The online retail giant Amazon took nearly 14 years after its initial public offering to finally report any kind of meaningful profit. This isn’t because there is anything fundamentally wrong with their business model. They likely could have been profitable after only a year or two. This was all by design. They chose to outspend their competitors to acquire customers and become the most dominant company in their space.
Many companies, large or small, are usually trying to become profitable as quickly as possible. Whether it is a company with a sole owner that just wants the cash coming in quickly, or there is a group of shareholders that need to be kept happy with a quick turnaround on the profits, it’s always short term thinking.
However, what if more companies, including small startups, chose to think with the long term in mind? What if they were willing to operate without a meaningful profit for years to give the customer a better experience and capture more of the market share?
In this article, we are going to examine Amazon’s famous customer acquisition spending strategy. We will also over the lessons that you can extrapolate and apply to your own business.
Amazon started as an online bookstore in the mid 90s. At this time, there weren’t many books being sold online. It was rare to find companies selling books cheaper than you can find at your local bookstore, and the shipping costs for such a heavy item was usually quite high.
Jeff Bezos decided to use this to his advantage. He knew that if he could offer books at a cheaper price than the local bookstore, with fast shipping, he could quickly take a large amount of market share from the huge book store chains. The shipping was even free as long as you spent enough on your order to earn the free standard shipping.
Eventually, Amazon expanded into all other kinds of retail products and became the number one online retail store in the world. They applied the same tactics to the rest of their products as they did to their online book store model.
Bezos and Amazon was the perfect embodiment of an often cited fundamental truth of marketing and business: whoever can spend more than their competition to acquire new customers, will win.
Amazon’s customer acquisition strategy was pushed further than most companies are ever willing to and it paid off dramatically. In only a few short years of operation, they made a massive dent in the market, and book-lovers were choosing Amazon over their local book stores.
Amazon started selling stock in 1997 under AMZN during their IPO at $18 per share. In 2019 that stock is hovering just below $2,000 per share, and the company is valued at over $1 trillion. They are the second US company to cross the trillion dollar valuation threshold. The only other company to ever accomplish this is Apple.
It’s safe to say that Amazon wouldn’t have ever been able to get to this point, and Bezo’s would have never been crowned as one of the richest men in the world, if they didn’t apply their aggressive customer acquisition spending strategy, and put their customer first.
Customer Experience First
One of the best things that Amazon did that anyone can learn from is that they put the customer’s experience first. For Amazon, this meant a much larger selection of products than any brick and mortar store can even imagine. Putting the customer first also meant offering the products cheaper than can be found locally. Finally, it means quick and often free delivery right to a customer’s door.
If you can give customer’s exactly what they want, in a better way than your competitors, at a cheaper price, and make it a hassle-free experience, customers will switch from your competitors to you in droves. This is how you break into a highly competitive market, even as a small company.
For your business, look closely at your market, and even closer at your niche or sub-niche. What do customers want that nobody else is providing? How can you make the customer’s experience much better than your competitors? Even if it will cost you money, is there something you can be doing that will make it a no-brainer for customers to go with you over the competition?
If you’re selling a physical product, can you offer free shipping? Can you pay for faster shipping to your customers? When it comes to the product itself, consider paying for high quality material and manufacturing while keeping the price to your customer low. If you can build a clearly superior product, and you can manage to sell your product at an equal or even cheaper price than your competitors and sustain that price, you will win.
One of the easiest ways to make a better customer experience is by having much better customer support. You can spend more on representatives so that there is no long wait when they call in with a problem. You can also spend more to retain a customer, like being more generous with your refund policy. Since customer retention is so vital, spending more to keep a loyal customer is also vital. Not only will Amazon quickly send out a replace product to a customer if there is any problem, they will often let the customer keep the original product as well. The new product will usually have free, upgraded shipping so they customer can have the replacement within only a day or two.
You can outspend competitors to acquire customers by simple brute force, like spending more on paid advertising, but if you can spend money to actually improve the customer experience, this will have one of the greatest long term benefits. This is how you not only take customers away from your competitors, but also make them long term, loyal customers, so that it will be much harder for competitors to take them away from you.
How Long Can You Sustainably Outspend Competitors?
