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Guest Opinion: Amazon: Finding Reality Amid the Myth

1 Dec, 2016 By: Doug Garnett Response

During the past five years, Amazon’s mythological power has swelled. It makes sense — lately Amazon has had excellent growth and done some fascinating things.

Yet despite several years of hype about Amazon “killing” brick-and-mortar retail, that clearly hasn’t happened. So I dug into the facts this past summer and found some surprising numbers. And that makes me wonder: why does anyone take what is said about Amazon at face value?

Some key Amazon reality:

  • We hear Amazon is a $100 billion online retailer — it’s not. Take away non-retail revenue and they look to have been about half that in 2015. In fact, Amazon’s U.S. retail seemed to be about $25 billion. Not chump change, but small compared with a roughly $400 billion U.S. online retail market and $4 trillion total retail market.
  • A lot of headlines claim Amazon is finally profitable. It is — but not from its retail sales. In third-quarter 2016, 75 percent of its profits came from selling cloud-based services.
  • The rest of Amazon’s profit seems to come from selling content (e-books, video, music) and devices.
  • This means online retailing isn’t working out to be profitable for Amazon (especially with giveaways like Amazon Prime). Incidentally, this supports other experience: direct-to-consumer online stores for a specific marketer are profitable, but replicating a retail store online is almost always a money loser.

The question for performance- based marketers is: how does knowing this affect our business choices? The answer depends on the size of the business you want.

Smaller, Niche, and Purely Direct-to-Consumer Operations

Amazon can be a very important player if you can generate enough profit through the channel, or if you are a smaller player selling direct-to-consumer. But I caution against using Amazon as your sole outlet.

Amazon is a classic digital player, so there is always risk of a sudden “pivot” that can seriously harm smaller marketers. Also, recently Amazon has been twisting arms quite hard to get merchants to pay for advertising (its equivalent of slotting fees, I suppose).

Mass-Market Product

For mass-market products, brick-and-mortar retail still dominates. Amazon is a nice incremental revenue stream — not a valid alternative when you’re playing in the big game. Consider a short-form campaign last year, tagged with both Amazon and a retailer. When one unit was sold on Amazon, eight were sold at the retailer’s website and 80 were sold in the brick-and-mortar stores. The profit is in the store.

So for all marketers: remember that Amazon is not your friend. It’s enjoyed shaking up the world under the mythology of disruption. But its investors have finally shown impatience.

Now that profit has shown up, Amazon looks to be pivoting toward it. The company’s third-quarter press release was filled with bullet points about its successes in content, cloud services, and devices. None of those bullet points indicated smart development for Amazon’s online retail segment.

So use Amazon as it fits your business. And keep your expectations realistic — with an eye toward an unclear future. With Amazon, always remember you are buying their services, and buyers need to beware. ■

About the Author: Doug Garnett

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