Amazon com Inc - Marketing Strategy - Report Example

Amazon.com Inc. Marketing Strategy

Company Overview

Amazon.com Inc. is a global e-commerce firm that is headquartered in Seattle, the USA. The company was established in 1994 by Jeff Bezos when it operated as an online bookstore. The company later expanded to offer customers a range of products such as video home systems (VHS), toys, jewelry, food, furniture, software, DVD’s apparels and compact disks (Spector, 2000). Amazon also provides Cloud Computing services globally as well as USB cables. Amazon, by market capitalization, is known to be the most valuable retailer in the US, surpassing the Wal-Mart that offers a one-stop shopping haven globally. The company relies on the internet as an intermediary to avail its goods to consumers. The firm plans to capitalize on the growing size of its market share by venturing into the European market through the internet e-commerce. The sales revenue outside the US is already soaring past 22%, and Amazon has even engaged in the acquisition of various companies (Laudon & Traver, 2007). 

The marketing strategy of Amazon is geared at ensuring it remains a leader in online retailing. Spector (2000) states that Amazon has a strategic vision that is anchored on differentiation to ensure its customers enjoy convenience, lower prices, have a wide variety of selection, and are served on time. The marketing strategy is designated to enhance the Amazon brand name of Amazon, expand its consumer base, strengthen customer loyalty, develop incremental product, and encourage repeat purchases

Identification and Analysis of Key Issues

Value Creation Process

Amazon’s value creation process is centered on the concept of providing satisfactory services to its clientele. The Corporation creates value by utilizing technology in management of its retail operations. Amazon focuses on operation efficiency to sustain its position in competitive environment by enhancing corporate performance and maintaining competitive advantage (Amit & Zott, 2001). Amazon’s value creation process also involves providing a wide assortment of products in its portal, amazon.com from which consumers can choose from. The company also strives to make quick and efficient delivery to its customers to exhibit a high degree of dedication and commitment to customers ’needs (Gibbert, Leibold, &Probst, 2002). Some of the strategies Amazon employs include the following.

Product Strategy

Amazon uses product diversification strategy to create competitive advantage and sustainability in the market. The company offers multiple products such as Kindle, DVDs, phones, books, jewelry and gardening equipment. The retailer was established to solely deal in books and gained a reputation in the world as a leading book-seller (McGrath, 2000). However, the company later progressed and added other products due to changing taste and preferences of customers, a strategy that was intended to maintain its presence in the market (Bailey, Feldman, &Rajaraman, 2004). In 2014, for instance, the retailer invested in the smartphone market and even released its smartphone known as Fire Phone. Currently, Amazon produces a variety of other knowledgeable products such as Amazon Fire TV, a set-top box platform that is used to stream live TV.

Pricing Strategy

Amazon.com offers its products using a competitive pricing approach in relation to its market rivals. One of the approach the company uses in its pricing is that it gives a customer an option to choose their preferred price based on product customization. For instance, Amazon offers a new and a used book all of which are tailored to consumer needs and preferences. It also has a premium account that enables an end-user to acquire goods quickly but at a higher cost than the traditional account. Chevalier and Goolsbee (2003) observed that the competitive prices of Amazon arise from a lower number of qualified employees at Amazon that provide better customer service.

The prices of Amazon sometimes hit the lowest levels compared to those of competitors such as Target and Wal-Mart. The firm uses programs such as Black Friday to persuade new customers in a drive that seeks to increase its market share. Clay, Krishnan, Wolff&Fernandez (2002) state that Amazon specializes in retail pricing by evaluating the behaviors of its active customers and this enables it to adjust it is prices accordingly. For instance, around Christmas when prices hike, Amazon ensures it is still the cheapest company by opting for penetration pricing strategy that allows it maintain lower prices compared to its rivals.

