‘Even when they don’t yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf.’
Jeff Bezos1
In Chapter 4 we began to explore the ‘on-my-terms’ shopper. We started to discuss the impact of technology on retail and how it is revolutionizing the way we shop – ‘on my terms’.
The key to understanding what this really means every day, to the average consumer, starts with understanding how a shopper sets these ‘terms’ for their shopping journeys. Simply put, rapid technology development has given consumers the tools to shop on their own terms. The digitization of modern life not only underpins our increased appetite for, and ability to seek out, more ‘fun’ or informed customer experiences over the more functional, weekly grocery type of shop; the so-called ‘consumerization’ of technology is also fuelling heightened expectations of convenience, immediacy, transparency and relevancy among more and more consumers.
While any looming retail apocalypse may be overstated, fears for the future of the industry are founded on the fact that many familiar household retail chains have fallen by the wayside. But we contend that their demise was by no means inevitable. They failed to accommodate today’s digitally empowered, on-my-terms shopper. This is why any focus on Amazon as a causative agent is unfounded. But, as more retail casualties fail to use technology to digitally transform and differentiate in response to the industry-wide challenge of the on-my-terms shopper, it is worth taking an in-depth look at how Amazon has seemingly been able to stay one step ahead of both the competition and the needs of its customers.
In the next two chapters, we explore how Amazon continues to use technology development in artificial intelligence (AI) and voice as two particularly strong areas of focus in combination with the underlying drivers of change such development responds to, and the next-generation expectations and demand for frictionless retail experiences on the part of today’s on-my-terms shopper it helps to meet. Through this exploration, it becomes easy to see how not just Amazon’s business, but more so the technology advantage that underpins its execution, will continue to weed out complacent players and push the entire retail industry towards the creation of customer experiences that make shopping instore as effortless as it has become online and turn the functional into something more fun.
Retailers that do not understand, and adjust their propositions accordingly in response to, the on-my-terms shopper are the very ones whose complacency means they also fail to keep pace with the impact of the technology drivers of change; they fail to recognize how the internet, mobile and subsequent tech-enabled service innovations, such as click & collect or shoppable media, are changing the retail landscape forever.
Before getting into how the technology itself has developed, let’s first examine its overall impact on the wider industry landscape and its role in empowering the on-my-terms shopper. We are about to reach a major tipping point, where over half of the planet has access to the internet. Widespread adoption of technology as it relates to retail has put the customer firmly in control of the terms of the buying process. This is where it becomes impossible to ignore the spectre of Amazon. We can see how the shifting balance of power from retailers to consumers has not only tracked closely against technology development, but how Amazon has also used this shift to support its growth and evolution. Acknowledging this shift is central to understanding how, just like Amazon, any successful business can use technology to both its own and its customers’ advantage. But here, it is also Amazon’s desire to ‘delight’ its customers, as Bezos has put it, that has allowed it to tap its technology advantage. It is also a lesson in putting the needs of the customer at the heart of innovation any business could learn from.
In the 2010 Amazon Annual Report, Bezos wrote:
Look inside a current textbook on software architecture, and you’ll find few patterns that we don’t apply at Amazon. We use high-performance transactions systems, complex rendering and object caching, workflow and queuing systems, business intelligence and data analytics, machine learning and pattern recognition, neural networks and probabilistic decision making, and a wide variety of other techniques. And while many of our systems are based on the latest in computer science research, this often hasn’t been sufficient; our architects and engineers have had to advance research in directions that no academic had yet taken. Many of the problems we face have no textbook solutions, and so we – happily – invent new approaches…
So, how has Amazon’s success tracked so closely against the rise of digital retail in the wake of consumer technology adoption? We strongly suggest that it is because Amazon is a technology company first and a retailer second, but it manages to successfully keep the customer it serves at the heart of the technology innovation it harnesses in support of its business strategy. For example, out of Amazon’s 14 Leadership Principles, the first is ‘Customer Obsession’. As referenced in Chapter 2, it is this customer-centric ethos that has served it well as consumers have begun to embrace digitally enabled or enhanced technology shopping tools. It cannot be underestimated, however, how much it helps that Amazon’s core business is founded on technology innovation. Before looking at this innovation, let’s take a step back here, as it wasn’t always this way.
Going back to 2002, with necessity truly being the mother of all invention, Amazon Web Services (AWS) was first born of the need for sufficient number-crunching capacity and standardized, automated computing infrastructures on which to run its retail marketplace. Capitalizing on advances in networking, storage, compute power and virtualization, Amazon began reselling its cloud computing capabilities as services in 2006.
However, from 2014 to 2015, Amazon saw its stock price fall 20 per cent. During that intervening time shareholders would have been forgiven for wondering if the company would ever make a profit, and its dwindling share price reflected this. In relative terms, it was smaller than Walmart. Even Alibaba, which went public in the autumn of the same year also dwarfed Amazon’s 2014 market cap. In the meantime, though, Amazon had quietly been consolidating market share in meeting the fast-growing demand for cloud computing services.
Then, in 2015, in what would be a pivotal year for the company, it first revealed just how profitable AWS had become, with margins to rival those of Starbucks, and investors started to see their Amazon stock start to rise in value. Today, its AWS customers include Netflix,2 NASA3 and retailers such as Nordstrom, Ocado and Under Armour.4 But even back then, in that fateful year, AWS was responsible for two-thirds of Amazon’s profits; by 2017, this had grown to 100 per cent. Don’t forget this is why we said Amazon is not your average retailer. It is a technology company first.
