Amazon already controls nearly half of the $513 billion U.S. ecommerce market. Considering the market-leading customer experience Amazon already offers, why did Bezos and company decide to invest $800 million in order to upgrade their Prime shipping guarantee from two-day to one-day?
The key to this decision is Amazon’s singular obsession with customer centricity and an appreciation for indirect results that don’t even register on the radar of some competitors. While this approach may be more complex than most, insights abound for those who are able to get past the headlines. Below are three of the most important takeaways that were either overlooked or under-covered in the media frenzy:
Rock the Customer Experience or Die
Amazon’s $800 million dollar investment would be considered a massive liability and probable loss by most retailers. With the expenses involved in offering free shipping, it’s not hard to see why Amazon’s annual shipping bill is set to exceed $7 billion dollars according to the latest estimates. Retailers often opt to pass these costs on to their customers or offer fulfillment options that won’t leave them substantially in the red, but they’re missing the point.
By offering free one-day fulfillment Amazon knows it will lose billions of dollars more, but it’s playing the long game. It’s betting on gaining market share while increasing order density and volumes, impulse buying, general expenditures and customer loyalty in order to maintain an edge over the competition and drive long term profits.
Customer loyalty, just one of the many benefits, is critically important. Bain & Company research shows that increasing customer retention rates by 5% increases profits by 25% to 95%. Furthermore, a 2018 study by Dropoff found that 65% of U.S. consumers who shop on Amazon would order from a different retailer if the same delivery options were available.
Providing ever improving customer experiences starting with fast shipping is more a necessity for survival and a precursor to success than a simple feature.
ROI Needs a Radical Rethink
A traditional cost/benefit analysis may not provide enterprises with a compelling case for making big investments in same-day delivery and a customer-centric experience. Luckily, the vast majority of enterprises are not alone. Even Amazon probably wouldn’t come up with compelling growth numbers if it used standard methods to crunch the costs of its one-day offering – at least by its own standards.
However, Amazon adds into its ROI equation intangible benefits such as brand perception, which drives a significant amount of its success with customers and partners, as well as with its own workforce recruiting efforts. According to Harvard Business Review, these intangible benefits “account for well over half the market capitalization of public companies” and are often undervalued.
Double Down on Innovation, Play to Your Strengths
If retailers really want to go after Amazon’s market share, they need to double down on innovation and play to their strengths. Shortly after Amazon’s one-day announcement, Walmart tweeted “One-day free shipping…without a membership fee. Now THAT would be groundbreaking. Stay tuned.” By this point, Amazon is not the only major player that understands the importance of customer experience and the gap is shrinking even beyond the biggest retailers.
Traditional retailers also have a major advantage with their physical presence, which Amazon most recently tried to compete with by setting up tents closer to their customers in urban areas where they still don’t have wide coverage. But at the end of the day, Amazon’s announcement will matter much less to retailers if they are able to offer delivery options that Amazon struggles with. These include options such as buy online pick up in store, same-day fulfillment, or even 1-3-hour delivery from store locations that are down the block from a customer, instead of on the outskirts of a large city.
Amazon’s one-day shipping announcement is big news, but it’s a step forward, not a giant leap. It’s up to retailers to think like Amazon by investing big in fulfillment which is fast becoming the most significant differentiator when it comes to the customer experience as a whole. Likewise, a more holistic approach to ROI that also recognizes the intangibles of the business is necessary in order to follow Amazon in your own unique way.
Ultimately, although no competitor will be a better Amazon than Amazon itself, they don’t have to be. What they need to do is play to their strengths by leveraging physical stores for a better customer experience, and success will follow.
Guy Bloch is CEO of Bringg