Amazon Prospers Most from the Social Media Craze

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

Social media is all the rage today. Look on the homepage of most news sites, and you are likely to see some reference to—or advertisement for—social media. Social media connects people, places, and things together like never before.

Social media includes sites that connect people and invite them to share things with each other. Examples include Facebook, which IPOs May 18, LinkedIn (LNKD), Twitter, Youtube, owned by Google (GOOG), Google+, Pinterest, and others. Each one is used differently and serves a slightly different marketing purpose. In some cases, using social media can explode a business or product from a small market to an international favorite.

Take start-up Dollar Shave Club, for example. The company’s initial marketing campaign—consisting of some targeted marketing and a Youtube video—garnered 12,000 customers in its first 48 hours. Now the company is a serious threat to giant Gillette, owned by Proctor & Gamble. If you haven’t seen their video, I highly recommend doing so. It is an excellent example of great social media.

Even more impressive, the company only has five employees. The firm is the perfect example of how a lean company can become largely successful using social media and e-mail marketing.

With so many people harping about how important it is to be successful on these platforms—mainly Facebook, LinkedIn, and Twitter, many investors see these marketing tools as a check box that companies check off and encompass into an overall marketing strategy. But social media is much more than that.

The astute investor is able to understand what social media is, how it works, how companies can use it to gain more customers and to sell those customers more products, and whether or not it will impact margins and cash flow. It always makes me smile when I hear commentators say that it is important for companies to use social media. Saying that companies can make money using social media is like saying that restaurants can make money by serving food. The important question is what type of food are they serving?

Obviously there is quite a bit of variety. Restaurants can be low-end, average, or high-end. They can serve fast food like McDonald’s (MCD), or they can sell an experience—like Brazilian Steakhouse or Ruth’s Chris. The point is this—saying that companies should use social media is like saying that restaurants should serve food. Average companies see it this way—they develop a presence online and then let it go. Great companies, however, see it differently.

The best firms understand that targeted use of social media can achieve any of three objectives, including cross-selling, customer acquisition, and customer retention. In this article I will focus specifically on cross-selling and its impact on margins and cash flows.

Cross-Selling

Amazon (NASDAQ: AMZN) is king at cross-selling. Ever noticed that at the bottom of the product page there is a heading that reads “Customers Who Viewed This Item Also Viewed”? Essentially, Amazon is saying: “You are about to buy a really great product. People like you also bought this other really great product—you should get it too.” Amazon uses our desire to be like our peers as a strong marketing campaign.

Amazon also sends targeted e-mails. The company’s algorithms decide which products you will like based on your past purchases, and the company sends focused offers to its customers.

It is for these reasons that everyone is afraid of Amazon. In fact, Wal-mart is scrambling to develop more of an online presence in an effort to confront Amazon.

But how does Amazon’s success relate to social media? It comes back to cross-selling.

Social media provides firms the opportunity to cross-sell like Amazon does. Here is an example. Facebook used to have an area of its Fan Pages—its version of a small, personal website—called “Featured Likes,” where companies could put up to five of their other products. Apple’s Facebook Fan Page, for example, may feature an iPod, an iPhone, an iPad, and others in this area.

So iPod customers who visit Apple’s Facebook Fan Page are also regularly exposed to Apple’s other products. Maybe those customers buy an iPad on the spot—or maybe they buy an iPad in five years when they get their first job. The point is that customers are continually being exposed to all of a company’s other product offerings.

Now that facebook has moved its Fan Page style to something called “Timeline,” firms can use other strategies. Specifically, here is how Nike (NYSE: NKE) uses its Fan Page to cross-sell products—the Nike Basketball 2012 Elite Series, the Nike Fuelband, and Nike Free Haven 3.0, its new speed training shoes, among others. The key here is that Nike fans who visit Nike’s Fan Page to see new videos and other Nike content are continually exposed to Nike’s other product offerings.

Even more powerful are friend referrals. A potential customer may inadvertently land on Nike’s Fan Page because a friend “liked” the page. When users “like” something on Nike’s page or when they write a comment, it becomes visible to all of their friends and creates a direct link to Nike’s Fan Page.

Impact on Revenue and Cash Flow

Take Amazon, for example. Amazon grew revenues 40% from 2009 to 2010 and another 41% from 2010 to 2011. While the company did make some key acquisitions during that time, primarily Woot, Lovefilm, and The Book Depository, Amazon also posted impressive organic growth. Amazon is adept at cross-selling to its newly acquired customers and in using social media marketing to boost its revenues and customer base.

Even more impressive, Amazon sustained its cash flow during the growth, maintaining cash flow from operations of $3.3, $3.5, and $3.9 billion during each of the last three years. Amazon’s results are impressive because they demonstrate that the company can leverage a free marketing tool to boost results. Also, Amazon’s profit margin decreased from 3.4% in 2010 to 1.3% in 2011, largely due to mounting product expenses for Amazon’s new Kindle Fire (Amazon posted $1.8 billion in capital expenditures for 2011). However, the firm’s cash flow from operations grew 11.4%.

In short, Amazon uses its social presence as an inexpensive way to market itself to consumers and to cross-sell to its current user base.

Cross-Selling on Twitter

Facebook is a great platform to cross-sell. Another one is Twitter. Fans read the most recent tweets from their favorite companies. These tweets often contain links to new products the firm is developing, new marketing campaigns, or to other firm products.

Best Buy (NYSE: BBY) is adept at using Twitter effectively. Note how the company effectively uses its tweats to share product details, special offers, marketing campaigns, and even celebrity information to its 262,600+ followers. Best Buy’s goal is to create a sticky brand—one that keeps users coming back for more engaging content.

Another Tool in the Toolbox

The Dollar Shave Club video brings up two interesting points. First, the company had an excellent product, and its hilarious approach to marketing presented a compelling reason for customers to share the company with friends. Second, Dollar Shave Club is creating problems for companies like Gillette. That is why I now pay closer attention to the competitors of my portfolio companies. How are they marketing? What do consumers think of them? Overall, thinking through the implications of social media marketing is becoming a strong tool in investor’s toolboxes.


QueenBC has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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