“The finest strategies are those in which other competitors do things largely, if not diametrically, opposed to what you do.” – Roger Martin
Amazon’s march across the different parts of retail has been forceful and made it the dominant player in the industry. The aggressive expansion of Amazon has been a key driver of strategy for retailers of all types.
Many companies have tried to directly compete with Amazon but, time and again, those attempts have failed.
However, there is one company that has been able to challenge Amazon at its own game. This new competitor’s challenge has been significant enough that Jeff Bezos himself has become directly involved in leading the effort to eliminate the challenger’s edge. Who is this challenger that has been able to do what so many others have not?
Process vs. Relationship: A Small but Significant Differentiation
To get to the core of Shopify’s differentiation, we need to look at one of Amazon’s most compelling strategies – the development of Amazon Marketplace. During the last 10 years, Amazon Marketplace has grown rapidly by giving small merchants access to selling with seamless integration into the coveted Amazon.com space and access to a built-in base of millions of customers. These small sellers also have the advantage of access to Amazon’s logistical excellence, which, for online retail, is essential for maintaining customer satisfaction and repeat business.
However, there is a major flaw. In the Marketplace structure, the most important part of the business remains in the hands of Amazon. That is, the relationship with the end-consumer. From the consumer’s viewpoint, they are purchasing from and doing business with Amazon. The actual merchant, who is carrying the inventory risk and selling the product, has minimal visibility. So, at the end of the day, the customer relationship is with Amazon, not with the merchant.
Amazon’s core business revolves around building relationships with end-customers and then using the data created from them to drive strategy and growth. The more customers Amazon gets on its platform, the more data it can generate. Further, more customers lead to a more attractive marketplace for sellers and greater revenue potential for Amazon’s advertising and logistics services.
Shopify’s business model is diametrically opposed to Amazon’s in this respect. Shopify does not insert itself into merchants’ relationships with their customers. The company provides the seller with the tools it needs to build its business, but the seller is ultimately responsible for attracting customers and maintaining those relationships, and it is the seller’s brand that benefits from those successful relationships. And, after all, retailing is a business of creating and maintaining customer relationships.
This small but crucial difference is the key to Amazon’s struggle to respond to the challenge posed by Shopify’s meteoric rise. To put perspective on that growth, according to Forbes, Shopify reported revenues of $2.9B for the fiscal year 2020—an 86% increase over the previous year—and it is not slowing down.
Shopify is a textbook example of great strategic differentiation. Great strategies focus on what is essential in an industry and turn that around. Another example of effective strategic differentiation is the success of German discounters and why they are difficult to copy. They are doing differently some of the most essential things for the grocery industry.
Whereas traditionally, grocery retailers attempted to lure customers by creating ever-larger assortments, German discounters countered that strategy by offering less. That gives them a huge advantage from the perspective of the efficiency of sourcing and in-store processes. Creating smaller assortments also counters the effects of the “paradox of choice”—when shoppers are given too many options, they are less likely to choose. This is a particular problem for online retail and can lead to lost sales.
Poking the Lion: Never Underestimate Amazon’s Adaptability
Late last year, it was reported widely in the business media that Jeff Bezos became concerned about the rise of Shopify. According to the media, Amazon established its ”Project Santos” to replicate some parts of the Shopify business model.
Copying Shopify is reminiscent of the late 1990s, when Bezos led Amazon to copy the eBay business model, which he deemed ”perfect” at the time. Initially, the project was ill conceived, and attempts failed time after time. However, by the 2010s, Amazon Marketplace was live and ready for serious growth. Today, it represents over 60% of all products sold on the Amazon platform. Even if “Project Santos” does not progress the same way the eBay project did, it would be a grave mistake to disregard Amazon’s ability to innovate and change its business model in the face of emerging competitors.
If Shopify has taught us something, it is to remember the words of famous strategy professor Michael Porter: ”Strategic positioning means performing different activities from rivals or performing similar activities in different ways.”
Everyone in the retail industry has learned by now that it is near madness to try to compete head-on with Amazon. However, several companies have been able to survive successfully alongside Amazon by doing things that Amazon either will not or cannot do.
Currently, Shopify is the best example of this. Focusing on the most important part of Amazon’s business—the customer relationship—and giving that back to the individual merchant, Shopify has put Amazon in the position of having to reconsider its position on something that it will find very difficult to give up. That gives Shopify its advantage and the time and space to keep growing, at least for a while.