Distribution Strategy

After inception started with two formal and manual fulfillment centers that were located in Delaware and Seattle. However, the business has expanded over the years, and has gone a notch higher to building customer service centers in nations where it operates. The retailer employs long-tail distribution strategy by availing diverse products to its customers (Flavián&Guinalíu, 2005). For instance, book titles are covered in depth and breadth in a way that no physical shop could handle such volume of the stock. The online store has a searchable catalog that gives the description of an item a customer wants.

Conversely, the retailer adopted a centralized distribution system that makes distribution cost-effective to the company, which ultimately has led to lower prices of stocked items. The locations of the warehouses use the non-traditional strategy to curb the issue of the taxation of sales by states, which do not require the retailer to file tax reports on behalf of customers (Teece, 2010). The traditional way was adopted to promote access across the country. However, the problem outbound transportation network remains since Amazon relies on courier services such as FedEx and UPS.

Promotion Strategy

The retailer has TV adverts that are aired in the US. However, outside the US, it uses the web-based advertising methodology and billboards, although not extensively (Mellahi & Johnson, 2000). Online advertising is practiced in such a way that whenever a person browses its website for products, the advert is subsequently posted in another internet site, displaying the searched product. Amazon also employs the smart promotional strategy where search engines are able to display Amazon’s products in Google and others by the use of search engine marketing.

The firm also relies upon word of mouth, such as in the case of the Indian market. People that talk positively about Amazon and, hence entice new customers into buying goods from the retailer. However, regardless of this efforts the company faces a couple of challenges. For example, in India, the retailer is being overrun by the Flipkart retailer that is a fierce competitor and very popular in those parts (Chaffey et al., 2009). Competition is, therefore, extremely stiff, which is the greatest threat to the position of the retailer in the world market.

Identified Issues

One of the issues emanating from the analysis of the marketing mix of the company is the low revenues that are brought about by a low pricing strategy. Even though the company has succeeded in becoming a global leader in online retailing, charging low prices does not necessarily translate to improved financial performance. The retailer does not cover some market segments such as those that comprise of customers that value products with high prices. Another issue that arises is the competition, threat of new entrants and the bottlenecks that are created by Amazon, which leads to controversies and criticisms on the ‘monopoly’ nature of the company.

The distribution strategy or place also has issues due to challenges with bargaining power of customers and suppliers. Suppliers have insufficient power since the retailer can acquire supplies from alternative cheaper suppliers (Kalakota& Robinson, 1999). Customers, on the other hand, have a high bargaining power due to availability of a wide variety of goods offered by other online traders in e-commerce platforms. Thus, this poses a threat to availability of substitute products except the 1-click ordering technology.

Strategic Alternatives

Online competition in often characterized by cutthroat techniques, and hence it is imperative for Amazon to devise alternatives that can create competitive advantage and boost its brand.

Cost-leadership Strategy

The strategy involves selling products using low prices by minimizing costs of operations (Kim, Nam&Stimpert, 2004). This can be achieved by the giant retailer through minimizing its staff to a few employees. The strategy can impact on the company negatively in short-term due a decline in the quality of customer experience. However, in the long-run, the experience can be reinstated to normalcy if profits are ploughed back and reinvested to ensure better customer service through employing more staff using long-run sustainable profits.

The advantages of the cost-leadership strategy to Amazon are that it will lead to higher profitability margins due to lower costs as well as increased market share since new customers will be enticed to buying company goods. The company will also acquire a sustainable business position and generate capital that is fundamental for sustainable and continuous growth. However, the cost-leadership strategy can also pose difficulties for Amazon. Reducing customer care services to cut operational costs can negatively on quality of services offered to customers. Back & Boggs (2008) argue that the cost leadership strategy can degenerate to lack of innovation due to reduction in budget for R&D to gain competitive advantage in the market.

