Amazon’s Building Out the Store

While carnage ruled the day among many Internet stocks yesterday (interest rates are rising), Amazon.com was a big exception. Its stock rose nearly 10% in price after it announced it will buy 46% of Drugstore.com, the fledgling online prescription drug dispenser backed by venture capital legends Kleiner Perkins Caufield & Byers.

The deal, and reaction to it, demonstrates a key lesson you can use in building your Internet business. That is, serve your own niche first.

Amazon, as everyone knows, was first and foremost a bookstore. It hit the market quickly, with a huge inventory, and was an early user of personalization software, so it can welcome its regular customers with suggestions on new purchases. Its affiliate program, while sometimes criticized, gave it a reach no rival could match. It also invested heavily in its distribution system.

Last year, when Amazon looked at expansion, it first chose the related field of music. Since Amazon could bring all their strengths in books to the new area, it had an immediate hit. Amazon quickly gained the leading market share in that category. Videos were another natural brand extension, and it was quickly able to compete closely with video specialty shops like Reel.com.

Amazon’s expansion moves were cheered by stock analysts like Alan Braverman of Deutsche Bank, who was on a segment of CNBC’s “Street Signs,” February 25th. Braverman calls Amazon a “blue-chip Internet stock.” The Drugstore.com deal is “entirely consistent with Amazon’s strategy from day one,” he said. “Amazon built a great brand, and an awesome distribution channel.”

From a sound foundation, in other words, a solid Internet store can move in many directions and quickly establish leadership. From a broad front, however, an Internet store will have a hard time establishing leadership anywhere.

The lesson is clear. Serve your niche well, then expand.

What do you think? Let’s talk about it.

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