How Amazon Wins: Innovation, Low Prices, and Free Cash Flow

In 2005, we (when we were named CRMGuru.com) awarded Amazon.com a customer-centric leadership award. In an acceptance letter, Craig Berman, Amazon’s director of platform and technology communications, said:

“It is simply in our DNA to approach our business by starting with the customer and working backwards and for the past 10 years, we have stayed laser-focused on this core principle,” wrote Craig Berman, Amazon’s director of platform and technology communications, in his acceptance letter.

Nearly 8 years later, Amazon.com has shown that customer-centricity is more than a slogan. The company keeps innovating to serve existing customers, by expanding what it sells and how consumers access its content (e.g. Kindle). But it has also been a pioneer into new markets like cloud computing with Amazon Web Services.

Without Amazon, we wouldn’t hear terms like showrooming, which terrifies traditional retailers. But they have other reasons to be worried, because Amazon may be coming to city near you.

Did you know that for the past five years Amazon has been quietly testing its Amazon Fresh grocery service in Seattle? I didn’t. According to a recent article in the SF Chronicle, Bezos may create new fulfillment centers in major US cities to handle perishable items. And the article opines that it wouldn’t take much to then deliver other products from local centers within 24 hours.

Target and Walmart, hello. Are you paying attention?

But for all the talk about innovation, customer-centricity, and a great online experience, what underpins Amazon.com’s success is simply this: Low Prices. That’s right, low prices. Seriously, would you pay the same or more for the convenience of shopping online? I doubt it.

However, in the Real World low prices are often associated with a bad experience. Yes, there are exceptions like Southwest Airlines. But the conventional wisdom is that there’s a tradeoff between price and customer experience.

For brick-and-mortar retailers, there’s some truth to that. It does cost real money to run a store, train staff, etc. Just ask Best Buy. However, in the online world where Amazon reigns supreme, economics work a bit differently. They’ve shown you can offer popular products at a low price, and do so packaged in a great shopping experience.

In the early days, analysts told Amazon CEO Jeff Bezos he needed to increase prices to get his margins up. He didn’t listen. Instead, he challenged his leadership team to cut their cost of operation so they could continue to offer the best deal to consumers.

Frankly, the more I hear about Amazon’s strategy, the more it sounds like Walmart. Except, Bezos doesn’t have to sacrifice the customer experience in exchange for low prices.

One last thing… we’ve all seen too-good-to-true business models that were not sustainable. Sooner or later, you have to pay your bills. Free cash flow is the key, not margins, according to the SF Chronicle article:

Bezos is more concerned with cash flow than making money because he believes the opportunity offered by the Internet, and by e-commerce, is huge and largely untapped. To him, it’s still a land grab. So he’s prepared to cut prices to the bone and add all those freebies to cultivate customer loyalty and increase sales. Then he reinvests it all in more low prices and further expansion, creating additional customer loyalty.

How else can you explain all the freebies you get with Amazon Prime?

Further reading: Amazon doesn’t put profit first.