Amazon's Quintuple Threat to Brands
Much is being written (and deservedly so) about the threat Amazon poses to retailers. It's now the #2 US retailer (worldwide sales) growing 24% annually. Less attention is being paid to the threat Amazon poses to brands. Amazon's unrelenting pursuit of dominance has resulted in its growing influence over four of the five factors that drive consumer purchase decisions. And it looks to be positioning itself to compete on the fifth.
The following explains the five factors, details the extent of the threat Amazon's poses, anticipates what is to come, and suggests strategies that brands can employ to prepare and thrive.
Consumer Purchase Decisions--A Framework
Before I discuss Amazon, I'll lay the groundwork for the basis of its broad-based threat. You've probably seen a depiction of a "Loyalty Pyramid" at least once over the past few years. Generally, at the apex of such pyramids is a segment of consumers identified as "Advocates." Consumers are regarded to journey up various levels of the pyramid to get that state of commitment.
There's nothing wrong with this depiction. Brand advocates make and influence a disproportionate amount of sales. So, tracking them is important. But these pyramids leave a great deal of useful consumer insight on the table.
A more useful pyramid/framework would portray the motivations underlying consumer advocacy, rather than lump all advocates together. Understanding what motivates consumer purchases would enable companies to better direct their efforts to generate the sort of customer engagement that leads to advocacy. My development of this framework was inspired by the work of and conversations with William O'Neil of SDR Consulting a number of years ago.
I've outlined the five primary motivators of consumer purchase decisions below, followed by more-detailed explanations.
Price: Meets basic needs inexpensively
Channel: Sold via methods and/or places where a consumer shops
Habit: Purchases made without consideration of alternatives
Differentiation: Perceived to offer something other brands don't
Meaning: Reflects a consumer's identity, values, or desired image
Let's start with Price; the bottom-most level. Consumers who shop primarily on price will stay committed to a brand so long as it continues to be the least expensive, viable alternative. The only companies that can count on these customers are those securely positioned as the low cost providers.
But here's the thing. Even though price shoppers have shallow commitment, they can be strong advocates for a brand. And, like other forms of commitment, their advocacy doesn't have to result from a drawn out process of engagement. If a price-conscious consumer tries a relatively-inexpensive consumer product that's just as good as others they've used in the past, they could become advocates upon their first purchase. No brand relationship; No two-way conversation. No progression up the sides of a pyramid. Immediate advocacy born from product adequacy and price.
INTERLUDE 1: An individual consumer's purchase motivations will differ by category. A traveler may care about little beyond price when it comes to air travel but be very particular about the brand of hotel they stay in. That same consumer may approach the purchase of laundry detergent very differently. Consumer research needs to be conducted in this light.
Descriptions of the other four purchase motivators follow:
Channel: Channel buyers are more influenced by how and where they shop rather than the specific products they buy. This could be a matter of their own choice or due to circumstances. For example, the choices of a customer who values the high level of service of a particular retailer will be limited to what that retailer carries. Choices of rural consumers or those on airport layovers will be constrained for different reasons.
Habit: Purchases made out of habit are made almost unconsciously without much expenditure of mental energy. This isn't intellectual laziness. This purchase process is a growing necessity. Imagine the time and effort it would take to make a well-reasoned purchase decision, weighing all available information, for all one's grocery items. You'd never get out of the store.
Differentiation: People who buy products or services based on differentiation have classified some as being superior to others. They will consciously pay a price premium for a better product. Differentiation, of course, is in the mind of the consumer. Just because consumers believe a product is better doesn't mean it actually is. And forming an objective opinion can be difficult. For example, consumers routinely face the unknown in their purchases of generic vs name brand drugs.
Meaning: The most personal and enduring form of consumer commitment is demonstrated by those who feel a brand says something meaningful about them. The bond may be based on how the brand makes them feel about themselves, or alternatively, how they look to others. Consumers engaged in this way will only switch brands if they or the brand have changed in some significant way.
Amazon is already impacting brand purchases along the first four purchase motivators. Its ever-expanding channel opens the door to a world of equally-convenient purchase options. The wealth of available choices makes it relatively easy for consumers to identify the lowest-cost, acceptable product.
Therefore, products which have traditionally competed on price may now find they are among an expanded field of competitors who can enter the market freely. Products that have benefited from exclusive arrangements with certain channels may suddenly find their competitors' products easier to buy than their own.
In addition, Amazon reinforces habitual buying through incentives it provides to ship frequently-purchased items on a regular schedule. This is not a competitive threat in itself, but as you'll read below, it could evolve to become one.
Going further up the pyramid, Amazon's crowd-sourced reviews and their associated questions and answers are a disruptive force in some brands' attempts to differentiate themselves from their competition. These reviews are becoming a standard of reference for how well a product performs. They, therefore, create enduring transparency as to whether a brand's products do or don't live up to that brand's reputation.
This may play to the advantage of products that are truly better than their alternatives. But in other circumstances it can severely diminish a brand's perceived value.
