Increasing Profits with Digital Products: How the World’s Biggest Ecommerce Site Doesn't Make Its Money Selling ‘Things’

Increasing Profits with Digital Products: How the World’s Biggest Ecommerce Site Doesn't Make Its Money Selling ‘Things’

Amazon might be best known for their ecommerce sales.

But their most profitable business is a little more under-the-radar ...

Cloud computing services. And it’s not a hobby — their profit margin in Q1 of 2015 was 12.5%, and they nearly doubled it to 23.5% in 2016.

Amazon also publishes books. And they bought content companies like Twitch (for nearly $1 billion) and Audible (for $300 million).

Think about that, Amazon went from selling books online to selling damn near all physical goods that can fit into a box, to web services and content. They also manufacture their own Kindle readers and other hardware. They have a very healthy product mix.

If you’re reading this, your core business is probably successful today. But visitors are expecting more — free shipping, lower prices, and exciting retention programs just being the tip of the iceberg. And you’re left scratching your head:

How the hell am I going to pay for all this?!

The answer lies in the earlier words about Amazon.

Amazon competes on price and convenience. Their ecommerce margins are notoriously thin across every industry they compete in. And yet despite their low margins, they still manage to create services like Prime.

In large part, that’s due to their very healthy product mix.

With products like Amazon Web Services, they can afford to generate the cash required to offset the cost of their Prime program and free shipping offers, serve up loss leaders through Lightning Deals, and sell ebooks that cost almost nothing to distribute through their Kindles.

Put another way, Amazon can offer great services for their customers because other parts of their business pay for it.

You may not have the cash flow or flexibility to offer customers those benefits, at Amazon’s scale, right now. But by diversifying your product mix, you can take the first step to do that.

This is slightly different from making a new product. It’s a decision to grow in a specific way — business strategists call this adjacent growth.

Image Via Innovation Catalyst Group

Harvard Business Review (HBR) considers entering new geographies, addressing more specific types of customer segments, and using new distribution channels tried and true methods of adjacent growth.

But HBR covers three other, more difficult, methods:

  1. Expand along the value chain. De Beers extended its diamond business from wholesaling into retailing.
  2. Grow new products and services. IBM moved into global services, which now constitutes 50% of the company’s revenue and pretax profits.
  3. Move into the “white space” with a new business built around a strong capability. This is the rarest and most difficult adjacency move to pull off: American Airlines created the Sabre reservation system, a spin-off now worth more than the airline itself. Sabre, in turn, went on to create a new business adjacency of its own in the online travel agent Travelocity.

As HBR highlights, moving into “white space” is the most difficult adjacent growth to pull off. Yet this type of diversification is what will enable you to sell products at higher profits (typically digital), which will then enable you to entice customers and build better experiences for them.

Sell Your Byproducts

Let’s go back to Amazon for a second:

Amazon’s executive team got together at founder Jeff Bezos’ house in 2003 for a retreat. They conducted an exercise in identifying their core competencies. It took quite a bit longer than the 30 minutes they’d allotted. Here’s what Amazon Web Services CEO Andy Jassy tells TechCrunch:

“As the team worked ... they realized they had also become quite good at running infrastructure services like compute, storage and database (due to those previously articulated internal requirements).”

What’s more, they had become highly skilled at running reliable, scalable, cost-effective data centers out of need. As a low-margin business like Amazon, they had to be as lean and efficient as possible. It was at that point, without even fully articulating it, that they started to formulate the idea of what AWS could be, and they began to wonder if they had an additional business providing infrastructure services to developers.”

Amazon realized that the infrastructure that they had developed for themselves could work for other businesses struggling to stand on their own. Amazon Web Services was born.

Selling your byproducts, whether they be software, excess materials, or ideas, is a good litmus test for evaluating your capabilities. A lot of great businesses sell their byproducts:

  • Lumber companies don’t just sell the wood, they also sell sawdust, chips, and shredded wood.
  • Purple made mattresses with their “No Pressure” technology. Using that same technology, they expanded to pillows and seat cushions and broke into adjacent product markets.
  • Mystery-flavored Dum Dum lollipops are a result of when they change the flavors between batches on the factory line.
  • Discount branded clothing at stores like TJ Maxx and Winners sell name-brand articles that are slightly threadbare and don't quite make quality standards.

It’s tough to spot your byproducts, especially if most of the work you do is mental — not physical.

But …

Maybe you’ve figured out a way to manage projects or inventory that’s really unique. (Basecamp was born when digital agency 37signals solved this problem.) Or, to get even more specific, maybe you’ve already solved an ecommerce technology problem (e.g., building a dashboard to track certain metrics, etc.) for yourself.

Perhaps there’s a way you can package that solution and sell it as a digital product. Have a look at the Shopify App Store for ideas.

Remember, if you’ve only identified a problem, and haven’t actually fully solved it yet (or even started to), your investment and development required will be much more similar to making a new product.

So let’s say you find a problem that you’ve solved for yourself — either through a process, a workflow, or a digital solution. Before you pull the trigger on investing, make sure you know that it’s an important problem for other people, too.

Validate Your Problem and Solution

No matter how sure you are of your new product idea, it’s best to get external opinions. Building a landing page could be a good low-investment way to test the waters. If there’s a thirst for your product, people won’t hesitate to sign up for pre-orders or email notifications on the product’s development.

You can gauge your consumer interest with the number of users that sign up for notifications. Better yet, you’ll also get a sense of who your initial audience is, and validate your idea.

The Lean Startup Machine both shares the process and philosophy of this, but embodies a great example of their own principles as well. They created a validation board in order to help entrepreneurs structure the problem-solving process.

While the Validation Board information product is interesting, they’ve also started selling a digital product called Javelin. This software helps entrepreneurs take their business ideas to product/market fit. They are still mixing up their products.

Final Thoughts

Overhauling your product mix is not an easy, quick, task that you can check off in a week. Doing it well takes time, concentration, and validation.

The best companies make it look like they were in the right place at the right time — but you never see the work their people take on in order to maneuver into that position.

And while these exercises can be challenging, they’ll be worth it in the end. Your insights will compound, your company will be much more robust, and your team will be well-positioned to introduce even more new products moving forward.

And ultimately, the customer will win ... and so will you.

About the Author

Herbert Lui is the creative director of Wonder Shuttle. He was a staff writer for Lifehacker, and his writing has appeared in The Globe and Mail, the New York Observer, and Fast Company.