Allison Hartsoe: 00:01 This is the Customer Equity Accelerator. If you are a marketing executive who wants to deliver bottom-line impact by identifying and connecting with revenue generating customers, then this is the show for you. I'm your host, Allison Hartsoe, CEO of Ambition Data. Each week I bring you the leaders behind the customer-centric revolution who share their expert advice. Are you ready to accelerate? Then let's go! Welcome everybody. Today's show is about the Amazon retail platform and the how do you see retailers should be thinking about it. Now to help me discuss this topic is Mark Mahaney. Mark is the managing director covering the Internet sector at RBC capital markets, and he has actually been covering Internet stocks since 1998 which I love because my first company was at 1996 in the Internet space, so we have a lot in common there. Mark, welcome to the show.
Mark Mahaney: 00:59 Thanks for having me on Allison.
Allison Hartsoe: 01:01 So tell us a little bit more about the big pillars of Amazon. This was something that I saw at your e-tail presentation. Can you start us off there about how Amazon generally is structured?
Mark Mahaney: 01:13 Yeah, you could say that there are three or four parts to Amazon. There's the first party retail that we all know and love. There's the third-party marketplace, which is for most consumers almost indistinguishable versus the first party marketplace. Then there's this massive cloud business. They've got Amazon web services. The fourth business is probably be AMS, Amazon marketing solutions or Amazon marketing services, which is really their advertising business, and now I'm going to go with the fifth category too, which is their grab bag of other products and services, things like video and music streaming. Also kindle hardware devices, also these Alexa devices. So, it's become one of the most successful in terms of market cap, but one of the broadest consumer technology names out there. I mean there may be three or four worldwide that are as present as Amazon and have as many customer touch points as Amazon, and it does it across these multiple businesses.
Allison Hartsoe: 02:10 So obviously if I'm a retailer and I'm looking for how to get my products out there, Amazon represents either an incredible threat or an incredible opportunity. Is there a way that retailers should be thinking about Amazon?
Mark Mahaney: 02:25 Well, it's a very large marketplace. They don't disclose the number of active customers that last time they did was probably five or six years ago, and the number was around 300 million. That's 300 million people who had purchased from them or at least one time in the prior 12 months. And my, our guess is that that number is now probably well north of 400 million. So, it's a very large customer base. It's an enormous amount of volume if you can successfully gain entrance into the Amazon marketplace. So that makes it valuable in and of itself. Conversations we've had with third-party sellers over time have generally been pretty impressed with the level of Amazon customers. They usually, the customer service requests are lower than what you can that you wouldn't, you would, what you would find on other platforms like eBay. So, they actually may be less expensive customers to acquire and to maintain. And you can also outsource a fair amount of your fulfillment marketing and shipping to Amazon. So, in a way it can be an all in one customer platform for you though one underlying, and maybe it's the big underlying risk, has always been that Amazon also sells directly in many, many of these verticals. And there's the risk that if you're dramatically successful on Amazon that Amazon may look to directly compete with you and there's nothing to stop them from doing that.
Allison Hartsoe: 03:39 Exactly. And in Barnes and noble being a great case study in that space and, and then we seem to have other companies, maybe Macy's, Costco, blue apron, other fast-moving consumer goods that seem to be feeling the pressure in the Amazon space. Does that comprehensiveness of their platform, does that make them well suited for niche players, but maybe not well suited for mass marketing companies?
Mark Mahaney: 04:05 Oh, I think I absolutely, I'll, and I think you know this just as well or better than I do. If you want to succeed on Amazon, you need that really differentiated product service experience. If you're just competing on price and even on selection, Amazon is probably going to be able to do better than you. They've got the scale and the customer base to be able to go straight to vendors and probably get better terms than just about anybody except for Walmart.
Allison Hartsoe: 04:27 That makes sense. Now I think in your presentation, you said something about Amazon prime penetration was really huge. It was about 55%, and prime, of course, is the Amazon loyalty machine. So, if I'm a retailer and I've got individual products, and I'm making my way with something that's fairly unique, is it problematic for me to try to create my own loyalty program or should I just always be selling through Amazon? Is there a strategic play here when Amazon has such a strong loyalty program?
Mark Mahaney: 04:58 So let's think through those prime customer numbers. Yeah, and survey work we've done over the last five years, we've seen a growing penetration of prime customers worldwide. Amazon did disclose recently that there are a number of prime customers somewhere in that hundred million range in North America, it's probably 50 to 60 million. That's not disclosed, but that's a reasonable guess could be off by a couple million up or down. But that's a reasonable guess. And those customers generally are bigger spenders. We do know based on our own survey work over the years that they shop more frequently with Amazon. They spend more on Amazon, and they generally have higher customer satisfaction scores. That means this is kind of a self-selected group. So anyway, that's a great customer base to try to get at. Do you want to try to surf off that, drift off that or do you want to develop your own customer loyalty program?
