November 16, 2011 at 8:29 am | Blog
Amazon is growing its network of distribution centers to match the growing customer demand for faster shipping and a wider array of products. According to a recent article from All Things D (“Amazon Seeks Greater Fulfillment by Adding Distribution Centers”), Amazon is planning to add 9 distribution centers during 2011, with the possibility of building even more if demand increases. This follows on a high-growth year during 2010, when Amazon added 13 fulfillment centers to its logistics network.
Although all of these new distribution centers cost money to build, they aren’t cutting into Amazon’s earnings too heavily: on July 26, 2011, Amazon announced its biggest sales growth in four years.
Three reasons why Amazon Prime was an amazing sales strategy:
- Treat different customers differently: A common mistake that many businesses make is to treat all customers the same: you try to offer the same value proposition to everyone, even though different people respond to different aspects of what you sell. Your company is valuable to different people for different reasons, and not all customers are going to be ideal for what you offer. By the same token, some of your customers might be willing to pay more for special benefits. Are you offering them? For example, Amazon has an Amazon Prime service, offering free 2-day shipping for a $79 annual membership fee. The high demand for Amazon Prime is helping to drive Amazon’s investment in new distribution centers in order to make all those 2-day deliveries. What are the opportunities for your business to create value-added services or other options to generate more revenue and deepen relationships with your best customers? It’s not a matter of “fairness,” it’s about doing the right thing for your best customers. As Seth Godin says, “Treat different people differently. But don’t treat anyone worse.”
- Customer loyalty is (almost) always a good investment: When Amazon introduced its Amazon Prime membership service, many analysts predicted that this would be bad thing for Amazon, eroding its profit margins. After all, how can Amazon afford to ship so many packages, in two days, for a flat $79 fee? However, the results were more positive: Amazon Prime has helped to improve customer loyalty, boosting overall sales volume and making it more efficient for Amazon to cover the costs of serving those Prime customers. Amazon is so supportive of its Amazon Prime option, that it is also offering free unlimited video streaming for Prime members, as a way to entice more people to pay the $79 annual fee. It’s cheaper than Netflix…which, as we’ve written, didn’t do itself any favors with its recent price hike.
- Play the long game: Many Wall Street analysts have been disappointed with Amazon’s short-term profits as a result of these investments in new distribution centers. However, it’s clear that Amazon is playing a longer-term game by investing for the future. (And Amazon’s stock hasn’t suffered too badly; its share price is up 12.6% year-to-date.) What are some of the decisions your business has made that might have aroused criticism, especially in the short-term, but were the right thing to do for your long-term goals? You can’t listen to short-sighted criticism. Always focus on the long-term benefits (and possible risks) of any action your company is going to take.