At Exact Media, I’m lucky to have the opportunity to work with some of the brightest minds in Retail and eCommerce on a daily basis. At every conference, and in almost every conversation, the inevitable question comes up:

 “How do I beat Amazon?”

After doing some deep thinking on it, I think I found the answer.

“You can’t. I’m sorry. Let me explain why.”

Founded in Jeff Bezos’ garage in 1994 as a simple online retailer selling books, Amazon has now grown into a near half-a-trillion market cap company.

Amazon’s core retail business is light years ahead of the field. But it gets scarier as you begin to break apart all the pieces that make Amazon such a brutal competitor in the world of retail.

Deconstructing the Amazon Mothership

When going up against Amazon as a retailer, it’s important to understand that while you have only one or two sources of revenue to build your war chest, Amazon has multiple billion dollar businesses that it can rely upon to fight battles on the retail turf.

As a retailer, here’s what you’re up against:

  • $1 Billion (and growing) Advertising Network
  • National Third Party Logistics Provider (aka Amazon’s Fulfilled By Amazon service) — which also helps Amazon compete with smaller services like UberEats with 1-hour restaurant delivery in key cities.
  • Free Shipping Subscription Service (aka Amazon Prime) with a complementary Netflix and Spotify competitor tacked on for free with Amazon Video and Amazon Music.
  • Amazon Movie Studios which helps secure original content for Amazon Video
  • A broadcaster that just secured rights to stream the NFL’s Thursday Night Football games as well as streaming eSports through Twitch.tv
  • A Multi-billion dollar cloud server business, Amazon Web Services, that powers multiple Billion-dollar Unicorns such as Netflix, Pinterest, AirBnB, Slack, Spotify, Stripe and Yelp (notice how Amazon Video + Music compete with the businesses they power through AWS) as well as key services for more mature businesses like Expedia, Adobe, AdRoll, Alcatel-Lucent, Citrix, Comcast, Conde Nast, General Electric, NASA and the NASDAQ.
  • A digital and audiobook publisher through Audible.com
  • Hardware manufacturer (Amazon Echo, Amazon Kindle Fire, Amazon TV) that competes with Google, Apple, Samsung and others.
  • A more “traditional” Flash Sales (6PM.com, Woot) and Full Price (Zappos) fashion retailer, all three of whom most likely rival if not eclipse the current independent, or recently acquired competitors in the market.

I’m pretty confident you can search for “Amazon _______”, fill in the blank with any term your heart desires, and discover Amazon has a division working on it.

The point that’s being made here is that Amazon has so many sources of income, they can easily compete on price on any individual category.

Case-in-point, they initiated a price war on diapers with Quidsi.com, dropping prices by 30%, essentially forcing Quidsi’s Founder, Marc Lore, to sell his company to Amazon.

What might surprise you is that Amazon is not always the cheapest.

Perception drives Reality when it comes to Pricing

Jeff Bezos, the Amazon Founder, is famous for his Nostradamus-like view of the future.

“‘What’s not going to change in the next 10 years?’…[I]n our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want vast selection. It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff I love Amazon; I just wish the prices were a little higher,’ [or] ‘I love Amazon; I just wish you’d deliver a little more slowly.’ Impossible.” — Jeff Bezos

However, in a recent study conducted by Boomerang Commerce, the price is the same for 63% of items listed on both Amazon and Walmart.

When shopping for beauty products or home essentials, Walmart is actually cheaper than Amazon. But in electronics and video games, Amazon has the lower prices.

Overall, Amazon is a half-percent cheaper than Walmart, but more importantly, by strategically pricing the most popular items incredibly low as compared to Walmart, it drives the perception that Amazon is significantly cheaper no matter what you shop for.

Where Amazon really locks shoppers in is through Amazon Prime, which delivers fast shipping and convenience.

It Starts with Prime

Through Amazon Prime, which is projected to reach 80 Million individuals, or 24.5% of Americans as of March 2017, you can get any Prime eligible item delivered to your home within 2 days. In select US metro areas, you can even get free one-day or free same-day shipping.

There are even designated Prime Now cities which offer free 2-hour delivery of essential goods (and 1-hour delivery from restaurants).

This locks in consumer spending by a huge margin. When comparing Amazon shoppers who have a Prime Membership to those who do not, Prime Members spend 2.4x more than non-Prime members on Amazon.

Combine the free two-or-less-day shipping, the convenience of never having to leave your home, and having access to what feels like an unlimited selection of SKU’s on Amazon, even though consumers may not always get the cheapest price on every item, the convenience of shopping in one place with all these benefits helps Amazon capture a tremendous share of your overall spending.

Unfortunately, if that isn’t compelling enough, Amazon has a few more tricks up their sleeve.

