The story over the last few years is that small, local businesses have been getting eaten up by Amazon. One of the most important pieces that Amazon figure it out early on, was that there was no need to have a physical storefront to sell to customers. Because of this they were able to save on a brick-and-mortar rents and ship directly from their warehouse.
From of the lack of rental expenses they were able to offer the best prices for all their products. With all the savings they were able to reinvest in new and emerging technologies which only built their moat out deeper and deeper. Now local businesses are stuck, not knowing what to do and ultimately will face the reality that they will most likely have to shut down-unless they change.
Moats (Rent The Runway, Uber, ClassPass)
Although closely related to Barriers to Entry, a moat is the economic advantage that an existing company has over a new…
There's a trade off when shopping local. You get the items instantly, but most likely you will have to pay a slight premium, especially over the price of Amazon offers. One reason why, is because of the intrinsic expenses that business is it incurs such as rent and employee overhead. Amazon doesn't have this. They're paying really cheap rural rents and they don't really have employees that are servicing the items. They have robots.
In addition, Amazon has algorithms which are constantly fluctuating the price to optimize margin. Very similar to a trading algorithm where as it sees that the demand for something increasing, it then increases the price to match the supply.
If you recall in 2011, this happened:
[…] how about this: $1.7 to $2.1 million for a book — a perfectly average, out of print but not quite rare title that’s considered a fundamental work of development biology? Or how about… $23.6 million?
That’s the result of a recent bidding war between two third-party Amazon merchants, each attempting to use algorithms to sell an out-of-print version of Peter A. Lawrence’s, “The Making of a Fly: The Genetics of Animal Design.”
So what can local businesses do? First they can perform Discovery. This is where they take their whole inventory and compare it to what it sells on Amazon. They might be shocked that they are severely over pricing certain items slightly or overpricing items and losing out on massive sales to Amazon. Through this discovery process they will understand what the going rate for a lot of the products are and what people are used to paying for such products. It might even make sense to sell certain items at cost just to allow for an upsell for a higher margin product in store.
A lesson from Costco, as we wrote here:
By maintaining bargain prices on rotisserie chickens, Costco exponentially increases foot traffic in stores. It also helps shoppers justify the cost of their annual memberships. And, while the hungry shopper is swinging by for a quick, cheap bite or because it’s 5 p.m. and he needs to grab a $4.99 chicken for the family dinner that night, he just might be tempted on the spur of the moment into buying a new TV, or grass seed, or vitamins, or a coffee maker, or any number of other items lining Costco’s aisles.
Pegging to Amazon
After these local businesses have done their discovery, they can programmatically peg the price of some of their products to Amazon. In this way they will be able to either match or slightly beat Amazon’s price for certain products which they choose. They will obviously be able to set floors on how low price can go.
In addition they would be able to show a side-by-side comparison to the Amazon listing — proving to the customer that they are the best price and that that person should come into the store and get this item. By creating a floating price these businesses will be able to incentivize local shopping while making a larger margin on other products.
This just one way for local businesses to be relevant in today's economy. There's definitely need for local businesses as they provide jobs and well-being for our neighbors. Without them, middle America will just be a bunch of windowless warehouses where we order books and socks from.
In future post of the series we'll talk about how businesses can actually leverage some the learnings that Amazon has put together in order to stay competitive in and entice customers.