Adventures with Amazon

Supported by Greenhaven Road Capital, finding value off the beaten path.

Brent Beshore and the crew have a page on their website dedicated to Amazon, comparing the company to a gorilla and the Borg. They step cautiously around businesses that might enter that Seattle based gravitational field and that might pass the event horizon into the Amazon vortex never to be heard from again.

But they don’t stop looking for companies.

And they quote Sun Tzu, If your opponent is temperamental, seek to irritate him…If his forces are united, separate them. Amazon’s size is a strength but also a weakness. Anyone competing or aligning with Amazon should know those strengths and find some weaknesses.

Moneyball arose because of strengths turning into weaknesses. Bill Gurley contrasted technology companies doing this. It works for tennis, war, and careers. How might it work for Amazon?

This post is also a podcast episode: iTunes, Overcast, or Soundcloud.

Rising Transaction Costs.

This post began when I had to buy Apple charging cables. In addition to normal wear and tear, my family members suffer from a, ‘I lost mine and I’m taking yours’ affliction.

A search for “lightning cable” in electronics yields 400 results. Just like Starbucks, there are different flavors, colors, and sizes. But something is amiss for a product like this. Do that many choices make sense?

Michael Munger reminds his Duke students that transaction costs are market frictions, and more friction means less exchange. Adopt the point of view of the consumer and ask:

  • Can I find what I want?
  • Can I trust it is what I want?
  • Can I fairly exchange money for what I want?

Amazon can be excellent at this. The company started with books where one hardcover was like another. Amazon also has great search and sprawling selection. Part of the reason bricked bookstores struggled was that Amazon reduced the friction.

The timing mattered too. Amazon (1994) arrived with eBay (1995) and the companies normalized internet strangers as transaction partners. One notable moment was when about 10% of all items on eBay were Beanie Babies, which is its own story of transaction costs. Beanie Babies were a regional toy, the value was in the eye of the beholder, and people had set up complicated systems for trading. Then the collectors found eBay.  Zac Bissonnette wrote:

“In order to lure people out of their comfort zone and into the idea of e-commerce—and, even scarier, peer-to-peer e-commerce—eBay needed to offer consumers something that was easy to ship, couldn’t be found anywhere else and elicited passion among the people who were looking for it.”

eBay reduced the transaction costs and a bubble was formed.

In the late 1990’s eBay was probably the more impressive company. They owned no inventory, pioneered internet trust, and (thanks to Paypal) popularized digital payments. eBay had everything people like about Uber, Airbnb, and AliExpress. But “In 2000, U.S. Patent No. 5,960,411 caused to have to intentionally complicate its online checkout process. The patent owner? Amazon.”

What did that patent do? One-click payments.

What did one-click payments do? Reduce transaction costs.

Amazon is great at exchanging money for items and then if necessary, returning items for money. In the decade of use, I’ve only had two returns and both times Amazon issued a refund, no questions asked. I didn’t even return the item.

However, it’s getting harder to find the right thing. A WSJ  podcast warned about vendors gaming the system. Somehow there are 400 options for a charging cord. Rory Sutherland noticed the same thing about toasters.

Amazon passed Barnes and Noble because they made it easier to find, order, and pay for a book. How true is that now?

Shopping or buying.

Rich Barton told Barry Ritholtz that his kids use their Alexa speaker rather than the Sonos one which is an app tap away. The kids just want to hear the song, not to hear the song beautifully.

The same is true for Tom Goodwin’s point about shopping and buying. Sometimes people want “to own something without thinking about it.” That’s buying. Other times people want to browse, seek, or hunt. That’s shopping.

This is why ridesharing is not a winner take all market. A (safe) ride is a (safe) ride just like a hardcover book is a hardcover book. But the same doesn’t hold for your destination. One vacation is not just like another vacation. One hotel is not like another hotel — well, it kind of is but hotel loyalty programs can make it seem like it’s not. Destinations are differentiated, getting there is not. 