The Cloud to Rain on your Parade

One of the secrets behind Amazon is the technology they built to power their online operations.

In layman’s terms, it’s a system of servers called Amazon Web Services, or AWS for short, which was originally built as an internal service to let Amazon Engineers quickly build and launch new features for Amazon.com.

Amazon quickly realized that what they’re building could actually be very valuable to other web developers, and launched AWS to the public in 2006.

As of January 2016 it’s a $7.88 Billion business, growing at 69% year over year. That’s about 50% of Walmart’s online revenues, and also more than Macy’s, Costco, Best Buy, Sears or Home Depot sell online. This gives Amazon an incredibly huge war chest to go to battle against any competitor that challenges them.

Some of the most valuable companies in the world are also powered by AWS, including Billion-dollar Unicorns like Netflix, Expedia, Reddit, Pinterest, AirBnB, Slack, Spotify, Stripe and Yelp. Amazon even has their own competitors to Netflix and Spotify in Amazon Video and Amazon Music.

When competing against Amazon you’re also indirectly competing against some of the worlds fastest growing Unicorns that pay to use Amazon’s services. But Amazon is not done.

In the War for Talent, Amazon has a 22nd Century Army

The companies who attract the best, brightest and most innovative individuals will typically become the best, brightest and most innovative companies. Yet again, Amazon comes out on top in talent as well.

In a 2016 study by Universum of ~72,000 undergraduate students in the US, Amazon was ranked as:

  • The #7 most ideal employer for Computer Science students, ahead of Tesla, SpaceX, Intel and Uber. The next highest multi-brand retailers on the list are eBay at #62 and Target at #80.
  • The #9 most ideal employer for Business students, ahead of Facebook, Microsoft and Major League Baseball. The next highest multi-brand retailers on the list are Nordstrom at #16, Target at #33 and Macy’s at #45.
  • The #28 most ideal employer for Engineering students. No other multi-brand retailer cracked the Top 100. 

Amazon even built a Bot Army, which it deployed against Walmart to prevent the company from scraping price data from Amazon’s website.

How Others are Competing

Larger retailers like Nordstrom, HBC, QVC and Walmart have tried to close the technology and talent gap by acquiring companies like HauteLook, Gilt Groupe, Zulily and Jet.com.

Walmart, under the leadership of Marc Lore (Founder of Jet.com), has taken it a step further, and begun exploring using Walmart’s unique strengths and assets to compete — for example, leveraging their 1.2 Million employees who work in their 4,700 US Stores to handle final mile delivery for customers on their way home.

My personal prediction is that Alibaba, with a similarly impressive technology stack and dominance in their home market of China, is best positioned long-term to fight Amazon head-to-head over the next 5 to 10 years.

Unless you have the unique assets of a Walmart, or the security of a powerful home market like Alibaba has with China, you have a limited set of options to consider.

How you Can Compete

There are a few ways you can think about thriving in an Amazon-dominant world.

Consider Cooperation

For all but the largest retailers who have the wherewithal to go toe-to-toe with Amazon, cooperation is the most logical option.

This is not to say to abandon your own online store — there are clear benefits to maintaining your own unique presence online.

Cross-list your products on your own site as well as Amazon.

Consumers who visit Amazon typically have a clear purchase in mind, and with their payment information already setup on the site, along with the trust they have in Amazon taking care of them post-purchase, Amazon boasts an impressive 13% conversion rate, 3.9x the average conversion rates across the other Top 500 online merchants.

If the products you sell on Amazon are Prime eligible, that conversion rate jumps up to 74%.

Look Outside the US

Internationally, Amazon is only really showing dominance in three key markets — Japan, Germany and the UK.

That leaves ~190 other countries to which you could potentially sell to without going head-to-head with Amazon.

Tactically, selling internationally has never been easier. Leveraging technology from a company like Flow Commerce (Co-Founded by Gilt Groupe’s Co-Founder and CTO) can help you instantly setup international pricing with a few simple integrations.

There are also partnerships to explore with competing international marketplaces, such as Tmall (owned by Alibaba) in China.

Big retailers like Target, as well as entrepreneurs from countries around the world like Australia are seeing success in partnering and selling on Tmall to access the Chinese market.

Invest in Building a Powerful Brand

There is only one thing Amazon cannot replicate — a unique, powerful brand.

While they have the war chest to able to build and fund a competitor, brands are inherently emotional assets that money alone cannot replicate.

There are numerous great examples of the power of brand building in the past few years alone.

Dollar Shave Club, the subscription shave products company built off the back of a viral YouTube video, recently sold to Unilever for $1 Billion. 

Casper, the mattress and sleep products manufacturer, was reportedly offered $1 Billion to be acquired by Target, before the parties mutually decided to turn it into a $75 Million investment by Target into the mattress company.