The Projected Revenue

Revenue in the last quarter of 2015 was up from 1420 US$ in 2014 to 2405 US $ (AMZN, 2015). This was an increase by about 985 million dollars, an equivalent to 69% per annum (Hauer, 2016). In three years the projected revenue will be:

Year

Permutations

Revenue Forecast (Million $)

2016

853.53*1.69

4064.45

2017

4064.45*1.69

6868.92

2018

6868.92*1.69

11608.48

Assumptions

The table above projects revenue assuming that the low prices will constantly draw clients to buy goods from Amazon.com. It is also assumed that customer loyalty will prevail so long as costs are minimized due to availability of high quality goods.

Differentiation Strategy

This strategy can be applied to offer a product that appears to be unique, a feature that is achieved by innovation in terms product characteristics such as technology, design, packaging, brand image, after-sale services or product development (Walker et al., 2005). Amazon should focus on the features of their offerings such as complexity. Products offered online should have an option that enables a customer to get a customized product, which is the responsibility of the retailer to customize products to consumer needs. The products can afterward be priced on a premium level without fear of losing to substitutes offered by the competitor.

The advantage of this strategy to Amazon is that it will enable Amazon to price its products better to improve its revenue. The retailer can also transfer costs from the supplier to customers due to lack of substitute products. Mudambi& Schuff, (2010) note that differentiation can also enable Amazon to gain customer loyalty, which is one of the most critical goals of Amazon Inc. One of the short-comings of differentiation strategy in the short-term is that it cannot achieve the objective of promoting the brand name of the company (Bradley, 2005). However, due to continues and better customer loyalty the company’s brand name can be strong in the long-run. The other limitation of differentiation strategy that its expensive to implement and this may lead to higher prices and a decline in market share as well as stimulating competition since rival firms can adopt the innovation of Amazon, consequently creating substitute products.

The Projected Revenue

According to Equities data forecasts, the revenue for 2015 fiscal year was 107.2 billion dollars. The average growth rate since 2012 has been 22.2% (Ma, Pace, & Stryker, 2015). The strategy will thus yield;

Fiscal Year

Permutations

Revenue forecast in billions

2016

102.01*1.22

130.78

2017

130.78*1.22

159.55

2018

159.55*1.22

194.65

Diversification Strategy

The strategy entails diversifying the business through selling different goods and services. Stern and Henderson (2004) asserted that, although Amazon now sells electronic goods, medicines, phones and motor vehicle spare parts, the retailer needs also to concentrate on these products and be novel about them. The diversification broadens the market portfolio which results in the increase of profits and sales revenue. One of the ways in which it can diversify is the use of partnerships with retailers who are not in the online business. The marketing team of Amazon must develop new products to serve the existing markets so as to add to their popularity.

According to Antoncic (2006), one of the impacts of diversification to Amazon is that it will lead to the growth of the business of the company. The financial benefits that are attributed to diversification are that the cash flow and profits will increase through the acquisitions. The market share will also automatically widen due to added customers (Antoncic, 2006). The short-term impact of diversification on the market share poses a threat due to competition and, hence cannot yield positive results promptly. Firms diversify to insulate themselves from the risks. If a new product is introduced into the market, there is a possibility of a failure. Hence, a limitation arises when a lot of money is invested in the development of new products, and then the product fails to succeed.

The diversification strategy will help in business expansion regarding sales, profits, and workforce. However, inefficiencies may crop up due to bureaucracies and mismanagement of resources due to use of this strategy resulting in provision of low standardized products to consumers due to lack of specialization (Baele, De Jonghe& Vander Vennet, 2007).

Projected Sales Revenue

Amazon should create a prime video service to compete with Netflix. Through diversification, Amazon’s revenue is expected to experience a hyper growth due to cloud computing and e-commerce. The research corporation forecasts that the sales revenue will double from 2015 through to 2019 meaning an increase of 25% per year (Segarraet al., 2016).

