Amazon (NASDAQ: AMZN) is the undisputed leader in the e-commerce industry and the second-largest brand on the 2020 Fortune 500 list. It has achieved enormous growth in recent years, driven by increased online shopping worldwide and its cloud platform’s (Amazon Web Services – AWS) growth. AWS is the largest cloud technology platform globally, followed by Microsoft’s Azure and Google’s Cloud Platform. With a market cap of around $1.7 Trillion, Amazon is one of the few brands enjoying a higher than $1.5 Trillion market cap. Even during the pandemic, the company continued to enjoy rapid growth mainly driven by the increased online shopping worldwide and a shift towards digital and cloud technologies that seems to be permanent. Amazon’s cloud platform is enjoying superior growth and a larger consumer base than any other cloud platform. The company’s total net sales gained sharply in the first two quarters of 2020 as more people were shopping online from their homes. A shift towards digital and cloud technologies has also begun as businesses have started changing their operating models to cater to the changing demand pattern worldwide. During the first half of 2020, the company’s net revenue from the AWS segment grew by more than 30% compared to the previous year.
Among the other major factors that have been driving the growth of Amazon’s e-commerce and cloud platforms, one central factor is its focus on research and development. The company is the largest spender on research and development in the entire industry and its R&D expenses continue to rise faster each year. The tech industry is marked by heavy competition and Amazon maintains a heavy focus on R&D to retain its leadership position in the e-commerce and cloud industries. While the US is the largest market for Amazon products and services, the firm has expanded worldwide and established a global sales and distribution network. Its global network is highly resilient, which became evident during the pandemic. Amazon has achieved the biggest competitive moat in e-retail. It is also using its strong bargaining power to strengthen its price advantage and beat both physical retail and e-commerce brands trying to compete with it. Another notable factor is that Amazon has achieved a market cap of more than $1.5 trillion within a smaller time span as compared to Microsoft, its leading competitor in the cloud industry.
In this post, we will look at the core pillars of Amazon’s business growth strategy and how the company has achieved enormous growth in a short period. However, prior to that we will analyze the key customer segments that Amazon is targeting worldwide or who the main customers of Amazon are.
Amazon’s Target Market:
Amazon is targeting a large audience globally as the largest e-commerce and cloud brand in the world. While the target customers of Amazon’s e-commerce platform come from all age groups and all classes, it is mainly the tech savvy millennial customers that are its main audience. Amazon’s ecommerce platform has the highest penetration in the millennial customer segment or the 18-38 age group. This is the most tech savvy group of consumers or the people who grew up using technology. The smartphone usage rate is also the highest in the age group. While around 99% of the US population owns a cellphone of some kind, only 81% of the population owns a smartphone according to Pewresearch. Smartphone ownership is the highest in the 18-49 age group and while smartphone ownership is at 96% in the 18-29 age group. It is at 92% in the 30-49 age group. With growing smartphone usage in the United States and other parts of the globe, Amazon’s customer base has also continued to expand. It is because a very large portion of all the online shoppers, shop online from their mobile devices.
Moreover, it was observed that of all the websites that the US consumers shop at, Amazon has the highest engagement rates or people spend higher time on the Amazon website compared to the other e-commerce websites. In 2019, 70% of Amazon’s holiday shoppers made purchases from their mobile devices. According to emarketer, millennials are digital in most aspects of their lives and find it easy to incorporate digital into their lives. They are also the largest segment of e-shoppers. A per emarketer’s estimate 85.9% of millennials are digital buyers in 2020, 78% genXers and 60.9% baby boomers. Amazon being the largest e-commerce platform in the US, attracts the largest crowd from the millennial segment. Millennials have become the core audience of its e-commerce platform in the US and abroad. However, Amazon targets a wide user base that includes buyers from various segments including middle class consumers, upper middle class consumers as well as the higher end market. A very large number of customers check the portal to compare prices before going for their purchase. The millennials are tech savvy consumers but they are also price savvy and it is why apart from customer experience, the company also focuses on pricing so as to attract millennial shoppers in larger numbers.
Amazon prime also has its largest portion of consumers among the millennial shoppers. The largest percentage of Amazon Prime members are in the 18-34 age group followed by the 35-54 age segment. The percentage of millennials in the US population that are Prime members grew sharply during the pandemic and shot very high in June 2020 reaching 81% compared to 69% in February 2020. At the same time, Prime membership rate among the internet using people aged 35-54 reached 68% which is quite impressive.
