The 1980s and 1990s witnessed the slow death of the “mom and pop” general store, replaced by superstores like Walmart that sold everything from butter to guns. Regardless of one’s position on this trend, it makes classic economic sense: by buying in bulk, Walmart commands better prices with suppliers, and then passes on lower prices to consumers. (Walmart has even been accused of “predatory” pricing to drive mom and pop stores out of business, raising prices after their disappearance.) By aggregating every product under the sun, Walmart can lure consumers in to buy staples (sometimes sold at/below cost), and cross-sell them other impulse items.
There’s one primary reason why Walmart hasn’t completely taken over the world: geography. Walmart.com is a drop in the bucket compared to Walmart’s offline retail presence (remember that people spend far more money offline than online). Some communities keep Walmart out, New York City being one such example. And some people just live far away from Walmart.
But nobody can keep UPS or Federal Express trucks away, and the Walmart effect is going to be even more extreme online. This time Amazon is the big gorilla.
Consumers traditionally shop at retailer A versus B based on the intersecting calculus of five variables:
Price (actual price to consumer + “friction” in ordering process)
Geography (proximity to consumer)
Selection (do they have X in my size, or sell rare item Y?)
Service/Brand (do I trust/like them?)
Experience (is it easy/designed to shop for X?)
Internet commerce has witnessed incredible price transparency, where the Walmart effect can play out without any pesky geographical barrier for most items that UPS will ship; this explains why there are 41,000 shoe stores offline in the US but maybe only 5 of scale online. That leaves Selection, Service, and Experience. Selection explains why a small site like SquashGear.com is likely thriving, and Service shows how Zappos got to $1B in sales.
The danger is that when a niche becomes big, it will simply be invaded by Amazon, the Internet’s Walmart. I’m pretty certain that if Squash becomes the number one sport in America, Amazon will “go big” and put squashgear.com out of business by squeezing better prices out of suppliers and providing lower prices to consumers, combined with a world-class logistics engine.
If you’re an entrepreneur itching to get into e-commerce, remember that you can’t compete on geography (unless you’re cloning an existing retailer in a region where there is no Amazon), and you can’t compete purely on price. But here’s what you can do:
Cultivate a better shopping experience: BlueNile is simply a better place to shop for engagement rings. Zappos is a better place to shop for shoes. In some cases, what makes Amazon.com great (every shopping experience is the same) is also its greatest weakness. Some things are designed to be bought differently.
De-Commoditize: If you’re just another reseller of a generic commodity, you better have a pretty clear advantage outside of price…but these are often tough to come by. Diapers.com is one of very few companies that has out-Amazoned Amazon. If there’s something unique you can add to the order (e.g., proprietary software that consumers can use with the commodity good) it makes it easier to differentiate and provide value to the consumer in excess of a nominally higher price. For example, a vitamin reseller might be wise to develop a smartphone app to remind consumers of pill times…and bundle it with every order.
Build a marketplace for buyers and sellers, don’t be a reseller. Etsy, eBay, IronPlanet, Copart, Elance and others have built great value by focusing on the defensible art of the network effect. This area is far from played out, and there are many marketplaces waiting to be created for verticals from babysitting to piano lessons. The best marketplaces tend to be for frequently purchased items with a diverse quantity of sellers and few repeated interactions. For example, you want to eat at different restaurants, but typically go to the same piano teacher for years, so it’s easy to see why OpenTable might be bigger than a piano lesson marketplace.
Distributed commerce: Who can beat Amazon on price? The companies whose products are sold on Amazon! Outside of the Kindle, Amazon is merely a reseller — marking up the price of others’ products, so those “others” could theoretically beat Amazon in selling direct to consumer. But most manufacturing companies do not do a very good job selling products direct to consumer, and hate to risk channel conflict. And consumers prefer to shop at supermarkets, not “silo” markets. Imagine a world of decentralized commerce — where you can shop at any number of manufacturers within the context of one meta-shopping cart or wallet. It might be a pipe-dream, but it’s a huge opportunity that could beat Amazon on price and selection if the experience and service components could be filled in.