In 1994, Amazon.com founder Jeff Bezos read a statistic that said the Internet was growing 2,300 percent annually. He shaped this changing tide into a business plan that shattered supply chain and e-commerce barriers, leaving an indelible mark with the Amazon Effect.
Starting with booksellers, the e-commerce giant has pushed many retailers to shut down and threatens to redefine the standards of shopping in a digital world. Retailers are forced to lower prices, streamline their systems and processes, and reduce profit margins in favor of competition; Meanwhile, Amazon continues on its way to dominance.
First coined by Steve Weinberg in 2012, this is the Amazon Effect. Adapted from Charles Fisherman’s 2006 book The Walmart Effect, the Amazon Effect is the story of an entrepreneur and his realization of an idea.
This implementation of this idea is changing consumer habits and raising the bar for sellers. Let’s take a closer look at the parallels between the Walmart Effect and the Amazon Effect and explore the implications for the future of online and brick-and-mortar shopping.
What is the Walmart Effect?
According to the 2006 book, the Walmart Effect begins with the idea of offering consumers the lowest possible price to purchase goods by leveraging great purchasing power and a culture focused on cost-cutting.
Entrepreneurs and small business owners are under such tremendous pressure that many of them are going bankrupt. Lost sales from price and convenience competition are causing many retailers to close their doors.
What is the Amazon Effect?
The Amazon effect now has a few meanings.
First, consumers are being offered something so compelling that they are changing their buying habits, resulting in lost sales for retailers. Retailers are responding by adapting their sales strategies to the changing consumer needs.
Clearing out overbuilt brick-and-mortar stores, improving the customer experience, and updating fulfillment networks and systems are slow and expensive endeavors. Retailers who react too slowly are forced into bankruptcy. The consumer experience is relatively unphased as shopping opportunities remain plentiful.
Is the Amazon Effect the New Walmart Effect?
Amazon offers third parties several ways to compete, but has the benefit of configuring the rules so that Amazon (the company) always wins.
While Amazon’s third-party vendors have extensive control over pricing, it can be difficult to sell more products when Amazon can achieve the same process with smaller profit margins. The game has changed and retailers, manufacturers and sellers must react quickly or face extinction.
In essence, the Amazon Effect has become the new Walmart Effect.
What does the Amazon Effect mean for retailers, entrepreneurs and small business owners?
In their recent book, The Amazon Marketplace Dilemma: A Brand Executive’s Challenge Growing Sales and Maintaining Control, authors James Thomson and Joseph Hansen examine dozens of strategic considerations that a brand needs to consider when developing and executing the right Amazon strategy.
They state that the five pillars for a strong foundation on Amazon are: branding, distribution, pricing, product availability, and catalog selection. In June 2017, sportswear giant Nike announced that it would sell its products directly on Amazon.com to improve the Nike customer experience. Previously, Nike products were only available on Amazon through third parties.
The same tactics used to overcome the pitfalls of the Walmart Effect, such as focusing on local selling strategies, listening to consumers, and offering more than a single product/service, can protect small business owners and retailers from this threat.
Use the lessons of the past to protect yourself against Amazon’s growing power
Amazon shares many similarities with the rise of Walmart, but it’s possible to stay competitive with the online giant. Protect your assets by integrating systems and reducing your supply chain costs.