Ride-sharing is buying, vacationing is shopping.

Amazon is more buying than shopping.

Dollar Shave Club started because buying razors is about convenience, not experience. The best performing Dollar General stores are near Walmart stores because it’s more convenient for someone to shop the smaller footprint. More than 100 million Alexa devices have been sold and these are perfect for restocking dog treats, toilet paper, and granola bars.

Restaurants are another sector of business that has differentiated between experience and convenience. When Ron Shaich expanded Panera Bread he looked for cheap rents in suburban areas where people could linger, hold meetings, and enjoy family meals. From the bagels to the booths, Panera has always been about experience.

Contrast that with meal delivery services. Door Dash co-founder Tony Xu said, “To make the shift from selling experiences – going into the store – to convenience and they need a business partner to help them.” It’s why UberEats was such a larger part of their IPO paperwork and why co-founder Travis Kalanick is focused on ‘cloud kitchens’.


The Orlando Cousins Maine Lobster truck puttered up to where I live at the end of April. My family went for lobster rolls, lobster tacos, and whoopie pies. This once a month effort is about serving people an experience. But food trucks at lunch are about convenience, quickly serving people something new.

Music too has faced the split between convenience (buying) and experience (shopping). Compact disc sound quality was overengineered. The music industry was selling experience when people wanted convenience. Napster didn’t succeed because of the price was free. Napster succeeded because the songs could tag along. How do we know? Apple created the iPod (and along with lawsuits) the free music sites went away. Netflix went into streaming and the free movie sites shriveled.

Consumers hire businesses to do a job and businesses succeed when they do that job and adapt with the customer. Which brings us to the third point.

Talk to your customers.

Businesses succeed when they serve customers and create sustainable profits. Serving means passing The Mom Test. Paul English founded Kayak and carried a notebook when he traveled. When he met people at airports he asked questions. An email newsletter for twenty and thirty-something women could be run by two thirty-something women.

Carl Turner Jr. thinks that Dollar General is defensible because the people who work in the store are the same people who shop there. In his conversation with Jeff Jordan, Jordan said, “Brian Chesky (Airbnb) strongly encourages the employees to host or be a guest on the platform because it keeps you connected to the value and philosophy of the business.”

Jenn Hyman understood this. During college, she went home for Thanksgiving and visited her sister Becky who showed her a new dress. The dress was nice, but cost more than a month of rent.

Ouch. But “it was a lightbulb moment for me,” Hyman said. She’d been talking to her sister about the feeling a great dress gave. Hyman wondered, do people ‘hire’ a dress to feel good?

She took her idea back to Harvard where Hyman and co-founder Jennifer Fleiss bought 100 dresses (all their sizes, this scheme might not work ya know) and had a pop-up event on campus. But it worked. People wanted to rent dresses. Fleiss and Hyman got funding to buy dresses. Tested, built a website, then needed more funding for more dresses, better pictures, and growth.

Hyman and Fleiss headed to Silicon Valley to secure funding. Only, the venture capitalists didn’t get it because they weren’t the customers and they didn’t even know the customers were out there. Their wives were too rich, their daughters were too young, and their admins were too old.

Customers hire for jobs to be done. Businesses survive when they do those jobs. Investors succeed by finding those matches.

In our podcast about restaurants, we saw many examples. Alice Waters walked the Chez Panisse dining room. Ray Kroc saw all kinds of places as a milkshake mixer salesman but only fixated on the McDonald’s brothers. Ron Shaich asked why people wanted their bread sliced. Patrick Doyle put the honest feedback he got right on social media.

Amazon uses databases, business owners sit at kitchen tables.

Steve Jobs said that people don’t know what they want until you give it to them, but Mark Ritson and I know there’s more to that quote. People know what they want if you ask them the right way. If you sit down with them, no matter where they are in the world.

Before the iPhone was the most successful product ever there was someone warning Nokia about Apple. Trica Wang was in China, in 2009. “I did things like working as a street vendor and selling dumplings to construction workers or fieldwork spending nights and days in internet cafes.”

