Amazon

I’m taking a more theoretical approach than usual, says Carl Reader, because I’d like to cover off something I hear quite often about shopping giant website Amazon.

Amazon is everywhere. From its roots as a bookseller back in 1995, its growth in the nearly-18 years since then into one of the world’s largest and most iconic online companies has been nothing short of astonishing. Some of you will know that Amazon have recently acquired Whole Foods, and I’m delighted to see Amazon are doing what they normally do, which is to reduce the prices massively.

In response to this, there’s been a lot of interest mixed with concern as to why Amazon have done this. Why would they look to reduce the prices when they could charge more? It was clear that Whole Foods were doing OK charging the higher amount, after all. So why does Amazon continue to keep prices low?

Let’s take this back a little bit. If we look at Amazon in general, it’s a good question. Why don’t they charge more for what they do? They’ve been pretty much running a breakeven for so long, so why do they charge what they do?

The reason is simple.

Amazon could very easily up the prices of their books by 2p. But why would they? That 2p would be a minimal impact on profit, and it could well jeopardise their position as one of the fastest growing retailers in the world. Amazon have taken over Whole Foods, complete with huge price cuts, and earnt themselves not only a surge of publicity, but also a massive boost in customer traffic.

Amazon effectively buy scale by lossmaking or breakeven. The small business approach that we take - of making sure that the unit level of economics work on every single item – doesn’t work for Amazon at all.

Those of us who did Business Studies at GCSE will probably remember that we’re told about the loss-leading baked beans story – a shop might sell baked beans for 10p to drag people in. But that’s not what they’re doing at Amazon. Instead, they’re buying in scale. And they’re buying in scale rapidly so that they can take on the Wal-Marts of this world. And the only way to do that is to lose money hand over fist.

It sounds ridiculous, and to those of us in the small business world absolutely crazy, but that’s what we’re up against. So when an Amazon or a Google come into your world, be afraid – because that’s what they can do.

Carl Reader is the author of The Start Up Coach, co-owner of dennisandturnbull.com