Amazon AWS targets a more diverse segment of consumers that includes both the individual users and the corporate customers. The customer base of Amazon AWS is larger as compared to other cloud players and has continued to grow larger. Among the individual users of AWS are the highly educated IT professionals, developers and programmers (mainly in the millennial segment) that use the wide range of AWS services for various purposes including programming, app development, running websites and for global deployment of their services. However, AWS offers a very wide range of products and services that target corporate customers from a wide range of industries including entertainment, education, telecom, manufacturing, media, retail, finance and travel. One of the leading customers of AWS is Netflix. According to Amazon, “Netflix uses AWS for nearly all its computing and storage needs, including databases, analytics, recommendation engines, video transcoding, and more—hundreds of functions that in total use more than 100,000 server instances on AWS.” Among the other leading customers of AWS are Coursera, The Washington Post, Verizon, Twenty First Century Fox and McDonald’s. As the sales of AWS during the pandemic crept up sharply, the company’s focus on corporate users has grown sharply.
Business growth strategy of Amazon:
Research and development:
Amazon is a highly innovative company, and its growth and fast rise to the above $1.5 Trillion market cap has been driven mainly by its continuous focus on innovation. Apart from its e-commerce platform, the company also offers a superior customer experience to its customers worldwide on its AWS platform. Amazon’s cloud platform has also found faster growth and popularity only through innovation.
Amazon’s e-commerce platform uses the A9 algorithm. In simpler words, Amazon’s search engine is like the Google search engine, a form of artificial intelligence that searches the Amazon marketplace for data and acts on its basis. It is a highly innovative search engine that ensures that the best products with the best margins and sold by the most customer-centric consumers are placed before the shoppers. Over time, the company has continued to improve its platform to provide a better search and more suitable suggestions. With continuous refinement, apart from higher conversion rates and engagement, Amazon’s search engine has also driven higher popularity of the e-commerce platform. Its focus on innovation drives Amazon’s popularity and higher engagement level. It is why the company continues to invest large sums each year in research and development. It is the biggest spender on R&D n the entire industry. Over the past few years, its R&D expenses have grown very fast. From 2018 to 2019, Amazon’s research and development expenses grew by more than $7 billion. IIn 2019, the company spent $35.9 billion on research and development compared to $28.8 billion in 2018. In its 2019 annual report, Amazon noted,
“We expect spending in technology and content will increase over time as we add computer scientists, designers, software and hardware engineers, and merchandising employees. Our technology and content investment and capital spending projects often support a variety of product and service offerings due to geographic expansion and the cross-functionality of our systems and operations. We seek to invest efficiently in several areas of technology and content, including AWS, and expansion of new and existing product categories and service offerings, as well as in technology infrastructure to enhance the customer experience and improve our process efficiencies. We believe that advances in technology, specifically the speed and reduced cost of processing power, the advances of wireless connectivity, and the practical applications of artificial intelligence and machine learning, will continue to improve the consumer experience on the Internet and increase its ubiquity in people’s lives. To best take advantage of these continued advances in technology, we are investing in initiatives to build and deploy innovative and efficient software and electronic devices. We are also investing in AWS, which offers a broad set of global compute, storage, database, and other service offerings to developers and enterprises of all sizes.”
The technology industry is marked by intense competition and with time the competition is expected to intensify. Apart from the retail and e-retail brands, Amazon faces heavy competition from the leading cloud brands including Microsoft and Google, the other two leading players in the cloud industry. Apart from beating the growing competitive pressure, it is also important that Amazon differentiates its products and services from its competitors in the US, China, and the other leading markets globally. Overall, investing in research and development has become an indispensable part of Amazon’s business strategy since it is critical for maintaining its leadership in the industry.
In the tech industry where competition is very high, maintaining customer loyalty requires a clear and sharp focus on customer experience. The more differentiated and superior customer experience a company offers, the higher user loyalty it will enjoy and the faster will be its growth. Amazon’s focus right since its foundation has remained on customer experience and that has helped the company find faster growth in sales and revenue. Behind Amazon’s superior customer experience is the company’s focus on technology that drives higher user engagement and conversion.
Amazon’s search engine provides better suggestions and faster as well as more accurate search results than any competing online retail brand. Amazon also enjoys higher customer loyalty overall because of its technologically advanced e-commerce platform and its focus on customer service. Customer service is a critical part of the overall shopping experience. It is not just the quality of products sold by a brand that affects the consumers’ perception of the platform but also its pricing and marketing strategy as well as the overall shopping experience from landing to purchase and post-sales service.
