Amazon’s 2 Key Strengths

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Amazon (NASDAQ: AMZN) is the perennial bully. The company loves to “eat other people’s lunch.”

This is what makes Amazon such a great company.  For example, it started out in book retailing and thumped Barnes and Noble (NYSE: BKS).  In fact, I cannot recall the last time I heard someone tell me that he “bought something from Barnes and Noble.”  Amazon rules the search engine results for books, and it owns the “mind share” of consumers.

Since then, Amazon has evolved from a book retailer.  It has morphed into one of the most recognizable brands in the U.S.  Here are two of the company’s biggest strengths.

Sticky Relationships

Amazon is adept at obtaining new customers – then keeping them.  For example, Amazon can quickly gain new customers because it rules the organic search results when consumers search for books online.  Once it signs a customer, it keeps that customer’s data, just like most other companies do. 

However, Amazon’s strength is that it makes it incredibly easy for customers to make “repeat purchases.”  The company recommends tailored products to customers as they browse the site.  Amazon also offers “1-click ordering,” making it almost too easy to buy additional merchandise.  And the company’s Kindle family gives Amazon a platform to cross-sell further books and products to customers.

Also, Amazon Prime is genius.  The $79 feature gives customers unlimited, 2-day shipping.  Personally, I tried the 30-day free trial, and I was hooked.  I may still cancel, but the math works out – at roughly $4 per shipment, I will break even if I buy only 20 products from Amazon per year.  Of course, this would incentivize me to actually buy 20 products from Amazon instead of other sources, making me feel justified in buying Amazon Prime.  I suspect that other customers have similar logic.

Also, with Prime Amazon offers an incredible deal of unlimited streaming of TV shows and movies.  The additional benefit invades Netflix’s (NASDAQ: NFLX) turf.  Many subscribers jolted when Netflix tried to up prices and split its streaming and DVD business in 2011.  Where is a logical place for Netflix customers to flock?  Amazon Prime. 

Of course Netflix offers an enormous content base.  But for the cost-conscious infrequent user, Amazon Prime offers the equivalent of $6.58 per month for unlimited streaming and free 2-day shipping, compared to $7.99 per month for Netflix.

For the customer who wants to connect directly to the TV for streaming, Amazon Prime’s streaming service, plus unlimited 2-day shipping, is compelling.

Product Distribution

Amazon announced that it would set up lockers for its urban customers to pick up their goods.  The distribution is a great idea, one that FedEx or UPS should have implemented years ago.

Also, Amazon’s fast product distribution is threatening Best Buy and Wal-Mart (NYSE: WMT).  The companies each offer a version of free shipping, and Wal-Mart recently announced that it would test same-day delivery.

Innovate in New Markets

Amazon grew from a book retailer to a purveyor of all goods.  Amazon used to compete with the likes of Barnes and Noble and Borders on the book front.  Since then, it has morphed into one of Wal-Mart’s top competitive threats.  In fact, Amazon even launched an app that allows customers to scan goods in a store like Wal-Mart and then buy them online.  This is known as “showrooming.”

Also, in an impressive bout, Amazon is pushing Apple (NASDAQ: AAPL) in the tablet space.  Amazon’s highest-end tablet cost $599, compared to Apple’s new tablet, which ranges from $499 to $829.  However, Amazon’s Fire tablets start at just $199, giving customers the option to opt for a less-expensive tablet.

I fully expect Apple’s loyal customers to still buy Macs faithfully.  After all, Apple makes an impeccable, wonderful product.  However, Amazon’s foray into the tablet space is an attempt to mop up the growth occurring in the market.  Amazon likely does not want to steal away Apple’s loyal fan base.  Rather, it wants to snatch the customers who are just entering the growing tablet market. 

Why?  It goes back to sticky relationships – Amazon wants products that create tighter relationships.  In turn, this will boost Amazon’s cross-selling capability.  Apple will certainly not be devastated by Amazon’s market entrance.  However, Amazon’s Kindle family will likely slow Apple’s magnanimous iPad growth.

Finally, Amazon has a growing new product line with its Amazon Web Services division.  The division helps small companies and start-ups gain inexpensive data storage, eliminating the need for expensive servers.  This market is also high-growth.  AWS targets venture capital firms and start-ups to provide them with its product.

Conclusion

Amazon is an incredible company.  It starts in one area of competence, like books – owns the market – then moves on from there.  Also, it uses each new company line to build strong, sticky relationships with its customers. 

With these relationships, Amazon is able to customize its offerings to meet the wants and desires of its customers, and to own one of the most important assets of all – mind share.


ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Netflix. Motley Fool newsletter services recommend Apple, Amazon.com, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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