Thinking about the values that have gone on to define Amazon, when it comes to technology innovation, its third Leadership Principle – ‘Invent and Simplify’ – is the most significant.
Although AWS fulfilled its potential to power Amazon to the behemoth it is today, in the first instance it was not afraid in its quest to invent and simplify its own operations. It then went on to repackage and resell these efforts to businesses and consumers alike. So much so that, since 2015 – the year following that fateful stock dive – its market value had increased fivefold to its 2018 market cap. It also provided its retail business with a massive balance sheet and the vast amounts of computing power required to build out the sophisticated AI-based systems needed to power its extensive, global e-commerce, supply chain and fulfilment operations, as well as the next digital frontiers in retail – automation and voice.
As we discussed in Chapter 2, Amazon itself suggests it can afford to ‘be misunderstood for long periods of time’, according to its third Leadership Principle. If the story of how AWS came to fruition isn’t clear enough illustration of the fact, then let’s take a closer look at Prime Day as another worthy proof point.
The first year Amazon held its Prime Day was 2015, in the company’s 20th year. By then, its Prime membership scheme was already 10 years old. While some reports from the inaugural discount day highlighted a lack of blockbuster deals, online retail marketplace IT provider ChannelAdvisor found it boosted Amazon’s US sales by 93 per cent and its European sales by 53 per cent.
On the second Prime Day, Amazon’s total orders during the 24-hour period increased 60 per cent from its debut, striking such a blow for bricks and mortar retail competitors everywhere that they now struggle to competitively keep up with the annual discount day. By 2017, Prime Day had expanded to 12 countries and was offering special incentives to Amazon customers using its Alexa voice assistant. We need to understand how Alexa has come to take such a prominent role recently and will delve into that later. Here we should pause to recognize that the 2017 Amazon Prime Day generated $2.4 billion. Even so, to put that amount in further perspective, its Chinese competitor Alibaba raked in some $25 billion during Singles’ Day in the same year.5
Despite its Chinese counterpart making Prime Day look like small change, it does represent a great example of Amazon’s phenomenal growth. Putting this in context, we need to go back to 2015 again – not only for AWS’ profits and the first Prime Day, but also because it was the year that sales exceeded $100 billion for the first time. Delivering sales growth was the last of Bezos’ ‘three pillars’, where AWS provided for its cost base, while Prime has gone on to power its customer acquisition and retention strategy. Breaking out sales, Amazon states there is a 50-50 split between the units shipped of its first-party wholesale merchandise and that of the millions of independent merchants who pay to use its marketplace as a store front and who can also pay to use its e-commerce and Fulfilment by Amazon (FBA) suite of supply chain and logistics services.
It is easy to see why 2015 was a momentous year for Amazon, where its Leadership Principles began to bear fruit, and Bezos’ ‘three pillars’ became stable enough to sustain its ‘flywheel’ ecosystem. The approach enabled it to offer more of what the on-my-terms shopper wanted.
The first technology trend Amazon has, therefore, taken advantage of is the rapidly growing number of individuals accessing the internet over mobile devices. According to mobile operators, the number of unique mobile subscribers will reach 5.9 billion, equivalent to 71 per cent of the world’s population, by 2025.6 Other internet- and mobile-enabled developments that have transformed the way we shop include payment, enabled via online banking and mobile wallets. Debit and credit so-called ‘card-not-present’ payments and PayPal, which saves time and adds extra security on entering payment information, introduced consumers to online shopping, in the same way as contactless credit and debit cards are paving the way for the rollout of mobile payment schemes instore.
The common denominator among such innovation is consumer demand for more immersive and portable experiences. This has led to the objective of eliminating ‘friction’ in customer experiences, as it relates to the speed, convenience, transparency and relevance throughout the shopping journey. This may be, for example, browsing online, using an app or visiting a store, only to find the item sought is out of stock, or having to join long queues at checkout. Eliminating such friction requires that the retailer enable that customer to perhaps order the desired product online for delivery to home; or, on finding the item, it then facilitates the looking up of reviews or offers to check on the best deal, right through to final, rapid checkout via mobile or express fulfilment. By contrast, anything that introduces friction into the customer experience, such as queues, delivery issues or poor sales service, is not compatible with today’s on-my-terms shopper. In order to give customers more of what they want, the ‘what’ of frictionless retail is enabled through the use of digital to improve customer experiences, where the ‘how’ is provided by technology. This is where Amazon’s technology business gives it an unprecedented advantage, and why it is wrong for both traditional and online retailers to compare themselves directly against it. They are traditional retailers; Amazon is a retail technology firm.
Technology is not only transforming the way consumers interact with retailers in this way, it is blurring the physical and digital divide. To understand how Amazon has successfully harnessed its technology advantage to provide a digitally enabled, frictionless shopping experience, it is necessary to first break down the fundamental drivers of technology that underpin the frictionless objectives of the on-my-terms shopper. They are:
We see the effects of the first of these drivers with the impact of mobile in and out of the home, as well as instore and in other public places. The more that connectivity becomes truly ubiquitous, with the development of fifth-generation (5G) mobile networks, alongside blanket Wi-Fi availability, wireless charging, and whatever device or means that enable us to be always connected and online at faster speeds, the more impatient we become for greater choice, more intuitive search and instantaneous response and fulfilment times.
The context for the second technology driver, towards more ‘pervasive interfaces’, requires that we go back to the early, pre-internet days of computing, where the idea of a handheld pointing device or ‘mouse’ was relatively new. For example, in 1984, reporter Gregg Williams wrote of the introduction of the first Macintosh computer that it ‘brings us one step closer to the ideal computer as appliance’.