Amazon has established a global distribution network so that it can make faster delivery possible. Amazon Prime service offers the same day and next deliveries which is faster than the competing retail websites. This means higher customer satisfaction and a superior customer experience resulting in higher customer loyalty and more repeat purchases by existing customers. Customer experience is a key driver of competitive advantage for the technology brands and this is how the top four including Amazon, Microsoft, Google, and Apple have differentiated themselves from the other brands. Amazon’s focus on customer experience is strong and in the coming years also it will continue to drive its growth. It is also one of the core pillars of Amazon’s business strategy.
Focus on cloud and other latest technologies:
Amazon likes to remain ahead of others in terms of innovation. Its focus remains on the latest technologies and capabilities that are bringing transformative changes industrywide. Staying ahead of the innovation curve helps grow competitive advantage and keep the competitive pressure under control. Amazon has achieved swift growth across various segments, including e-commerce, cloud technology, and Amazon Prime videos. However, Amazon’s cloud segment, which has acquired faster growth momentum in recent years, has become a key driver of revenue and global growth for the brand. The reason is that Amazon is not just great at understanding consumer needs, but it is also ahead of the others when it comes to innovation. This is why, despite Google’s strong position in the internet industry, it is trying to play catch up with Amazon in the cloud industry.
Amazon’s competitive edge in search advertising continues to grow stronger, driven by AI and smarter algorithms that better understand and analyze user needs and preferences. Amazon crossed the market cap of $1.5 Trillion faster than Microsoft, an older company because of bleeding-edge technology that is the main source of its competitive advantage in both the cloud and e-commerce industries. AI, machine learning, and a diverse range of cloud computing services that are driving major changes across the industry worldwide. While Amazon is the leader in the cloud industry, the edge it has gained is because apart from investing heavily in emerging technologies, the company was also smarter than the others in terms of innovation. Its market cap grew rapidly even during the pandemic because the industry moved fast to adopt cloud technology. A larger number of people started depending on the e-commerce channels, mainly for shopping.
The user base of Amazon has continued to expand fast. Apart from the increased number of smartphone users worldwide and growing adoption of digital technology worldwide among individual consumers as well as firms in various industries from education to food, fashion, automobiles, and telecom, the increased reliance of people on Amazon as their favorite online shopping destination also drove faster growth for the company. Amazon started as a similar bookseller but grew into the world’s largest e-commerce and cloud company. Its product portfolio has also continued to expand fast over the years. Amazon and third-party sellers that sell their products on the Amazon marketplace sell hundreds of millions of products. There is no other online shopping channel offering as diverse an array of products. This also drives competition among the third-party sellers higher that ultimately benefits the consumers.
In just four years since the launch of Alexa the company had sold more than 100 million Alexa-enabled devices and in the fifth year, Amazon has doubled the number. The company sells a nice range of devices with Alexa built-in including wearables and electronics. Amazon Prime includes shipping benefits as well as a large collection of movies, video shows, and documentaries. Apart from that users can also find their favorite and latest music albums on Amazon music. They can also buy memberships of the Amazon library to read from a large number of books available online. Overall, Amazon offers a very wide range of products and services that the customers can buy from its e-commerce site. While the e-commerce website is its main driver of revenue, Amazon Prime continues to remain a major driver of user loyalty.
Amazon AWS also offers a diverse array of products meant to serve the varying needs of customers across several industries. Cloud computing is helping many industries find faster growth and serve their customers more efficiently including automobiles, media, telecom, healthcare, and education as well as other industry sectors like manufacturing, retail, and tourism. According to Amazon,
“Amazon Web Services offers a broad set of global cloud-based products including compute, storage, databases, analytics, networking, mobile, developer tools, management tools, IoT, security and enterprise applications. These services help organizations move faster, lower IT costs, and scale. AWS is trusted by the largest enterprises and the hottest start-ups to power a wide variety of workloads including: web and mobile applications, game development, data processing and warehousing, storage, archive, and many others.”
Thus, you can see that the product portfolio of Amazon has grown highly diverse since the company started and continues to grow. It has become a major driver of competitive edge for the brand and Amazon’s business strategy includes widening its portfolio of products and services to grow its user base and maintain its lead in the tech industry.
Marketing is also a key driver of sales and revenue growth in the tech industry, and its shiniest example is the largest technology brand Apple Inc. Companies in the technology industry cannot survive only by focusing on product quality and investing in innovation. They also need to focus on the type of image they are trying to build. Brand recognition and brand image play a central role in driving the growth and success of technology businesses.
