon decouples the physical product sell from the shipping service. This could be further extended in the future, e.g. Prime subscribers are also getting preferred customer service treatment with a dedicated hotline or special return handling.
  3. Lever for Amazon Marketplace: Prime has different effects on the Marketplace business. A) Prime encourages 3rd party Merchants to go for Fulfillment by Amazon, as Merchants benefit from the free express shipping that Prime subscribers get B) Even if Amazon itself is not the cheapest seller, customers with Amazon Prime are incentivized to order from Amazon directly, as they get the free express shipping.
  4. Amazon Prime should also help to improve Amazon’s cash flow. Subscription based-models typically also help to create more stable cash-flows and have a better predictability. 

Adding digital goods (ebooks, movies, music, photos storage) as value add to Amazon Prime, which have zero respectively low marginal cost (Ok, licensing), is another smart move and helps to drive the Amazon hardware business with the Kindle and Fire TV.

There are probably a couple of other advantages for Amazon. (e.g. driving customer satisfaction). Prime is definitely more than a simple loss-making up-sell/cross-sell.

When you’re a large company with significant market share, it’s tempting to view market disruptions as a threat, but we view them as an opportunity. When a market isn’t in transition, gaining market share is hard—you’re fighting to take one or two points of share from competitors. …
The most important thing I learned during my time at IBM and Wang is that even great companies are imperiled if they miss a market transition—and I saw both of them miss important ones. …
For Cisco, each transition required a decision about when to jump from selling a profitable product to a new technology—often one that would cannibalize our existing product line. …
Adapting to new markets means constantly bringing in new expertise and sustaining a resilient culture with an appetite for change.

Traction is basically quantitative evidence of customer demand. So if you’re in enterprise software, [initial traction] may be two or three early customers who are paying a bit; if you’re in consumer software the bar might be as high as hundreds of thousands of users. … It’s the Supreme Court definition of porn. You’ll know it when you see it.

Naval Ravikant, founder of AngelList

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Nidalo feat. Bonnie Legion – Oblivion (Original Mix)

strategy is an integrated set of choices that uniquely positions the firm in its industry, so as to create sustainable advantage and superior value relative to the competition.

Playing to Win: How Strategy Really Works Hardcover – by A.G. Lafley (Author), Roger L. Martin (Author)


“A marketer having a bad product is like bringing a knife to a gun fight.” – Everette Taylor, founder of MilliSense

View from the balcony toward JLT and Dubai Marina.

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