Mark Mahaney: 05:45 I don't know that you have to choose between one or the other. I would imagine generating your own. It'd be a lot better. It depends on the individual businesses and their unit economics. So, it's a great pool of customers to tap into the prime customer base, and Amazon now is offering more ways to do that. One of the things that have come up, of these, is kind of sponsored product listings. Now they've actually become pretty broadly distributed across Amazon's platform. They've almost become a necessary rent to compete in the Amazon marketplace. There's good and bad to that.
Allison Hartsoe: 06:15 So in order to get your product seen because it's so vast and I've got to pay rent to get the traffic to my products in order to get them seen and found.
Mark Mahaney: 06:24 Yeah, I think about it this way, like if you're a retailer looking to sell online, you got a good number of options as to how you market and then fulfill products to customers. Amazon is one option. It's one of the faster-growing marketplaces. It's certainly growing faster than eBay. I think Walmart now is in that same business, and you'd run the same sort of risk of being disintermediated if you were to sell on that platform. You can also work via Google directly or through a marketplace that they are loosely confederating, maybe? So, there are options out there. It does seem like the company that has the most developed range of options for selling your products online that you can outsource almost all of the customer experience too. It seems that that company is Amazon, but that may not hold in the future.
Allison Hartsoe: 07:06 Well and one thing that's really interesting at least to us is on the AWS, on the services side, you've got these new customer experience tools that are rolling out alongside different algorithmic analysis tools. So, it's really interesting that in the marketplace you have disintermediation. But on the AWS side, you have a lot of tools designed to help you get closer to your customers. Do you think those two will come together at all?
Mark Mahaney: 07:32 That's a really interesting idea. I'm not sure that Amazon yet has been able to do that. But with AWS, they have an enormous amount of ability, and they're implementing it to provide machine learning skills, machine learning tools, and the artificial intelligence tools to customers. If they can set it up in a really nice self-service format to help retailers that are selling on the Amazon marketplace, and to better mind their own customer data to figure out which customers are best to target, which products are best to promote which products are best to not promote, uh, I would imagine that there's an enormous amount of intelligence, retail, and customer intelligence that Amazon could provide the third party merchants on its marketplace. I would imagine an Amazon would do that too. So, I think that's in a very intriguing idea, Alison, that you laid out. But I think that's still early stage on Amazon. But I think that's more of the kit that Amazon can provide to third-party vendors on Amazon.
Allison Hartsoe: 08:28 And I think that aligns very well with what the company's talking about. It's always been an industry for customer centricity on the, you know, the world's most customer-centric company. We oftentimes assume that that means just that they are fully customer obsessed, which is true. But I think if you look at the AWS strategy, you end up with so much more behind that. And I think that's what keeps them ahead of Walmart and eBay. But I'm not sure that that's what keeps them ahead of an international company like Alibaba who has also said that customer is number one, investors are number three and employees sit in the middle at number two. Do you think if I were a retailer and trying to look at a global strategy, would Alibaba be a stronger play than Amazon?
Mark Mahaney: 09:11 It's an interesting question. I don't think we would have even debated this 10 years ago. Five years ago, we would've started to, and now we really can debate that Alibaba's presence, that's a very small part of their overall business. Alibaba's commerce in China itself is dramatically larger than its presence outside of China, but that is changing. It's so, it depends. We'd have to go market by market on it. I think in western Europe, in parts of Latin America, and then in parts of Asia like India, the Amazon marketplace is still going to be dramatically more robust than Alibaba whether that could change over time. Absolutely. That could change over time. I don't think there's clear evidence that that's where the puck is going, but it's possible.
Allison Hartsoe: 09:52 That makes a lot of sense what you're saying about Alibaba internationally versus Amazon? I was surprised with one of the retailers we were talking to recently that they were seeing so much international growth come from Russia as in terms of their US market was flat, and they were starting to grow through Russia, which makes sense if you're going to look at the Alibaba angle. So it sounds like for the average retailer, Amazon still remains the, the first place to look and Alibaba's maybe something to keep an eye on as the US market might flatten, or do you think that it's moving so quickly in China internationally, at least for a China strategy, you need both.
Mark Mahaney: 10:29 Oh, for a Chinese strategy, you could probably rely solely on Alibaba.
Allison Hartsoe: 10:33 Yes. You probably could. Now, one of the things that you talked about, and I'm not sure if I can say this correctly, but in the Etail presentation, you talked about the physicalization, not even sure if that's a word of the Internet. Uh, could you talk a little bit about what that means in relation to the Amazon stores?