Amazon’s growth from a bookseller to the e-commerce giant did not happen just because the company hacked into an excellent and highly profitable industry segment. The brand gained the support of its customers quickly and rose as a customer-centric company. Amazon marketed itself the right way and achieved the image of a customer-centric company that it has successfully maintained. Even today, its focus remains on improving its platform and services to provide the best quality experience to its customers worldwide.
Apart from that, the retail industry and the technology industry are marked by heavy competition, and maintaining demand and achieving sales requires a strong focus on marketing. Marketing is important for demand creation and for achieving higher user loyalty and maintaining strong customer relationships. Amazon’s image of a customer-centric and highly innovative brand has also helped it achieve a distinct position in the industry and establish itself as a different brand compared to its competitors. The company also uses other channels for marketing and mainly digital channels. However, Amazon’s biggest driver of sales is its strong brand recognition, and that keeps driving users to its website. The company has gained strong brand recognition in the cloud segment, and AWS has become very famous since Amazon started providing cloud-based services. Amazon also invests a large sum in marketing and promotions to maintain the demand level and sales. In 2019, the company’s marketing expenses reached $18.9 billion compared to $13.8 billion in 2018. Apart from increased competition, the growth in marketing expenses also reflects Amazon’s focus on maintaining its market dominance.
Amazon’s market has continued to expand faster in recent years. With the increased use of smartphones and the internet worldwide, its customer base has also continued to grow. Now, it is a global e-commerce company. While the US remains its core market and the largest revenue source, Amazon has also established its dominance in several more markets in the European and Asian regions. In 2019, the United States accounted for around 69% of the total revenue of the company. Amazon has divided its business into two main geographic segments that include the Amazon United States and International. The international segment includes the business operations of Amazon in foreign countries. The leading international markets of Amazon include the United Kingdom, Japan, and Germany. The company reports the other markets in its annual reports as the rest of the world. However, while Amazon has maintained a strong market position in the US, it has continued to strengthen its distribution network and warehouses in the foreign markets.
Amazon is just as relentless in its pursuit of international growth. Amazon has established more than 175 warehouses worldwide and the majority of them are located across North America and Europe. Amazon has also maintained a strategic focus on emerging markets like Brazil, Mexico, and India. In India, its main competitor is Flipkart, the Indian e-commerce brand owned by Walmart. Amazon continues to seek higher penetration of the international market and so strives to make its platform and products more attractive for customers internationally. In the Indian market also it is a dominant player and enjoys nearly the same market share as its rival Flipkart.
The pricing strategies followed by retail brands have a leading role in ascertaining their success or failure. For example, Walmart’s growth and success in the US were based mainly on its pricing strategy, which helped it gain the largest market share in the US physical retail. Costco has also focused on maintaining competitive prices and is enjoying a leading position in physical retail in the US market. While Amazon does not guarantee the lowest prices like Walmart, its sales have also been driven by the company’s overall competitive pricing strategy.
A large array of products available on the platform are sold by third-party sellers. However, the company’s strategy has remained to drive price competition among sellers to ensure lower prices for the customers. Most of the products sold on the platform are available from multiple sellers. While on the one hand, this allows the customers access to a large array of products, it also ensures that they can buy it from the seller offering the lowest prices and best quality. Amazon’s search engine picks the best suggestions for customers based on their past activity. However, prices are still a key consideration for customers, a large number of which also use the website for comparing prices. Higher price competition on the platform has proved profitable for the customers who are attracted by the lower prices of products. Amazon has also followed a competitive pricing strategy on its cloud platform and the corporate customers buying these services in larger volumes can especially benefit from the competitive pricing strategy of the AWS platform. The competitive pricing strategy of the company has helped it maintain its leadership position in both the e-commerce and the cloud industries.
A few last words:
Amazon has acquired stellar growth over the past several years. Its rise as the largest e-commerce and cloud business globally continues driven by its focus on innovation and customer service. As these factors have helped the company build a strong position in the industry, its position was further strengthened during the pandemic. In the coming years, the cloud will drive faster growth for Amazon. The post-pandemic world will be remarkable for the heavier use of digital technology and a swift movement towards cloud-based operating models. Amazon has set itself apart from its competition and will play a key role in helping businesses worldwide move their infrastructure to the clouds. While technological innovation has played a key role in growing the demand for Amazon products and services, other factors like marketing, pricing strategy, and the company’s continuously expanding product portfolio have also enabled a faster expansion of the brand worldwide.