These were people living in the bottom quartile of worldly wealth, but Tricia Wang noticed something about them. They wanted iPhones or affordable knockoffs. “I saw people investing over half their monthly income into buying a phone.”

Nokia and RIM missed this because they assumed the world wouldn’t change. They aggregated data which requires numbers. Income, hard drive size, camera pixels, etc. But not all purchases are rational and measurable.

The iPhone and smartphone wave is parallel to the three-pointer in basketball. Of course, it makes sense that 3 is worth more than 2 and that a computer in your pocket would come after a computer on every desk, in every home. But we have a hard time predicting who will succeed when things change. Here’s Zach Lowe talking to Kevin Arnovitz about James Harden.

What’s in the “collective imagination”? Ask your customers.

Technology companies have a data advantage. That’s fine. Strengths are weaknesses. Knives cut boxes as well as fingers.

Channel surfing.

Amazon is one of many channels for a business. Nike sells shoes on Amazon but also its website, Kohls, and Footlocker. The question a business must ask about a channel is: ‘Who needs who more?’

When it’s hard to switch, people switch less. Switching between television and cable operators is easier than switching between phone and cellular providers even though they look the same. One piece of hardware (TV/phone) and one bit of service (internet/cell). But the job I hire my phone for is vertically integrated. That gives one company an advantage. Whereas TV is horizontal and substitutes take little work at all.

Who needs who more? Does Amazon need a merchant or does a merchant need Amazon? There are five million+ marketplace sellers on Amazon. More than 300,000 Americans joined those throngs in 2017. But there’s only one Amazon and that means Amazon has pricing power. 

When one business passes along costs that another business can not, the first business does well and the second business does not. Tren Griffin says to imagine a restaurant. A landlord can increase the rent easier than a chef can increase the menu prices. That’s exactly what Amazon is doing. Amazon is like the troll who lives under the bridge, only this troll also maintains this bridge that reaches Consumer Land, population 330,000,000+.

But there are other bridges, other channels. A business needs to match its competitive advantage to its channel. Ben Horowitz said, “Your channel is a function of your product and your target customer.”


Direct, all the pain, and all the gain. Ben Thompson noted that Disney+ is a great expansion for the company. What consumers watch will feed into what ads it sees for what vacations it might take. But this same direct to consumer approach probably isn’t good for Showtime.

Direct means it’s just you and them. Their payments are your profits but their problems are your problems too. Fulfilled by Amazon puts Amazon between a business and its customers, but it also means Amazon picks, packs, and ships the orders.

When Peter Rahal and Sam McBride worked on RXBar they went straight to the consumers who were in Crossfit gyms. Rahal said he’d rather be in a Crossfit box than a grocery store. Why? Direct was a better channel for the company to grow.

A unicorn in a field of horses. As far I can I tell AmazonBasics batteries are the same as any other brand of battery. They look the same, feel the same, and work when I put them in a mouse. Batteries are undifferentiated. Alex Rampell explains this for hotels.

“If the only route to the customer is Priceline and there are four hotels, all indistinguishable, then Priceline will say, ‘Hilton, I’m not going to list you among those four unless you give me 99% of your profits from each customer.’ That’s a very dangerous position to be in. Unless people show up and say ‘Hilton is the hotel I want to stay in’. Suddenly the sharing of the economic rent changes dramatically.”

That’s where the Amazon squeeze is. Marketplace sellers have to comply when marketplace sellers sell commodities.

To successfully sell on Amazon means offering something Amazon can’t or won’t.

New channels. Amazon accounts for half of all online sales which makes it the largest online channel, but less than 10% of total retail sales. That means shelf space in stores is even more competitive. How might someone get shelf space from Coca-Cola? What if that’s the wrong question? Why is a shelf important at all?

