The Growth Levers in Retail: Price, Selection, Convenience

July 18, 2012 — 7 Comments

Feedback Loop No Outside Cash

If we were forced to reduce the secret of Amazon’s success to one simple concept, this would be it: Amazon churning hard on the Feedback Loop featured above.

This is absolutely critical to understanding Amazon. And not just retail. I mean every business line it’s in. So I’ll dedicate several posts to breaking it down, and then building it back up again.

Stick with me on this. It will be worth it.

The Growth Levers in Retail: Price, Selection, Convenience

In the world of retailing three variables are responsible for driving the lion’s share of growth. Price, Selection, and Convenience. Price is self-evident. When comparing apples to apples, customers want the lower-priced apple. Selection means the retailer offers the products the customer wants. And convenience means the shopping experience is streamlined, not confusing, not complex, and requires as little exertion from the customer as is humanly possible.

LCD Levers Simple

Think of these variables as levers a retailer can push, but that pushing each lever requires an investment of capital and other resources (e.g., management attention, supply chain capabilities, real estate acquisition, etc.) that diminishes your ability to invest in the other levers. You can choose to invest heavily in lowering the price of your products, marking them up less than your competitors. But that leaves you fewer resources to invest in having the widest selection possible or the most convenient shopping locations. Since capital and other resources are limited, each retailer must decide which lever to push the hardest making it a game of priorities and compromise. There are always trade-offs.

See the red X’s in the diagram below showing (in simplistic form) how retailers might choose to push their levers. At the far left, price gets the biggest investment, but selection is narrow and convenience is low. In this scenario (think discount grocer Aldi), the retailer is betting the very low price gets customers in the door even if they have to drive further to the store or have fewer items on the shelves to select from.

In the middle, the retailer only pushes any of the levers so far, aiming for balance instead of a big bet on any individual lever. This might be the case for a grocery store like Kroger. It wants to find the real estate that makes its store locations more convenient to customers so they won’t drive another five miles to Safeway or ten miles to a Walmart Supercenter. It will keep a wide selection to meet your full week of grocery needs without making trips to other stores. And it will charge the highest price it can without forcing customers to seek cheaper (but less convenient) alternatives.

And on the right we have the retailer that forfeits price investments in favor of a very wide selection and a high degree of convenience for its customers. This might be the Whole Foods approach.

Why do we call them the growth levers? I’ll get to that next
.

Paul Dryden

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Trackbacks and Pingbacks:

  1. Deconstructing Amazon’s Feedback Loop…A New Series | Paul Dryden - September 19, 2012

    […] feeds cash into the loop, investing in the growth levers – lower prices, wider selection, and enhanced convenience. This earns it a greater portion of […]

  2. Bringing It All Back to Amazon: Summary and What’s Coming | Paul Dryden - September 19, 2012

    […] Loop, the mechanism most responsible for the company’s success. See also the previous posts, The Growth Levers in Retail: Price, Selection, Convenience; Unlocking the Broad Middle (Hint: Price Is the Key); Sam Walton, Panties and Power Laws; The […]

  3. Sophie the Giraffe and the Productivity Loop | Paul Dryden - September 19, 2012

    […] Loop, the mechanism most responsible for the company’s success. See also the previous posts, The Growth Levers in Retail: Price, Selection, Convenience; Unlocking the Broad Middle (Hint: Price Is the Key); Sam Walton, Panties and Power Laws; The […]

  4. Why Is Price the Ultimate Competitive Advantage? (Playing Games) | Paul Dryden - September 19, 2012

    […] Loop, the mechanism most responsible for the company’s success. See also the previous posts, The Growth Levers in Retail: Price, Selection, Convenience; Unlocking the Broad Middle (Hint: Price Is the Key); Sam Walton, Panties and Power Laws; […]

  5. The Productivity Loop (Walmart’s Feedback Loop) | Paul Dryden - September 19, 2012

    […] Loop, the mechanism most responsible for the company’s success. See also the previous posts, The Growth Levers in Retail: Price, Selection, Convenience; Unlocking the Broad Middle (Hint: Price Is the Key); and Sam Walton, Panties and Power […]

  6. Sam Walton, Panties and Power Laws | Paul Dryden - September 19, 2012

    […] Loop, the mechanism most responsible for the company’s success. See also the previous posts, The Growth Levers in Retail: Price, Selection, Convenience and Unlocking the Broad Middle (Hint: Price Is the […]

  7. Unlocking the Broad Middle (Hint: Price Is the Key) | Paul Dryden - September 19, 2012

    […] This is the second post in a series about Amazon’s Feedback Loop, the mechanism most responsible for the company’s success. See also the previous post, The Growth Levers in Retail: Price, Selection, Convenience. […]

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