Question

Part A

Leonard Berry suggests that companies delivering great service as a differentiator may create a sustainable competitive advantage. Using Amazon as an example, what problems might some companies face in trying to create that advantage?

Part B

Amazon Prime, briefly mentioned in the case, is a subscription service that gives members free two-day shipping on hundreds of thousands of products, plus provides many other features such as access to music, movies, TV shows, book sharing, and more. In the United States, Prime membership is $100 per year. What affect do you think Prime membership has on customer loyalty and switching costs?

Answer 1

1. Leonard Berry suggests that companies delivering great service as a differentiator may create a sustainable competitive advantage. Using Amazon as an example, what problems might some companies face in trying to create that advantage?

            The overlapping business structures of Amazon make it difficult, but it's worth looking at Walmart has been doing to compete. They've started to actually increase their market share relative to Amazon in the past few years through strategic acquisitions and investment into new logistics infrastructure to handle eCommerce. Where Amazon differs from Walmart is its external software and cloud computing business (AWS), whereas Walmart's vast IT capacity is purely for internal use. It leverages these profits to increase market share by loss leading. Amazon is being targeted for anti-trust for loss-leading, with lawmakers arguing they need to separate logistics from the AWS side of the business.

The biggest threat to Amazon I imagine would come from some massive strategic acquisitions or corporate partnerships. Google has started to partner with Walmart to channel consumers to Walmart rather than Amazon and get a portion of revenue, and it's not hard to imagine Walmart partnering with content platforms (Hulu? Netflix? Disney+?) to offer a similar 'prime' bundle to what Amazon offers now. It looks a bit more like an oligarchy than monopoly, but the big players can compete on the same terrain.

In other countries, Amazon's business model has been challenged through economic nationalist arguments, saying that local competitors should be prioritized. This has been a big thing in India and why in China they’ve seen greater success with Alibaba. In Europe, this looks like a more aggressive anti-trust law.

Amazon Prime, briefly mentioned in the case, is a subscription service that gives members free two-day shipping on hundreds of thousands of products, plus provides many other features such as access to music, movies, TV shows, book sharing, and more. In the United States, Prime membership is $100 per year. What affect do you think Prime membership has on customer loyalty and switching costs?

            I think that the Prime membership is more than just the two-day shipping, although I believe that may be a huge reason that people sign up for it. Prime also includes a video streaming service, music streaming, a photo uploading site, discounts on items and additional services (such as Amazon Channels which is $14.99 for nonprime members and $4.99 for prime members). I think prime having all of these services helps ensure customer loyalty, but also having it be an annual membership and how it automatically renew means that people with continue to keep subscribing to the service unless they go in and cancel.

            Although because Amazon dabbles in all of the different services, it does not excel in any of them which means that people will not only subscribe to amazon prime, but also to Netflix, Hulu, or Disney+ in order to get more than amazon can offer. I think that if it were a service people had to pay separately for they most likely wouldn’t.

            Amazon Prime has however changed people’s prospectives of shipping speed. People used to be impressed with 7-10 business days for shipping and now if it isn’t two days they will often continue to shop. This is the same perspective people have gained on paying for shipping, although people are paying that $100 fee annually they aren’t really thinking about that fee when they order items, therefore on websites where they are not receiving free shipping they feel as though they are being ripped off. ITworld has calculated that someone would have to purchase at least 10 items with 2-day shipping, 20 items that cost under $35 (since they have a $35 minimum for free shipping when you aren’t prime), watch the videos on Prime instead of Netflix which has a similar per-year cost as amazon, and lend a book from the kindle library at least once a month. My guess is that most people don’t use all these services, but still continue to get prime because they think they’re getting a deal and good service at a good cost.