Why You Can’t Compete Against Amazon.com
Pretty glaring title today, don’t you think? And yes, I already know what some of you are thinking, “But Stuart, if I can’t compete against other retailers on the Web, than why even bother?”
That’s a legitimate question. After all, if you could capture just 1% of Amazon.com’s market, you’d be sitting pretty. Here, take a look at Amazon’s most recent quarterly income statement (taken from Yahoo! Finance):
Over a period of one year, you can see that 1% would come out to about $24.5 million in sales. Well, I hate to break it to you, but you’re not going to get 1% of Amazon’s market. While you can eventually do 1% of their business, you’re just not going to get it by stealing their customers.
Now understand that when I suggest avoid competing with Amazon.com, I’m talking about trying to go head to head with them. Don’t try to sell everything under the sun the way Amazon.com does, and especially don’t go after their customers by competing on price.
How Does Amazon Do It?
Have you ever noticed that Amazon.com has the lowest price on virtually everything they sell? There’s a reason for that, and it’s not because they are getting the lowest price on the cost of goods sold (wholesale price). When you have the power to move $9.5 billion worth of inventory in a single quarter you’ve got some serious price-negotiating power under your belt. That said, I doubt Amazon is getting a better deal than, say, Wal-Mart, who reported revenue just short of $100 billion in the 4th quarter of 2009. Yet, somehow, Amazon.com still always seems to have the lowest price, not to mention free shipping on many orders.
Let’s look at Amazon’s income statement again. If you look closely, it appears they are marking their product up about 26%, but the truth is that not all of that 26% gross profit is from items sold. In fact, the reason Amazon.com has such low prices is because they sell many of their items at or even below cost. But if they are doing that, how are they making any money at all?
To better understand how Amazon makes money, it helps to know that large volume retailers like Amazon.com often operate on a net-30 basis. That just means that when they place an order for a product they’re selling, the distributor will ship it without getting paid, floating the cost until 30 days later, when Amazon is required to pay.
With some retailers, the product they order is sold in about 30 days, at which time they’ll pay the distributor for the order, keep the profits, and then place another order which they won’t pay for for another 30 days. But most retailers take longer than 30 days to turn their inventory over, so in order to pay their distributors, they rely on the profits made from whatever inventory they have managed to sell.
Amazon sells a lot of inventory
Amazon, on the other hand, turns inventory over on average every 20 days or so. Well, if you’ve just brought in over a billion dollars in that 20 days, and you have 10 more days before you have to pay your distributor, do you think there’s something you can do with a billion dollars in 10 days to make a little bit more money? Amazon sure does.
And that’s exactly why Amazon.com is able to get away with selling items at cost. They make it up by selling billions of dollars worth of products, then investing those dollars during the 10+ days they are allowed to keep it before paying their distributors.
So some of you reading this blog post will probably ask the question, “If I can’t compete with Amazon.com’s price, why bother?” Well, you should bother for the same reason that BestBuy.com, ToysRUs.com, Costco.com, Staples.com (all of whom use a drop ship aggregator similar to Doba to fulfill at least a portion of their product orders), and every other retailer on the Web bothers. There’s more to making the sale than price. Much more.
Check out Competing on Trust – Part I, Part II, and Part III for additional information on competing on something other than price.
Update 2/19/2010: For some additional tips for selling on Amazon.com, check out Mikal’s blog post, 5 Tips for Selling on Amazon
