Amazon transforms data into bricks

There’s been a lot of news lately about Amazon opening physical stores. These news articles keep interrupting my regular stream of stories about digital transformation. Or are these topics the same?

Digital transformation involves using technology to improve performance and/or experience. The tool kit to do this is largely software-based and includes improved integration and workflow, analytics, mobility, social media and IoT devices.

Due to Amazon.com’s advantage in price and selection, the company has become a retailing behemoth at the expense of local retail. Store closures are about to hit a 20-year high, and malls are dying. This is unfortunate because retail centers provide more benefits than shopping. They are gathering places and contribute tax revenue for their municipalities.

+ Also on Network World: Can Amazon be stopped? +

On the surface, it seems cruel that Amazon is opening stores in some centers where Borders Books and Barnes and Noble once flourished. Because Amazon’s new stores are a bit unusual, many people think the effort is destined to fail.

For example, in a Quartz post titled “Amazon’s first bookstore in New York City sucks the joy out of buying books,” Thu-Huong Ha laments: “The store seems to miss the point of buying books in a physical location.”

For another example, here is Kevin Lewis’ comment on a Publisher’s Weekly post: “So I’ve got to consult a device or an app to find a price, huh? What kind of user-hostile procedures do you have to go through to get coffee? I’m simply not going to a place where I have to jump through hoops and play Simon Says just to look around.”

These views miss that realistically Amazon has no intent to re-create Borders. Amazon does not generally compete in established markets. Instead, it applies digital technologies for an advantage that, more times than not, changes the game.

The world has largely moved past traditional bookstores. Comparing Amazon’s new bookstores to existing big-box or even independent booksellers is not useful. Brick-and-mortar retail will remain in decline until someone figures out how to re-invent it. Godspeed Amazon.

Amazon’s move into physical stores appears to be a new twist on augmented reality. Instead of using digital visual cues to supplement what we see, Amazon is using digital technologies to change the model. Here are a few examples:

What is Amazon really selling?

The natural assumption is Amazon bookstores are selling books, but there’s more to it than that. Amazon is really selling Prime memberships. Once a person buys Prime, they no longer feel obligated to comparison shop. Instead, they work to get the most out of their fixed price membership. Every purchase increases the value derived from Prime membership.

It’s a win-win situation because Prime customers spend 2.7 times as much with Amazon as non-Prime members, according to Evercore. Rather than earning customer loyalty, Amazon has figured out how to sell it.

Initially, Prime was associated with free two-day shipping, but it now includes video, e-books and music services. An increasing number of products and services are available only to Prime members. At these new bookstores, there’s a separate, lower price for Prime members. Don’t worry, Amazon makes it very easy to join Prime.

Amazon’s stores also feature Kindles, a product that many retailers avoid or have avoided in the past. Each store has an electronics section for Kindles, Amazon tablets and Amazon Echo devices. This is a page from the last time retail was up-ended—by Apple. If you recall, Apple started opening stores at the same time computer retailing was considered dead. CompUSA and Gateway were closing stores. Apple determined that it had to control the hands-on experience and training of its staff, and now Amazon is doing the same.

Both Prime memberships and Amazon electronics strengthen the customer relationship and simplify future shopping. Amazon’s bookstores are really a front for its digital retail expansion.

Curation

Key to Amazon’s online success is its extensive selection. The retail mantra has been value and selection for eons—think of the Sears catalog. However, in the age of the internet, a large physical selection can backfire. Many companies, such as Costco, drive profits by limiting selection.

Too much selection can cause inaction and decrease satisfaction. This is sometimes referred to as the paradox of choice. Traditional bookstores offered a lot of choice, but Amazon’s new physical stores don’t.

It’s a bit ironic that Amazon.com was optimized for the browser and its in-store experience is being optimized for browsing. Just as on the website, the book covers face out toward the shopper. Evidently, people do judge books by their covers.

Amazon’s in-store experience is further enhanced with a curated collection of books, all of which have a minimum of four stars on Amazon.com. Customer reviews, not just sales, impact the selection. Additionally, categories that do best in physical stores, such as children’s books and cookbooks, are the largest sections.

Digitally enabled

Amazon’s new stores are also a bit more digital than most physical retailers. For example, the books don’t have prices. The easiest way to check the price is with the Amazon smartphone app which enables personalized pricing (such as Prime or non-Prime). It also allows Amazon to apply its sophisticated pricing algorithms to in-store purchases. Amazon.com changes prices on products frequently—and sometimes dramatically.

Having customers scan prices also facilitates the collection of purchasing intent information (targeted and macro). Like Google and Facebook, Amazon also determines purchasing intent for marketing purposes. While most physical retailers struggle to personalize marketing based on what was actually purchased, Amazon not only does that, it also has the ability to personalize marketing based on what was scanned and not purchased.

Amazon’s move to open physical stores should not be interpreted as a capitulation that physical retail has it right. Instead, it appears Amazon sees an opportunity to disrupt with books (again), and that existing physical bookstores are still too analog in a digital world.