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On September 4th, 2018, Amazon became a 1
trillion dollar company.
That’s twice what it was a year ago, and
only a month after Apple first broke the record.
Now, if your name rhymes with Real deGrasse
Bison, you might point out that 1 trillion
is a pretty arbitrary milestone, that new
years is fake, leap day is a lie, and the
phrase “time flies” is scientifically
inaccurate.
But it’s still a good excuse to stop and
ask, Why?
Why is Amazon valued higher than Walmart,
Samsung, Netflix, and Disney put together?
First, Jeff Bezos thinks only in the long-term.
And because investors understand this, the
company can act in ways that only make sense
three, five, ten years in the future.
Second, they focus more on customers than
the competition.
The goal is building loyalty, even if it means
sacrificing profit today.
And finally, with remarkable scale comes remarkable
efficiency.
When you ship billions of packages a year,
you can buy your own airplanes, start your
own shipping company, and lower your prices.
But there’s another reason Amazon has such
an advantage: data.
No other website even comes close to the number
of sales made with Amazon.
Not Ebay, not Apple, not even Walmart.
The battle seems already won.
Unlike a Costco or a Staples, companies can’t
really choose whether to sell on Amazon, only
whether they make the profit.
Say you’re shopping for a pair of tennis
shoes,
Most people would click buy, receive it in
the mail, and never question who it came from.
It says Nike, the pictures are real, it even
has the logo.
But often it’s actually a reseller, who
buys in bulk, adds a margin, and sells on
the same official-looking product page.
Sometimes it’s not even the real product.
Knockoffs are everywhere.
In part, because Amazon isn’t really incentivized
to police them.
To you and me, it doesn’t matter who the
seller is if the price is right.
But for Nike, it’s everything.
Brands can either refuse to sell on Amazon
and watch other people do it for them,
Or they can embrace it, and yes, give them
a cut of the profit, but at least see some
of it.
So, you can guess which one they choose.
Either way, Amazon wins.
In theory, a company the size of Nike doesn’t
need them, they have a recognizable brand,
and they can easily sell on their own website.
But even they submit to Amazon, who, at this
point, isn’t so much a player as the game
itself,
There’s a whole industry around making sure
your product shows up when someone searches
for it, and you get picked as the seller when
someone clicks “buy”.
It’s called “Winning the buy box”, in
fact, here’s a whole book about it, which
you can purchase, you guessed it, on Amazon.
Now, controlling 49% of online sales is impressive,
But here’s the catch: Online is only one-tenth
of retail,
It’s a big slice of a relatively small pie.
To really prove its trillion-dollar valuation,
Amazon needs to beat Walmart, at its game.
And that’s harder than it looks.
This is Amazon’s revenue from retail, this
is Costco’s, and this is Walmart’s.
90% of Americans live within 15 miles of its
doors.
You could drive twenty-six hundred miles through
Canada, and take a ferry to the remote Kodiak
Island, but you still haven’t escaped the
land of low prices and… poor fashion choices.
Not even if you’re Pitbull.
Whole Foods gives Amazon a 500 store head
start, but nothing compared to Walmart’s
eleven thousand.
And yet, I’d still bet on Amazon.
Here’s why.
The average grocery store has a profit margin
of about 1%.
The slightest change in efficiency can be
the difference between failing and thriving.
They need to know what customers are buying,
how much they’re willing to spend, and when
they’re vulnerable to advertising.
This is why stores are so eager to sign you
up for their rewards program, are you sure
you want to pass up on this 5% cash back opportunity
of a lifetime?
Because all of a sudden you’re the perfect
customer, voluntarily identifying yourself
at the cash register, allowing them to link
your purchases together and slowly build a
profile.
No individual receipt is all that valuable,
but together, they can start to see trends
and even make predictions.
A few years ago, Target made the news for
doing exactly this:
A man from Minnesota drove to the store, demanding
to see a manager,
His teenage daughter was receiving coupon
after coupon for baby clothes and diapers
and strollers - what were they trying to encourage?
So Target called him a few days later to apologize,
but by then, he had his own apologizing to
do, his daughter was pregnant, and Target
knew before he did.
You might say they hit the bullseye.
The other benefit of all this data is predictive
stocking, not the creepy kind, well, depending
on who you ask, It’s being able to order
and ship products in anticipation of their
demand.
Walmart began doing this back in 2004, Guessing
which items it should order in preparation
for Hurricane Frances.
The answer was strawberry pop-tarts, of course
Today, this isn’t just handy information,
it’s an essential part of the business model.
Consumers expect faster delivery and wider
availability.
As free shipping becomes 2-day shipping…
becomes 2-hour shipping, the dynamics of retail
change dramatically.
There isn’t enough time to ship your bananas
from Colombia, they have to be waiting in
a local warehouse before you decide to buy,
but without wasting valuable space.
And that means predicting which items will
be ordered and when.
Here Amazon has the advantage, It doesn’t
just know what products you buy but what device
you use, what you search for, how long you
spend looking, all that and a whole lot more,
at much bigger scale than someone like Walmart.
It doesn’t have to guess how shoppers behave,
it knows.
Of course, there’s also a downside.
Amazon has always been the magic way to make
stuff show up at your door.
Walmart, well, controversial.
“Criticism of Walmart” isn’t exactly
the shortest Wikipedia page.
Part of which is just distance.
Walmart is visible.
With Amazon, you see only the results.
But public perception may start to change
- more stores, more warehouses, more people
concerned about their privacy.
The seeds are already planted, there’s even
talk of regulating Amazon as a monopoly.
But it has a built-in defense against those
arguments: Low prices.
It may control huge portions of many huge
industries, but it uses that scale to save
money for consumers.
It even competes with its own sellers.
Amazon can find which products are selling
well but whose brands people don’t care
about, things like batteries and knives, analyze
their return and review data, and manufacture
a cheaper version without the normal marketing
expenses.
It’s their version of generic brands, with
the power of data.
Their most successful is AmazonBasics, which,
if you search for something like “iPhone
charger”, is practically all you see, here,
here, here, here, here and here.
Many of its brands you wouldn’t even know
were Amazon’s, like Rivet and Presto.
It knows how to rank first on its own website,
which allows it to sell more products, therefore
manufacture them cheaper, lower their prices,
which, again, sells more products.
And the beauty of being in so many different
industries, online storage, movie production,
music distribution, print publishing, organic
groceries, personal electronics, and so on,
is more data and more uses for it.
That’s why investors are so confident, Scale,
long-term investment, customer-focus, and
data are all universal - they give Amazon
an advantage in any business they enter.
In other words, if your business sells, well
anything to consumers… there’s a good
chance you should be worried.
Amazon isn’t alone, the future of many industries
is using algorithms to predict and analyze
big sets of data.
With Brilliant, you can learn those valuable
computer science skills in a very approachable,
intuitive way.
Say you have a list customers and their purchases,
and you want to guess what one of them will
buy next.
One way to do that is called Collaborative
Filtering, noticing that many people who buy
a backpack also look for school supplies.
Some patterns are invisible to you and me,
so we use a neural network.
For example, retailers might want to automatically
classify their shoppers in different categories.
So you train the network with data you already
have, which it can use to understand completely
new information you give it.
Those are the kinds of topics you can learn
with Brilliant.
To get started or dive deeper into the world
of computer science and learn more about Brilliant,
go to brilliant.org/Polymatter and sign up
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