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Be Afraid. Be Very Afraid.

By Susan Bloom

Industry expert Justin King believes that distributors should be “terrified” following the recent launch of Amazon Business Prime.  Here's why and how he suggests they compete with the online giant.

On October 24, small businesses were rocked by an announcement they'd long dreaded—Amazon's launch of 'Business Prime Shipping,' a service which offers business customers unlimited free two-day shipping based on a tiered pricing schedule (e.g., $499 for up to 10 users, $1,299 for up to 100 users, and $10,099 for over 100 users).  With the announcement—which represents the extension of Amazon's profitable consumer-focused Prime service to its business customers for the first time—small businesses like electrical distribution firms are now under even more pressure to shore up their logistics and service capabilities in order to compete with the online giant.  But opportunities still abound according to industry expert Justin King, senior partner at Washington, D.C.-based B2X Partners (www.B2XPartners.com) and co-founder of the DigitalBranch (www.digitalbranch.co), who confirmed that savvy distributors who cover the basics and capitalize on their service strengths can still win in the increasingly competitive marketplace for electrical products.

In the following interview—part of tED magazine's continuing series of strategic discussions on Amazon developments with King—he discusses the threat that Amazon's latest announcement poses for electrical distributors and the approach distributors must now take to successfully compete.

tED magazine:  Please help frame Amazon's decision to introduce Amazon Business Prime Shipping.

King:  According to their annual reports, Amazon derives its revenue from three key pillars—Amazon Prime, Amazon Web Services, and Amazon Marketplace.  As shared in the book 'Everything Store,' author Brad Stone reveals that the idea for Prime was first conceived during a 2001 meeting over coffee between Jeff Bezos and Costco founder Jim Sinegal, who told Bezos, “Costco buys in bulk and marks up everything at a standard, across-the-board 14 percent, even when it could charge more. It doesn't advertise at all, and earns most of its gross profit from the annual membership fee.” In 2002, Amazon tapped into this model by introducing a new service called 'Free Super Saver Shipping' for orders over $99, which quickly dropped to $49 and then $25. This set the stage for the new subscription club membership 'Amazon Prime'….and now we have Amazon Business Prime. I believe that we'll see the same results—e.g., Amazon deriving most of its Amazon Business revenue from the Prime program and not on profit from product sales.

tED magazine:  How should electrical distributors feel about this announcement?

King:  This is the biggest and scariest announcement we've seen from Amazon in the last several years and distributors should be terrified.  Amazon has now extended a core pillar of its company to business customers and we can be assured that it will have Amazon leadership's full attention and backing.  Amazon has the scale, fulfillment, and procurement capabilities to not care whether they make money on the products they're selling because they make so much money on Prime.  This announcement is a big swing at small businesses like distributors and contractors—now, a small electrical contractor can give 10 people access to Business Prime for $499 (just $50 per person, half of the $99 Prime cost to consumers), save costs on shipping (which can definitely add up), and receive any product in under two days, enabling small companies to have great service at their fingertips.  Amazon's reach today is extensive—recent studies show that 55% of all online product searches today take place on Amazon first instead of Google, where customers would find their local distributor or retailer, so this announcement is definitely a major threat to distributors.

tED magazine:  In light of this development, how can distributors compete against Amazon?

King:  Despite the obvious threat this announcement poses to distributors, I feel confident that they can effectively compete against Amazon by being savvy and covering all of their bases.  Among the strategies they should consider are preferential shipping pricing (like loyalty, membership, or top-tier structures) to reward their best customers as well as the provision of rebates and/or membership programs for online orders.  Distributors should also keep improving their product data to make the navigation and search processes faster, smoother, and more rewarding for their customers than searching through the huge assortment that is Amazon.  In a nutshell, we're recommending that distributors drive customer relationships with a 'Digital PLUS' approach that capitalizes on their current strengths and competitive advantages, which include responsive, reliable, and friendly customer service available in person or via chat, phone, and e-mail mediums, deep product knowledge, emergency support, and services including everything from installation and vendor-managed inventory to education and events.

tED magazine:  Please explain the 'Digital PLUS' approach further.

King:  Digital PLUS essentially refers to the ability to offer solid digital capabilities plus a fantastic customer experience.  While Amazon has many strengths, it also has many weaknesses, the largest of which is that they have no product knowledge or customer service—while they're good at making a catalog available and delivering products to customers, people can't call Amazon and ask them about anything.  Those personal relationships and product knowledge skills/expertise are the distributor's competitive advantage, so Amazon's announcement presents opportunities for savvy distributors to double down on great customer service, delivery, etc.  When customers do want help or want to talk to someone about a product or project, those are cases for differentiation.

Of course, Digital PLUS requires that you have the 'digital' part down too.  On that front, distributors need to have at least the three basics—a search engine that can help customers find what they're looking for, the ability to answer key questions involving current inventory of that product, its price, and its availability/when customers can get it, and the ability to conduct the transaction.  The first step in this process involves 'journey-mapping' to identify how customers interact with you and then the application of automation to the appropriate processes in your company (with humans overseeing them), which requires good product data at its very core.  Overall, you want to digitize your processes such that it provides a positive, simple experience that delights customers.

tED magazine:  What final takeaway message would you share with distributors regarding Amazon's recent launch of Business Prime?

King:  Amazon is a force to be reckoned with and one that's not going away fast.  While distributors can't pretend that their customers aren't going online, it's imperative that they optimize their digital experience and triple-down on their strengths through a Digital PLUS approach.

Bloom is a 25-year veteran of the lighting and electrical products industry. Reach her at susan.bloom.chester@gmail.com.

 

 

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