The Amazon Doctrine

Why is Amazon such a successful company?  They are great examples of smart managerial economics at work.  Amazon has identified goals that they want to achieve and the different constraints that they are under to reach those goals.   They understand the concept of opportunity cost.  They could be taking the time and money that is currently invested in training employees in customer service and apply it elsewhere.  Amazon is successful because they are accomplishing their goals by following “The Amazon Doctrine” which is, “Above all else, align with customers.  Win when they win. Win only when they win.
            Amazon has realized that customers are linked directly to their bottom line by way of “consumer sovereignty”.  Amazon has realized what consumers want.  Consumers are looking for quality products, cheap prices, accessibility and customer service.

            From a personal perspective, Amazon followed their “doctrine” to the letter.  My wife and I ordered a game online.  We were super excited for it to arrive, but when it did, the package on our doorstep was opened and nothing was inside.  We called UPS, but they couldn’t help us.  We then called Amazon and they went to great lengths to make sure I was a satisfied customer.  They sent me a new game and also refunded my purchase.  On that day I won and according their doctrine when I win Amazon does as well.  Because of this I will continue to shop on Amazon.

This is the link to the article I read.

Brett Bodily


Dr. Tufte said...

Brett Bodily: 100/100 (make that link look pretty, or I will ding you for 6 points). You don't have to add your name at the bottom either!

No offense Brett, but I think this is an economically weak post. Two things pop out at me (and I know the guy who wrote the source article ... but that doesn't make it great either).

First, the real assessment of a successful firm is some rate of return (ROI or some close alternative). Just because Amazon's stock is on a tear does not mean their ROI is. In fact, Amazon is widely known as a historically weak performer. So I wonder if there's cherry-picking going on here.

The other is the Amazon Doctrine itself. "Win when they win" sounds great, and it is. "Win only when they win" sounds great, and it is. But what exactly are other companies doing? Not winning when consumers win? Winning when consumers don't win? Not winning when consumers don't win? To the extent that other companies say they're doing the same thing as Amazon, it may be meaningless. But it's worse than that: if all other companies are doing exactly what Amazon is doing, then neither of them should show any particular success from doing it. That doesn't mean it's a bad thing, but it does mean that it would be a thing that could be good but which is hard to assess as such.

In Brett's defense, I think these are pretty subtle points, but they're important if we're going to say something wide-ranging like Amazon is better than Wal-Mart.

Hank Hill said...

I was glad to read an article about Amazon, thanks Brett! As I read this post my thoughts immediately brought me to a debate I have had (among myself) over the last few years of whether to buy through Amazon or some other source. I am a big motorcycle enthusiast and have long supported a motorcycle and ATV parts company that originated out of a guys garage in Spanish Fork back in 1985. Rocky Mountain ATV MC, now has its corporate headquarters in Payson and has since become one of the largest motorcycle and ATV parts distributors in the United States. The business is well known for sponsoring riders and events, low prices, extremely good customer service, and for excellent shipping times. When Amazon became more popular, I suddenly found (for me) a real competitor to Rocky Mountain ATV MC. Amazon also has excellent customer service, great prices, and a wide variety of products, but they lack something important to me; they don't directly support the local economy.

Many feel its a good thing that they don't have to pay state sales tax when purchasing through Amazon here in the state of Utah, but what effects does that have on our state? Does Amazon have enough market that it can negatively affect our state income? I recently found out that Best Buy price matches Amazon products, but you still pay sales tax. That's awesome! I know, sales tax sucks sometimes, but you choose the state you live in and hopefully have some say in where that tax money is spent.

In the end I am grateful for Amazon (wow, they have made our life much easier, and made pricing very competitive), but I would also say I am more grateful for the local entrepreneurs that support local events and contribute directly to the local economy.

Thanks for the post!

Dave Tufte said...

Hank Hill: 47/50 (you wrote "guys" instead of "guy's").

Interesting: a buy local argument couched in terms of sales tax revenue. I have to say, this may be the first time I've heard that on this blog.

There's so many ways to go on this one. So Hank:

If you are positively disposed towards the sales tax now, would you still be if it was increased?

Would you be more likely to shop at Amazon if Utah lowered its sales tax (since the marginal benefit of your in-state purchase is smaller)?

How do people in states without a sales tax view this issue?

If Amazon started collecting sales tax based on your IP address, and then remitted it to the state (as many people in Congress would like to have happen) would you be more likely to buy through Amazon?

If there were a sales tax holiday (Utah hasn't had one of those, to my knowledge, but other states have), would you be more likely to shop at Amazon?

Does the quality of the state matter? Utah's government, at least for the last few decades, has been more efficient than most state governments.

Almost all sales taxes have a state component and one or more local components. How would your purchasing strategy change if the state and local rate were changed in equal and opposite directions?