Year

Permutations (Increase 25%)

Forecast (trillion)

2017

1.67*(1+0.25)

2.23

2018

2.23*(1+0.25)

2.78

2019

2.78*(1+0.25)

3.58

Formulation of Strategy & Recommendation of Tactics

The development of the diversification strategy in Amazon is intended to increase the market share so as to oust competitors. Diversification must be carried out by Amazon if it intends to remain a key player in the online business through re-invention (Chaffey, 2007). One of the rationales of diversification, though the company will need to be careful, is that the market for the existing businesses such as the books is near saturation point. The market of books is nearly fully exploited hence the need to get other lines of businesses.

Diversification is also relevant considering that there can be excess cash generated from the main business which can be channeled to other businesses instead of lying idle. It has been established that technical expertise that is needed to start another line of business is also easily acquired. In addition to getting more product variety, more markets are tapped. Mercieca, Schaeck& Wolfe (2007) echoed that distribution increases to cover these new markets and supply new products hence it is a market penetration tool.

The retailer will also gain economies of scale through diversification strategy in the form of discounts in inputs and overhead costs (Denis, Denis, & Yost, 2002). Amazon should also diversify as it can engage in cross-selling. Cross-selling is where Amazon can introduce new products in the old market or introduce old products in new markets. Cross-selling is advantageous in that it does not involve additional costs to achieve what the company intends.

New Value Creation Process

Amazon needs to adopt a business model that empowers buyers to act as sellers and buyers. Here, the buyers are to examine the sellers at Amazon and share their experiences to establish trust. Therefore, co-creation of value is achieved through interaction of buyers and sellers (Prahalad & Ramaswamy, 2004). The interaction creates more value than it would when sellers and buyers are not jointly involved. Amazon can utilize the web to provide domestic services such as plumbing, mechanics, and music teaching among others to enable homeowners’ access services at their convenience. Amazon will have to supervise the payment for such services and facilitate exposure of sellers to buyers and vice versa. The retailer will also have to add more warehouses to increase reliability and speed of t delivery of products to buyers.

Implementation of Strategy

Implementation of the diversification strategy will involve conducting a market research to identify the best market segments to explore (Gary, 2005). Amazon can diversify into several segments that will lead to more profits. For instance, some industries remain untapped by Amazon yet are attractive. Biodegradable goods, flowers, and lubricants are some of the products not included by the retailer. Flowers usually sell on special occasions such as on the Valentine Day and in Christmas. This is an area they need to invest in by selling Christmas trees and flowers.

The company also needs to diversify its delivery systems, and it should not exclusively rely on courier services. Diversification will be implemented with a view to ensuring that the consumer can get anything under one roof. The products will be availed online and will be accessible via a shared channel. Industry analysis will help to check barriers to entry, level of competition and economies of distribution. The company can utilize its expertise in technology to deliver goods.

Assessment of the Risks Involved

Risks involved in the diversification strategy are conspicuous, hence Amazon must assess the level of risks perform investigation. One of the risks is that an unknown market for a product may bring challenges and that the skills required to supply the new products may be unavailable. Therefore, diversification may require considerable use of financial and human resources distracting commitment, and focus on the primary business (Stiroh& Rumble, 2006). Consequently, Amazon should diversify if it has ascertained that the market for existing products is saturated or fully exploited.

Assessing the risks involves tests such as attractiveness test where an industry is evaluated to determine its attractiveness. The other test is the cost-of-entry test, which must ensure that the entry does not capitalize all its future profits. Ibragimov, Jaffee, and Walden (2011) suggested that a new business should be assessed to determine if it creates competitive advantage, and should be abandoned if it falls short.

Recommendations & Conclusion

Amazon should expand on its web-based goods and services so as to exploit its cost-leadership strategy by offering goods at low price. It should escalate web sales in the global and new markets, particularly in Eastern Europe and Asian regions. The retailer should advocate for regulation to permit automated deliveries of smaller general merchandize. It is highly recommendable that the retailer should open physical shops where the firm will sell goods directly in a quest to diversify its market portfolio.