What's Wrong with Amazon? What Isn't?!

by Michael Noll

Last week I ordered a part from Amazon. It ‘retailed’ for $12.99, but was on sale for $6.50. I paid with my credit card, and FedEx delivered it in two days. Shipping was FREE! If I made a mistake, ordered the wrong thing, changed my mind, or just decided that I didn’t like the way the box looked, they would happily pay for FedEx to come back to my house, pick it up, and return it to their warehouse.

All of this, of course, is great – unless you happen to be the guy who owns the hardware store a few miles from my house. He’s paying more than $6.50 for that very same part. He’s also paying many people to stock the shelves, sweep the floors, answer all sorts of questions, and operate the cash register.

Does anyone really believe that Amazon is doing anything but losing money when they sell a ten dollar widget for less than anyone else and then ship it anywhere in the country, via Fed-Ex, for FREE?

When we launch a new product campaign, we work through the costs of fulfillment (taking orders, handling customer service, warehousing goods, packing and shipping, and managing returns) and then decide on a ‘shipping and handling’ fee. It’s almost always less than our actual cost and, equally invariably, customers complain voraciously about how high it is – they do this because they’ve been conditioned to believe that shipping must be FREE. All of the facilities, planes, trucks, and people involved in getting a product from warehouse to doorstep simply shouldn’t cost anything.

Interestingly, in the current political climate, no one ever proposes limiting how little a company can make in a ‘free market’. Instead, everyone is concerned about curing corporate greed and limiting the upside of profitability. The willingness to sell for less, even if that means losing money, is never at issue – in fact, it’s encouraged. Not coincidentally, the values assigned to companies are now largely linked to the number of customers that they can accumulate, and, to a lesser extent, the gross sales that they can generate from those customers – how much of that revenue that they’re actually able to hold on to is almost incidental in the calculus. Some of the most valuable companies in the universe have never operated at a profit. Vast fortunes are being built on the idea of selling things for less than they cost – we’re in deep trouble!

#innovation #formula #knoll