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Amazon: We cut prices to scare ourselves into innovation

Bezos outlines thinking behind own-goal margin destruction

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Amazon Web Services' campaign of price cuts and rapid product development is part of a customer-first strategy designed to prevent stagnation, the company's chief executive has said.

In the e-retailer's annual report released on Thursday, Amazon chief Jeff Bezos told investors that Amazon's customer-centric strategy should protect it from being blindsided by technological innovations from other companies.

"We are internally driven to improve our services, adding benefits and features, before we have to. We lower prices and increase value for customers before we have to. We invent before we have to," Bezos wrote. "These investments are motivated by customer focus rather than by reaction to competition."

In Bezos's world, this strategy of cutting prices before the company needs to, and developing technologies before there is a financially motivating factor, is what protects the company from building up a debt that needs to be paid when markets shift.

"To me, trying to dole out improvements in a just-in-time fashion would be too clever by half," Bezos wrote. "It would be risky in a world as fast-moving as the one we all live in."

By doing this, the company hopes to develop customer loyalty that will enable the strategy will pay off in the long term, even though right now it leads to occasional losses or razor-thin profit margins.

Bezos identified Amazon Web Services as "a very clear example of internally driven motivation", citing the cloud's 27 price cuts since launching in 2006, combined with its rapid development of new products (159 new features and services in 2012), as an example of how the company tries to get its customers to say "Wow".

This philosophy extends to all of Amazon's major product endeavors, Bezos said, pointing to the company's investments in Prime, Kindle, AWS, and digital media as examples of how it has tried to rapidly grow at the expense of short-term profits.

With Microsoft and Google still ramping up their own infrastructure-as-a-service clouds in a slow and steady way, Amazon's strategy does strike us to be working. In the time it takes Google or Microsoft to implement one new feature, Amazon seems to implement two or more. ®

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