Making Your Margin Your Moat: How to Survive the Amazon Era

In this piece for RetailTechNews, Al Hussain (pictured below), senior strategist, Verbal Identity, outlines the lengths businesses must go if they are to stand the test in an era being dominated by online retail giants. Everyone’s worried about Amazon entering their industry. Just the thought of it can reshape markets. On the recent news that Amazon acquired Pillpack, the three largest pharmaceutical chains in the U.S. collectively tanked USD$11bn (£8.56bn) in one day.

But what is it specifically about Amazon that scares people? Efficiency. Amazon is a ruthlessly efficient machine. As Jeff Bezos put it, "your margin is my opportunity". That terrifies executives at other companies. They panic – "How can we cut costs? Who can we let go? How can we become more efficient? How can we be more like Amazon?" But that’s trying to solve the wrong problem.

You won’t be more efficient than Amazon. Even if you could be, Amazon can afford to lose billions just to put the squeeze on a new market, because they’re drawing revenue from a whole bunch of other places. Instead of trying to out-Amazon Amazon, step back and take a breath.

You’ll realise the implication inherent in Bezos’ quote is based on a false assumption about how human beings work. He’s implying that people only buy things based on price.We know that’s not true.

Al Hussain, Senior Strategist, Verbal Identity

Human beings aren’t strictly rational. Homo Economicus doesn’t exist. Or at least, if Homo Economicus does exist, the factors that go into his decisions are far more complex and volatile than most economic models account for. Our perception of value isn’t just based on rational utility. It’s also based on emotional desirability and the myriad cognitive biases that affect our thinking at any given moment.

The luxury sector knows this. The best luxury goods companies have been brilliant at taking advantage of it. And now other companies are doing it, too. They do this by defining a compelling brand vision and story, and communicating it to the wider world. As Walpole’s CEO, Helen Brocklebank, says: “Storytelling is the heart of luxury; it is what casts its enchantment over us, conjuring up emotions that pull us towards beautiful objects and make experiences unforgettable." 

This strategy relies on creating strong, desirable associations, which used to require a visibly heavy marketing spend with big print ads and TV campaigns. It also used to require big, glitsy flagship stores in prime retail locations. However, now there are many more channels to use, and not all of them cost a lot of money.

The key is to use those channels in a coherent way that amplifies your brand’s vision. Here are three ways that companies are using these channels to create value that justifies a margin:

Exceptional delivery: In e-commerce, your delivery team are your shop staff. This means they’re an opportunity to create a relationship with your customers. For example, JD.com, China’s second largest e-commerce site, recently launched a ‘luxury’ delivery service with ‘handsome’ staff wearing white gloves, to differentiate their offering. And in the UK, who doesn’t love the supermarket delivery person who offers to put your food straight into the fridge? (Of course, the flipside is the Yodel guy chucking a parcel over your fence and scarpering. Ugh.)

Radical Transparency: Companies like Everlane and Brathwait use their website and social media to communicate their vision of radical transparency. Consumers value this honesty. Both companies even show breakdowns of the costs that go into making their products, and the margins that they’re making. Other companies can build trust using this technique, regardless of the industry they’re in. The challenge is living up to the promise of transparency throughout the customer journey.

Community: People value curated social interaction. In the world of cycling, Rapha does this brilliantly. People are happy to spend more on Rapha shorts because they get access to a community (‘clubhouse’) of like-minded people. Any shared interest is an opportunity to create a community. If you’re delivering pharmaceutical drugs to people who suffer from a particular ailment, why not invite them to (anonymously) join an online support network exclusively for other people in the same situation.

The spectre of Amazon looms large across many industries. Only a couple of weeks ago, Bernstein analysts published a report warning that it is well-placed to get into wealth management. As Amazon’s quest for world domination continues, online retailers and brands have the means to protect themselves by creating a compelling vision and story that justifies their margin and delivers on more than price.