Last week, Amazon released its quarterly earnings report, which contained data on its first full quarter since the release of its new line of Kindle products, including the Kindle Fire and the Kindle Paperwhite, and the numbers were impressive. With a net sales figure of $21.27 billion and a net income gain of $97 million, the online retailer more than exceeded its sales projections.
Although the company posted a net loss of $39 million early in 2012, the end of the year sales definitely put Amazon back in the black. Early predictions are that its next quarter will show an even higher increase. In fact, it was the most money Amazon has made in a single quarter since 2010.
So, what is the secret to Amazon's success? While it's known for its excellent customer service, low prices and fast shipping times, that isn't enough to stay competitive in retail sales. Yet, year after year, Amazon continues to grow and find new ways to increase sales. How does Amazon do it?
A large part of Amazon's success can be attributed to wise decisions made by founder and CEO, Jeff Bezos. Bezos, who Forbes says is the greatest living CEO, started Amazon in 1994 as an online bookstore. From the beginning, Bezos has claimed that he isn't really interested in making money or in profit margins. His initial business plan was completely unheard of – he didn't plan on making a profit for about 4 or 5 years. Instead, his plan focused on gaining market share, building customer loyalty and increasing cash flow, both incoming and outgoing.
While it might seem a bit crazy on the surface, this focus on grabbing market share has been the key to Amazon's success. As a simple online book retailer, Amazon was able to provide the lowest prices on even hard-to-find books without having to incur the costs of building retail stores or even stocking slow-moving inventory. After all, if a customer wanted to buy a less popular book, Amazon would sell it to them and then have the book drop-shipped from the publisher. In addition, since online shoppers pay for their merchandise by credit card, Amazon received the money instantly. Most publishers and publishing houses work on 90-day, revolving credit, meaning they hold the money for weeks, potentially giving them a negative operating cycle. Because Amazon wasn't focused on maximizing profit on each book sold, it was able to offer the lowest price and throw in a few extra goodies like free two-day shipping.
This focus on increasing market share and building customer loyalty led to the success the company has had with its line of Kindle products. Because Amazon isn't interested in making a profit on these devices, it can offer a really decent Android tablet at a very low cost. The Kindle product line offers excellent value in a competitive market. Amazon takes a loss on hardware, just so it can provide its customers tools that make it simple to buy content.
It's a strategy that's similar to Apple's iTunes and the iPad and iPhone. The big difference is that Apple makes money on both the hardware and the content. Since Amazon is primarily interested in gaining market share and loyal customers, it's willing to give its devices away--a move that has paid off royally. Today, Amazon's Kindle Fire tablet is one of the most popular Android tablets on the market..
The other thing that Amazon has done differently is that it has embraced competition in a way that actually builds market share. For example, if someone wanted to sell products online, they could create a website, stock their online store and market their business, or they could simply open an Amazon storefront and list their products for sale with Amazon's easy-to-use application. As more and more companies choose to list their products on Amazon, the site grows larger and is able to provide any number of products, making them the go to online shopping site.
While the Amazon business plan might not work for everyone, it's interesting to see how a company can continue to innovate and create new ways to sell products and become and industry leader. It's hard to believe that a simple online bookseller could grow to become the leader in online sales and create a vibrant network of online retailers.
Image Source: Amazon