Amazon’s $4 Billion E-Commerce War Chest

Chris Trayhorn
by Chris Trayhorn
February 7, 2013

Forrester Research senior analyst Andy Hoar delivered a fascinating keynote at the Rakuten Linkshare Symposium last week.  His theme was the continuing evolution of e-commerce and the insights he brought will have a lot of consequences for the performance marketing sector. Some of his points restated things that anyone that has been paying attention already knows: mobile is going to become even more important than it is already, tablets are replacing laptops, and coupons/discounts are a critical part of any etail offering.

But how many of us realised that Amazon essentially has a $4 billion per year war-chest from its marketplace revenues that it uses to cross-subsidize its other businesses? Forrester take the view that Amazon Marketplaces is a very high margin business that has increased revenues by10x since 2005, and those profits are not reflected in Amazon’s global net income of only $631 million in 2011.

The Number of Marketplaces

Etail competitors have to try and compete by developing their own marketplaces – note Rakuten’s latest initiative rebranding as Rakuten Shopping – but it will inevitably be an uphill struggle if Forrester’s interpretation of Amazon’s cross-subsidizing strategy is correct.

The fact is that offline retail is flat; all the growth in the industry is online. Hoar pointed out that we used to be excited when Black Friday broke $1 billion in sales, but last year there were 10 other days that broke that barrier as well.

Several  1 Billion Dollar DaysPerhaps the most interesting part of the presentation came with an analysis of how Amazon dynamically changes its prices throughout the course of a day. tracked pricing of a microwave on Amazon, Best Buy and Sears over 24 hours.  Sears maintained the same (highest) price for the entire period. Best Buy kept their price $90 less than Sears right through except for two hours early evening, when they raised their price to match Sears exactly.
Amazon though, has a totally different philosophy and an algorithm to match. They had no less than 9 price changes over the course of the day.  Most of the time they weren’t the cheapest, but clearly they have profit-maximization data that is driving a sophisticated pricing engine.

Perhaps it is not surprising that they can do this if it is true that they have $4 billion to spend on development. But it surely raises a question of just how major etailers and performance marketing networks will be able to compete in the long-term. Investment in technology has to be the priority.
Intra-day price changes

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Chris Trayhorn

About Chris Trayhorn

Chris Trayhorn is the Founder & Editor of Revenue Performance magazine and the CEO of mThink LLC, a performance marketing services company based in San Francisco. Chris has worked on marketing campaigns with over 200 of the Forbes Global 2000. Friends say he knows a lot about a couple of things and a little bit about everything. He likes motorcycles, Manchester United and making pictures.

View all posts by Chris Trayhorn

3 Responses to “Amazon’s $4 Billion E-Commerce War Chest”

  1. Julius Minor Says:

    Great post.. The funny part about the whole thing is that if you have a Kindle Fire that’s get’s destroyed, they will send you another one instantly “on call”. I personally have seen people buy Kindles and call them as if it’s destroyed and end up with two of them even when there is nothing wrong with the device.

  2. Geofferson Marcy Says:

    I wonder if the prices also change by time zone. Would someone in New York follow the same price curve as someone in LA at the exact same time? I also heard Amazon loses money on its Prime membership, but subsidizes it from other profitable units. For example, buying a safe where shipping would normally be over $1000, it’s free with Prime. Competitors can’t match the price, Amazon is willing to lose money (if needed) to keep the customer. Long term it seems they hope to eliminate as much competition as possible through price moats.

  3. Peter Riva Says:

    Excellent article, matches what we’ve found with books (Kindle and other) when licensed and/or jointly promoted with Amazon.