January 25, 2013

Amazon’s Real Low Margin Strategy

Amazon’s real low margin strategy.

Eugene Wei an ex-Amazon employee gives his view of Amazon’s low-margin strategy. 
Most people just look at a company's margins and judge the quality of the business model based on that, but the cash flow characteristics of the business can make one company a far more valuable company than another with the exact same operating margin. Amazon could have had a margin of zero and still made money.
Amazon is surviving on cash flow? Amazon (mis) uses its vendor’s money to survive? If you do this on a large enough scale like Amazon, you survive for a long time.

This strategy surely kills competition 
We convened a quick emergency huddle, but it didn't take long to come to a decision. We'd match the 50% off. We had to. Our leading opponent had challenged us to a game of who can hold your breath longer. We were confident in our lung capacity. They only sold DVDs whereas we had the security of a giant books and music business buttressing our revenues.

After a few weeks, DVD Empire blinked. They had to. Sometime later, I can't remember how long it was, DVD Empire rebranded, tried expanding to sell adult DVDs, then went out of business. There were other DVD-only retailers online at the time, but none from that period survived. I doubt any online retailer selling only DVDs still exists.
and Amazon investors are cheering and backing Amazon while Amazon accomplishes this

But, does Amazon really operate on low prices?

If you track the price of a product on Amazon, over time Amazon prices increase and are generally higher than others offering the same product.

So is Amazon’s real strategy – drive off all competition in a market and then raise prices? There is a word for this strategy.

Tags: amazon low margin strategy, amazon high price strategy, amazon monopoly strategy, amazon vs dvd empire