Mark Mahaney: 10:49 Yeah. Physicalization of the Internet. Uh, it's funny, I remember talking to Jeff Bezos, you know, in 2000 something like that and asking them once a really dumb question, would you ever consider opening up physical stores? And I got one of his trademark belly rolls laughs in response to what I guess was a really stupid question at the time. Uh, and I think I would have probably still gotten that belly roll laugh 10 years ago, five years ago. I think the more thoughtful response that he would have given to the question would have been something like if there's a way we could solve a pain point or create a physical retail experience that solved a problem or it was just materially better than what existed out there. If there was an Amazonian advantage to that physical store, then we'd consider it. And I think they're not with these ghost doors.
Mark Mahaney: 11:38 Now there are, I dunno, it doesn't have these out now. So they are chump change. They're tiny. There are two here in San Francisco actually there may be more now, but there are two here, one just a few blocks away from our office. And I think they have solved something. I think they have helped solve time, and it's the one thing we all want more of, and they've solved it, and it sounds cliched, but they solve it by if anybody's gone one to one of these stories, the ability to just walk in and walk out super quick, there's no checkout and uh, you know, you just scan the APP, pick what you want, walk out. You can get $10 worth of products in 30 seconds depending on how nimble you are when you're in the store. So I, I think they've really solved something when using cameras that track exactly where you are in the store, track your movements to figure out what you picked up off the shelves, what you may have put back on the shelves.
Mark Mahaney: 12:24 I don't know if anybody's successfully has shoplifted from the stores. It'd be interesting to find out, but it's a really interesting innovative retail experience. Now, how broad is that retail experience? There is an increasing broad range of products that are in these stores today. And, um, yeah, if you think about where this could go 10 years from now, you think about the amount of time when you're in your average grocery store, and the amount of time you spend in that store in the checkout line. But that'd be a great little statistic. Somebody must have studied this, and uh, I'm just going to throw out a guess that it's anywhere between 10 and 25% of your time spent in the store is checking out. If what if somebody said you no longer needed to check out, but the go technology is not yet there. You can only work with barcoded items.
Mark Mahaney: 13:09 So those stacks of asparagus or I don't know how they would handle the salmon that you get from the Deli, you know, things like that. There's a lot of stuff it'd be very hard to figure out, but just the idea of where that could go in the future, I think that's very interesting anyway, so that's what I was struck by when I think about the physicalization of the Internet. I mean these pure place no longer really exists. Almost all of these digital companies stepping began digitally or trying to build up some sort of physical presence to better connect with customers, to offer more solutions and if they can do it in a way that's truly innovative, and I think these go stores are truly innovative, how scalable they are, what remains to be seen, how category broadening they are remains to be seen. But I'm going to go long on both of those concepts and ideas, and that's what I find very interesting to coming out of Amazon today.
Allison Hartsoe: 13:54 I also think that's interesting and I also think it's interesting that they start with something that I think is a little bit more difficult like stores that are grocery stores as opposed to maybe a drug store where everything is barcoded, and then it also makes me wonder how, how far can you stretch that? Just like you were saying a minute ago, how broad can you take that store? I'm up here in Oregon. We have Fred Meyers, which is a competitor to target and Walmart or at least the superstores where you have groceries on one side and then you have a product on the other side including clothes and things that might not be as commoditized furniture, and I wonder if the go store could be as broad as that. It seems like it doesn't really have a limit.
Mark Mahaney: 14:32 Yeah, I think that's how we should think about it. The trick is everything that's in those go stores now is Barcodable. These were great in urban environments. I'm not sure how useful they are in suburban environments, but the basic point about removing a pain point and there is clearly a pain point in checkout wait times, and maybe you don't think about it. When you get so used to the Amazon go store where you think about it the next time you're in that grocery store or in that convenience store or in that pharmacy, and you're waiting in line to check out and then all of a sudden you realize if there's a better solution than I've experienced one that was the Amazon go store. Why am I doing this? That's your Aha moment.
Allison Hartsoe: 15:12 We oftentimes think about customer equity, and on the show, we're always looking at how can I calculate or how can I get better customers, long term, higher quality customers, and Amazon is such a great example of that. They, as you've mentioned, there are attracting high-quality customers through prime. They've really got it dialed in on a loyalty program. They've built a fairly large moat, but when it comes to the retailer that's selling on the Amazon marketplaces, the amount of customer data coming through is very limited. Do you think a retailer to just take it for granted, Hey, I'm getting great services, I'm getting shipping services, I'm getting distribution, I'm getting all of this, all these great advantages, even though I don't get a lot of customer information. Are All those distribution advantages worth the lack of customer information?
