Low prices are a critical input to Amazon’s growth flywheel. But it’s one thing to say you care about low prices; it’s another to deliver low prices when you are losing money.
Keeping prices low was a constant challenge. One way we struggled was that our brick-and-mortar competitors, like Walmart, rely on a loss-leader strategy. That is, they put very popular new products on sale at prices below their cost of production to incentivize customers to come to the store.
For example, in the 2000s, when a new blockbuster movie came out on DVD — like Titanic or Star Wars — they’d pile it into a massive display near the entrance and price it aggressively low, typically below cost.
This strategy made sense for physical stores like Walmart or Target because, in addition to buying the latest DVD, customers would continue shopping, adding another $100+ worth of profitable merchandise to their cart. The average customer drives more than 30 minutes each way to get to a Walmart. Having invested this time, they need to buy a lot of other things to make the trip worth it.
But Amazon is just a click away, and you can find and buy items in seconds. By making it so fast and easy to shop at Amazon, we created a problem. When a customer would buy only one or two deeply discounted items, we lost money — not a good business model.
So we had a seemingly impossible choice: match the price and lose money, or lose the customer and their trust in our commitment to low prices. We chose to lose the money and keep the trust.
When we discovered that a competitor was beating our price, we would match it right away and then figure out later how to minimize our losses. We would lose money when we matched prices on loss leaders, but it forced our teams to operate with urgency and creativity.
This made it very hard to be a Category Manager at Amazon because you had to react to these events and come up with solutions (fast). This could be through supply chain efficiencies, vendor negotiations, or co-op marketing dollars, but the point was that we had to figure out how to offset these losses. We couldn’t make customers foot the bill; otherwise, we would lose them.
That sequence — customer first, profitability second — is what made the approach unique. Most companies would have done the opposite: figure out how to make it profitable, then lower the price. But by then, the customer’s already gone. In most cases, we weren’t sure whether our efforts would work or not… whether we had set ourselves up for an unsustainable business model.
Over time, we realized that the only way to afford this approach was through operational excellence — reducing our cost per unit for buying, transporting, and fulfilling while improving our speed and quality. When I arrived at Amazon in 1999, we were nowhere close to this. We were an operational disaster in these early years.
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