How Amazon Utilized Networks Effects
How did the famous e-commerce site we all know today rise to power? Amazon first started as an online book shop and slowly grew on one of the biggest well-known companies today. Today we’ll analyze the how Amazon’s strategy used the Networks Effects we’ve learned in class to its advantage.
To begin, Amazon’s networks effects is clearly generated by demand: the more people who buy and use the product, the greater it’s worth is to others. This is similiar to the network effect that Facebook has – the more people who use Facebook, the greater the value in Facebook’s friendship network and the more people one can connect with. Analytically, users come in with what is called a reservation price for a product – what they deem a product is worth. The company selling the product can set the actual price, however if the company sets for the product is higher than the user’s reservation price, then the user will not purchase the product since they deem the product’s worth as less than the price they need to pay.
In order to entice users, companies can start out by pricing their product very low and offering discounts in order to convince people to stay with product. Amazon utilized this model and didn’t make profit for years. By offering things such as free shipping with a customer’s purchase of a certain amount, Amazon was able to attract more customers to use their site. As more people came to know of Amazon, the company increased its offerings to not just books but merchandise such as sporting goods and food products. The increase of products offered by Amazon increased the amount of customers who used Amazon to purchase those products and thereby increased its worth . By 2005, Amazon had enough users to debut Amazon Prime – a service that offered free 2 day shipping for goods. Essentially, by starting prices off small and offering free shipping, Amazon was able to gain a big enough following so that it could raise its prices – have users pay for free shipping through Amazon Prime. This exhibits Amazon’s network effect – as more people use Amazon, Amazon is able to offer more products and the more valuable it is to other users. Today Prime membership offers not only free shipping but music and movies as well.
Source:
https://abcnews.go.com/Technology/amazon-bigger-walmart/story?id=32661220
https://www.computerworld.com/article/2575106/amazon-records-first-profitable-year-in-its-history.html