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