I"m not sure what the answers are to any of these questions are, or what they should be. But I think they're worth tossing out there for further discussion.

JP said...

I generally only use Amazon when I have points to redeem from my Chase credit card I have through Amazon, so I am not a huge online shopper. And I would say that I enjoy supporting the local economy, even if that’s not my primary reason for purchasing locally. But this brings up an interesting point about not paying sales tax on Amazon purchases, and I have to ask this question, isn’t that what use tax is for? So when people say they don’t have to pay sales tax on Amazon purchases, they really should be paying use tax. I guess the main problem is that it’s a self-reporting tax. So although I generally don’t like government regulation of business, I would consider legislation requiring Amazon to collect sales tax based on your IP address and remitting it to the state. I don’t think it would cause a huge burden to profitable online companies like Amazon; unfortunately, maybe it would cause a heavier burden to small businesses operating online. And Utah’s government has been performing well, as Dr. Tufte pointed out, and I would like to see that continue. Also, based on my personal consumer habits, requiring the collection of sales tax on online purchases wouldn’t affect me much.

Additionally, for some reasons I prefer the idea of a consumption tax to an income tax, so if the tax code were to be simplified and income tax rates were pulled back (like all GOP presidential candidates propose), I suppose it would make even more sense to make Amazon and other companies collect sales tax on online purchases. Anyway, I like the article and the thoughts. Both Amazon and Rocky Mountain ATV MC seem like good companies.

Dr. Tufte said...

JP: 50/50

Yes, JP, that's exactly what the "use tax" is for. But I think we can tell how seriously people take that tax by the way they talk about their online shopping.

I have 3 things to ponder.

1) I think there's an issue here that's bigger than ManEc: to what extent are online purchases a form of "voting with their feet" rather than just tax avoidance or tax fraud? Hypothetically, what if hackers set up a virtual country that they were capable of defending from attacks from real countries (basically, our hackers are better than yours)? And what if they collected sales taxes too. What would we make of people who had a choice of places to make their purchases who chose those virtual places? In short, are online shoppers already sending a message to physical governments that they ought to be listening to?

2) Governments that were a little more serious about the issues, and a little less inclined to act like martinets, might realize that a lot of these issues can be readily addressed through value added rather than sales taxes.

3) As to your preference for a consumption rather than an income tax, I think this has sound economic footing. To see this, think of income that hasn't yet been split between consumption and saving. When we tax income, we're taxing both. When we tax consumption, we're only doing the one. So the question really boils down to whether we should tax saving or not. Most people are inclined to say no as a matter of principle. Economists regard saving as consumption that will ultimately take place, and thus recognize that it will get taxed ultimately with a consumption tax. So to us, it's really a matter of timing. Since the choice to consume now or consumer later seems relatively benign, most economists would probably be content to leave it alone ... and the best and easiest way to do that is by taxing consumption at the time it's consumed.

JP said...
This comment has been removed by the author.
JP said...

I read this KSL article (http://www.ksl.com/?sid=37577709&nid=157&title=cyber-monday-sparks-online-sales-tax-debate-again&s_cid=queue-17) that adds to this debate at a local level. It seems like eventually there will be some kind of online sales tax added to the picture. Dr. Tufte, one question I have from this article is, aside from additional hiring to collect and remit sales tax, how much of a burden would sales tax add to online companies? Would they most likely raise prices a little to compensate for the sales tax? The CEO of Overstock.com talks in this article about how he shouldn’t have to pay as much taxes to a state where he doesn’t have a physical location as he does in Utah, where the company operates. But with an online sales tax, wouldn’t he only be collecting and paying sales tax in proportion to the sales generated in that state?

Dave Tufte said...

JP: 50/50

I would not call an online sales tax a sure thing. There may be some bias in media coverage of these things, because it's a lot easier for them to interview the small number of bureaucrats that think it's necessary than the multitude of voters who won't support it.

But, having said that, it probably will happen because the legislators will keep bringing it up. I think the public will get tired of defending it before the legislators get tired of proposing it.

But, getting on to JP's question, I think what we're seeing here is that the Overstock.com CEO is willing to "do the right thing" and be taxed similarly to other retail businesses. But what they're worried about is what the tax revenue is spent on. If they have a physical operation in Utah, they will burden the community in some ways. At least in part, the idea behind all taxes is to collect money to alleviate the burdens our actions place on those around us. But the CEO's claim is that the burden they place on others is larger in Utah (where they have more facilities) than in another state where the packages arrive. But somehow, I don't think legislators in the other states are going to put in a lower sales tax rate on companies that just ship into the state. To the extent that any entity has a right to have input into how taxes are spent, I think they have a good point. I'm not sure there's a decent solution. But it isn't just internet companies that have this issue, and we've largely ignored it for wholesale shippers and catalog retailers.