Five Hour Energy drinks did just this. The bottle is small and founder Manoj Bhargava said he started in GNC because there was more elbow room. The product was also different, it had no extra water, just the sugar, and caffeine. In a further end-a-round the endcaps, the bottles easily fit on a store’s counter.

Five Hour Energy avoided the TiVo problem, getting distribution before Coca-Cola got innovation. That said, the energy drink’s market share fell from 93% to 67% once the innovation spread. This, said Marc Andreessen, will always happen. “One of the things you see crystal clearly in VC is how much competition emerges whenever anything works.”

Uncompeteable. FinTech startups face one of the more difficult TiVo problems. “In the US the big ones are Betterment and Wealthfront who were the innovators,” said Rampell, “The challenge is, it turns out that Vanguard and Fidelity and Schwab have now replicated what they’re doing and has a massive distribution.”

So Rampell co-founded a company the incumbents couldn’t compete with. Affirm CEO Max Levchin said, “Those guys cannot enter our business because they’re addicted to the income. If you make half your money on fees and the other half on these nasty deferred interest programs.”

Affirm’s strategy is to offer simple, dollar-based pricing, loans with no fees or deferred interest programs.

I still need you, but less. A final example of a company diversifying its channels to decrease the WTP risk and increase their BATNA is Buzzfeed.

Like Amazon, Buzzfeed has multiple revenue sources; advertising, branded content, affiliate links, and products. Ben Kaufman and the product teams partnered with Shopify  so that those merchants can have their items listed on Buzzfeed articles like 2016’s, 42 gifts every elephant lover will want to get this year.

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Why can Buzzfeed do this? Their customers aren’t on Amazon, they’re on Buzzfeed.

Business owners must remember that this too will pass. No company dominates a market forever. Detroit auto manufacturers lost the car market to international producers. Microsoft lost the consumer internet to Silicon Valley. Lots of small business grow in small niches, take root, and blossom despite the harshest conditions.

Here’s what businesses need to do.

1/ Reduce transaction costs. Make it easy for consumers to find, pay, and trust your products. Currently, there’s a gap in Amazon’s find function and they don’t have a patent on good payments. Apple pay on mobile worksnicely. Tom Goodwin sells his book with a QR code.

2/ Distinguish between shopping and buying. Amazon isn’t for shopping, it’s for buying. Platforms like Instagram, Pinterest, and YouTube are for shopping. What do those platforms have in common? They’re visual. Ditto for the physical. I love visiting bike shops.

3/ Talk to your customers. Any business has to know what job the customer is hiring them to do and to understand that those jobs change over time. Amazon has better data and better data scientists but all data is backward looking. Understanding customer needs is about anticipating future solutions.

4/ Channel surfing. A business’s channel should match their competitive advantage. A direct relationship can be good but will certainly be more work. There is more than one way to avoid the TiVo Problem.

Walmart is my favorite example of a retailer who might be succeeding against Amazon. Specifically Walmart grocery. The service allows users to add grocery (and other items) to their cart and schedule a pickup, often the same day.

Walmart has reduced the transaction costs because all my shopping is done in the app rather than wandering the aisles. My credit card is saved in the app too. I also trust what I’m getting because substitute items are of an equal or greater value and consumers have the chance to decline offerings.

Walmart is a buying experience. I need this and this and I want to get in and out. Not only does Walmart make it easy by collecting the grocery items in the store, but they have a special side parking lot adjacent to the building where grocery customers can wait and the items will be brought to you. I time the staff and their best mark from shifting to park to shifting to reverse was 70 seconds. That’s what buying experiences should be, not the average 43 minutes.

For my family of four, we add things to the list and order via the app once a week or so. Before checkout Walmart suggests other items I’ve purchased. On average, people buy the same 13 items each week.

Walmart is not our only grocery store. There’s a Publix that’s closer to my kids’ school and we go there once a week too. But Publix is more like a shopping experience. The kids get a free cookie. We can buy fried chicken, or try a new hummus flavor, or test a new Aprons recipe. But we still use Walmart.


Thanks for reading.



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