Mark Mahaney: 16:01 I don't know. I think that's a very hard thing to answer as a general rule. I just liked the fact Allison, that you just pointed out the big trade-off. For each individual retailer, I don't know that there's a universal answer to that for retailers, but I would make the point that the companies that do best on Amazon or those that have more specialty-oriented, they're creating something that's a truly differentiated product. Probably not that retailers who are succeeding on Amazon to date because it just happened to have a very good supply of inexpensive, or a very inexpensive supplier products. If it's just cost that you're competing with, I don't think that's a longterm sustainable strategy and Amazon's marketplace.
Allison Hartsoe: 16:39 Yeah, I think that makes sense. And it kind of gets back to what you were just talking about with the go stores, not just the presence of the product that's in there, but it also gets into where should those stores be located. So if we look at Bonobos and their strategy, they took their best customers and decided to open the stores in reverse, you know, instead of using demographic information, they mined to the customer equity and decided, okay, we're going to open a store here because this is where our best customers are. Not necessarily, this is where the highest dollar four demographic is. And I think you could do the same strategy with Amazon. So if I'm a retailer today, maybe the strategy going forward is thinking about Amazon as a holistic platform for my business while also running my own pieces on the side. But boy, the costs add up on the retail side when you do it yourself, and you have to organize your shipping and your stores and everything else. Perhaps we're seeing the 50 50 mark between 50% of my strategy should be on Amazon and 50% should be alone. Maybe in the future, it moves towards more of a 75, 25, or even a hundred percent. Is there anything else about Amazon you think is being underestimated?
Mark Mahaney: 17:52 Oh, yes. One last thing, which is, you know, if all the different areas, uh, we haven't really talked so much about the Alexa echo system, and they started launching these Alexa devices a few years ago, and there are over a hundred million of these devices that are installed. Once you get to 100 million, you create something called the platform. 10 million is interesting. 50 million is intriguing, 100 million is a platform, something like that. And what they have done is I think they've created these devices in the home that it takes a while cause you're talking about changing human behavior, but it could impact how people shop in the extent to which people would spin around in the kitchen and say, Alexa, order more peanut butter. Like for a replenishment shopping where um, as a family or as an individual you have a real attachment to a brand, whether it's diapers, peanut butter or cereals.
Mark Mahaney: 18:43 Then you're not shopping based on selection. You're shopping based on price and convenience only. Then this Alexa devices could really have an impact. So just as we're talking now about how people kind of use sponsored product ads, sponsored listings ads to pitch against each other or to a jockey against each other for placement on the Amazon website or on the Amazon App. I just wonder if there isn't going to be an opportunity for retailers to jockey against each other for a placement within the Amazon Alexa Echo system now that it's become a large enough of an ecosystem, the warrant being called a platform. I'm very intrigued by that. This may still be five to 10 years away from really being a material shopping channel, but voice shopping within the home. I think that that's going to be a material part of overall shopping spend. Just given the ease of use and given the naturalness of it, the idea that you just turn around and say, Oh damn, we're out of Jiffy. Um, Alexa, order more Jiffy, and it'll say you last order three jars of Jiffy, 12 ounces for $12 and 58 cents. Would you like us to reorder? Like that speed that had the ability to tap into compulsive but regular shopping, I think that could be a real game changer the next five to 10 years.
Allison Hartsoe: 19:53 That's a fascinating point. It's almost like micro shopping, you know, instead of just going for one hall a week, I can micro shop the little pieces as I need them.
Mark Mahaney: 20:02 Yes, that's right.
Allison Hartsoe: 20:03 Well mark, this has been really great, so thank you for all of the, your comments.
Mark Mahaney: 20:08 Oh, thank you, Allison. It was nice chatting with you.
Allison Hartsoe: 20:09 Yeah, and I appreciate having you on the show. Remember everyone, when you use your data effectively, you can build customer equity, this is not magic. It's just a very specific journey that you can follow to get results. Thank you for joining today's show. This is your host, Alison Hartsoe, and I have two gifts for you. First, I've written a guide for the customer centric Cmo, which contains some of the best ideas from this podcast, and you can receive it right now. Simply text, ambitiondata, one word to, three, one, nine, nine, six, (31996) and after you get that white paper, you'll have the option for the second gift, which is to receive The Signal. Once a month. I put together a list of three to five things I've seen that represent customer equity signal not noise, and believe me, there's a lot of noise out there. Things I include could be smart tools. I've run across, articles I've shared cool statistics, or people and companies I think are making amazing progress as they build customer equity. I hope you enjoy the CMO guide and The Signal. See you next week on the Customer Equity Accelerator.
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