INTERLUDE 2: As an example, a consumer named Greg may be looking to purchase a new 4K Ultra HD Blu-ray Player on Amazon. He came to the site with a particular brand in mind because of past experience, reinforced by the brand's positive reputation. Once on the site he almost can't avoid seeing alternative products, their star-ratings, and their prices. In this case he notices a couple of comparable offerings he wasn't aware of.
Even if Greg would prefer to ignore this information, he might be led to investigate it to avoid the potential for feeling later regret for not having made the right purchase. After all, a few minutes of research might serve to help him make a better decision for a product which he will use for years. So, by a glance and a few clicks, the premium value Greg once assigned to his preferred brand could very well evaporate.
There's nothing new about product reviews, of course, But Amazon has changed the game by making them free, up-to-date, and widely available--even while consumers are in competing retailers' stores.
Private Labeling; Amazon's Double Threat
Like product reviews, there's nothing new about private labeling. Supermarkets, drug stores, and other outlets introduced this concept decades ago. Private-labelled products are significantly cheaper, but they are often perceived to be inferior to the name brands sitting right next them.
This has limited their appeal for many. But what if consumers had confidence private-labelled products were just as good as name brands, or, judged the lower price to be worth the tradeoff? Then you'd have just part of the threat posed Amazon's Private Labels.
The AmazonBasics line offers products in over ten categories; from camping gear to pet supplies to camera accessories. Ten years ago, It would have stretched the imagination that Amazon could be considered a credible provider of such a diverse array of goods, but if the products live up to their ratings, then what's the barrier?
Amazon sells batteries for half the price of the name brands. Consumer Reports judges these batteries to be comparable to name brands. Perhaps, as a consequence, AmazonBasics is the best-selling brand of batteries online. Online sales comprise a small proportion of all battery sales, but how confident should name brand manufacturers be this will continue? And what prevents Amazon from expanding its reach by selling its private labelled products through existing brick and mortar retailers?
The second threat Amazon's private labelling poses to brands may be the more severe. AmazonBasics, Kindle e-readers, and Echo speakers, among many other products are explicitly branded by Amazon. But Amazon has a separate, stealthy private-labelling program. Overall, Amazon sells products under 70 privately-labelled brand names. Many of these brands are only subtly branded by Amazon or portrayed as exclusive to Amazon without disclosing brand ownership. The brands are primarily devoted to clothing and accessories, but they extend to furniture, groceries, and a few other categories.
Brand Managers should monitor Amazon's private labelling program. It's quite possible it could start to develop a selection of these lines into strong, stand-alone brands. This opens the door for Amazon to create multiple brands that consumers identify with. Thus, its private-labelling program enables Amazon to compete on the fifth and most-enduring purchase motivator.
Building multiple, meaningful brands won't be easy, but it helps if you have $25 billion in cash, $18 billion in operating cash flow, and a penchant for sacrificing near-term profits in return for longer-term market position.
Amazon could purchase already-dominant brands, of course, but that invites scrutiny, and it generally doesn't appear to be their style (notwithstanding the acquisition of Whole Foods, a brand category that would have been really hard to build from the ground up). If you question the wisdom of their entry into conventional retail, then consider the acceleration of brand building that can be brought about by street presence.
This isn't necessarily Amazon's intent, but if you were in their competitive position, possessed an expanding number of test brands, and had deep expertise in rapid experimentation, then wouldn't you consider it?
Where is all this going?
1) Low-cost producers may find themselves increasingly running up against Amazon's private labels. They may wish to explore other ways to position their products or to become part of Amazon's (or another retailer's) private-labelling universe.
2) Brands will find it increasingly difficult to maintain or establish superior reputations unless their products continually live up to that reputation. They must therefore monitor how well they are performing relative to their competition and adjust their development efforts to ensure they maintain or expand their competitive edge.
3) Brands should explore how to create and maintain habitual buying through Amazon and other channels. Brands should closely monitor whether Amazon appears to be biasing its subscription service toward its private-labels. As referenced above, this is how Amazon's subscription program poses a competitive threat.
4) If Amazon's penetration of retail continues (and it is likely to), then a brand's sales through other channels will naturally decline. Some brands may wish to counteract this by shoring up the strength of these alternate channels. This would normally be viewed at the domain of a retailer, but brands may not wish to leave this entirely in their hands.
To expand on this thought, there are few retail outlets where a consumer's online/mobile experiences are meaningfully linked to their in-store experiences. Creating that link is very clearly one of Amazon's objectives, but it is unlikely to get there in most product categories anytime soon. Brands which get there first in a way consumers find meaningful, will create near- and longer-term competitive advantages and defenses.
To get there, take a cue from Amazon. Don't try to solve the entire problem at once. That will result in paralysis. First, identify what's most meaningful to your customers, deliver that, and expand your offering from that base.
5) Add Amazon's private labels to the set of competing products you monitor.
Over time, undifferentiated brands with limited consumer awareness will lose share or fade away entirely unless they can stake out positions as low-cost providers or some other defensible (or uninteresting) competitive position. On the opposite side of the spectrum, brands offering superior products, services, value, and/or meaning will have opportunities to occupy the vacuum left by these retreating brands.