This is the real question. Most companies can outspend their customers for a short period. Anyone can run a short, discount sale to bring in a lot of new customers. However, to achieve massive success like Amazon, long term sustainability becomes an issue.
Even for a business where you’re the sole proprietor, what’s the minimum you can get away with paying yourself so that you can reinvest any profits back into the business? While many people want to go out and buy a new house, a fancy new car, or take their family on an expensive vacation the second those profits start coming in, hold off on any idea of luxury. Think in the long term.
Keep your personal expenses to an absolute minimum so you can pay yourself as little as you need to. If you already know you and your family can survive on a certain, minimal amount every year, continue living on that amount for another few years. Your business is your best asset and any and all money that can be poured back into it for growth, should be.
Even with expenses within your company, you should be picking and choosing which expenses have the greatest benefit to your customers, and the best use for growth. Despite having a good year, do you really need to upgrade to a fancy new office with a much higher lease? Of course, if you’re growing and need more space for new employees, office space is an important expense. However, there is no need to lease out a corner office in an expensive building, when your at-home operation works just fine for a couple more years.
If you’re deciding between two different business expenses for growth, put a focus on improving customer experience. While it can be tempting to dump all of the profits into scaling your advertising budget once you have a profitable campaign, you will get more long term benefits by taking some of that money and improving the product, the delivery method, or even customer service and retention.
It’s also critical to approach this as building an progressively wider moat. The first years will be painful: you’re fending off your competitive peers AND plowing scarce resources into long term investments to build the moat. You’re doing double the work for less pay. After that, however, your progress accelerates. It becomes progressively easier to parry competitors, freeing up more resources to reinvest in growth. Your growth compounds.
While we have covered why improving customer experience should definitely be a priority when outspending your competition, paid advertising definitely takes an important role and shouldn’t be ignored.
Most, if not all of your customers will be focused on making sure their advertising campaigns are profitable before scaling. However, paying for more customer awareness than the competitors can make a big difference, even if your advertising campaign isn’t profitable.
All online advertising campaigns are built around competitive ad pricing. This means that the more competitive the keyword or target demographic is, the more that particular ad reach will cost. If you can build a strategy that allows you to spend more on advertising than your competitors, more eyes will be on you, and you should be able to capture more of the market share.
It’s not just about spending more on the specific ad platforms. If you can afford to pay for better copywriters, better ad managers, or even pay for a high end advertising agency, it will certainly show in your growth. Like investing in the customer experience, the effects of your optimization efforts will also compound over time.
The Art of Giving
One thing that is often overlooked when it comes to outspending competition is simply giving things away to the customer. So many companies are going directly for a sale, but if you can manage to give something away of value to your customer, even at a loss, you can gain a lot of customers.
For Amazon, they gave away free shipping to anyone who ordered a minimum amount. For online marketers that sell information or courses, they usually give away amazing free content in the form of free training or courses. It’s hard for their target demographic to ignore such a great offer, and it gives the company an opportunity to deliver massive value to their potential customers.
What can you give away to gain new customers? Can you give away a free sample of your physical product? Can you give away valuable content that is better than your competitors’ content? Can you give away free consultation calls and deliver massive value in the chance that they can become a customer later?
Initial Offers at a Loss
While it’s difficult for most startups to operate at such a loss like Amazon did, there are still plenty of ways to outspend customers by simply taking a loss on your initial offer.
First, it’s important to know your back end numbers. That means you need to figure out how much your average customer is worth. If you have a sales funnel with several products or services, in the end, how much does your average customer end up spending? Once you know the average value of your customers, you can afford to lose money upfront, knowing you will make up the loss with the back end profits.
This can be as simple as spending a larger amount on advertising to acquire customers, knowing that on average, you’ll make it back months or years down the road. If you have a SaaS subscription model and you know your average customer stays with you for a year, you can spend the equivalent of six months of that paid subscription just to acquire a customer and still be profitable.
If you have an affiliate program, you can pay your affiliates 100% or more in commission for the initial offer. Knowing you will make your money back in the back end, you will attract the best affiliates to grow your business.
What Are Your Goals?
If you’re just trying to make a quick cash flow type of business, then you’re probably going to focus on making profit as quickly as possible. However, if this is your main business and you’re looking for massive growth, it’s vital that you figure out how you can outspend your competition to carve yourself out a large chunk of your niche’s market share.