Rule Britannia!

I’ve a set of Encyclopaedia Britannica.

I bought them in 1990. I’d ridden the Lawson Boom with a degree of success and had yet to start the return trip of the Lawson Bust. I think they represent the exact moment when I reached the inflexion point of having more money than sense. My motives were pure enough; with Jonny’s arrival a year or so before our brood was complete; our next big job was to educate them. What better tool than the sum of human knowledge and understanding distilled into a mere forty million words over 30,000 pages?

I’d called the company after seeing them advertised in a Sunday supplement. They couldn’t tell me how much they cost or take my order, I had to meet a salesman. Trevor duly pitched up in a suit and shirt that looked like they’d been borrowed from his smaller brother and a large pilot’s case. He was sweating, whether from lugging the case or nerves was not entirely clear.

You don’t need to sell to us – just give us your best price

But I have a process I need to go through

OK – fire away

He went through a short demonstration which included showing us that we could pick a volume up by one of the pages and it wouldn’t tear – a neat party trick but not obviously useful. He then went into his close.

What would you say if I said a full set was £3,000?

Before I could say ‘fine, where do I sign’ he continued his spiel.

You’d probably say ‘that’s far too much’ so what would you say if I said that today I can do you special deal at just £2,000?

Mrs R and I exchanged confused glances.

You’d probably say ‘that’s still more than I was expecting’ so what would you say if I said I’d spoken to my manager before I came to see you and he said I could offer you a special deal of just £1,500?

Mrs R and I exchanged confused glances.

You’d probably say ‘thanks, but it still seems like a lot of money’ So, what if I said I could throw in a set of Junior Britannica, with a recommended retail price of £500, free of charge?

Mrs R and I exchanged confused glances.

You’d probably say ‘that’s great for the older children but what about the younger one? So, what if I said I’d throw in a Children’s Britannia (recommended retail price £300) absolutely free of charge?

Mrs R and I exchanged confused glances.

You’d probably say something like – thanks Trevor but it still seems like a lot of money. So, what if I said you could have all three sets – the 30 volume Encyclopaedia Britannica, the 20 volume Junior Britannia and the ten volume Children’s Britannia for just £1,250?

Trevor thrust out his hand and we shook on our deal. Had he successfully beat himself down from £3,000 or had we overpaid? I still have no idea other than we would have happily paid the full price.

This great collection has followed us from house to house. Most of the volumes have never been opened. Within a short while the internet became our default source of information and within six years Encyclopaedia Britannica was itself struggling for survival, rescued from the brink of extinction by a Swiss-based Brazilian billionaire.

Back then, Amazon was a small start-up; an online book retailer looking to disrupt a market that had become lazy and inefficient. Last year it was in the vanguard of platform businesses that now threaten the future of our high streets.

Economic theory tells us that perfect competition requires an infinite number of firms and transparent markets. It further suggests that when we have perfect competition no-one makes any profit – worse than that, they don’t even cover their overheads. In the jargon, prices will settle at the point where marginal cost and marginal income are in equilibrium.

Platforms such as Amazon accelerate the drive towards perfect competition, not just for books but for pretty much anything I might need. Sellers can see a range of prices from across the market and adjust their prices accordingly. Whatever price you set, there’s likely to be someone, somewhere willing to sell for a fraction less until there’s no margin left.

A worrying trend that has developed over the last twelve months is the rate at which this disruption is extending beyond retail to the B2B marketplace – companies across the board are feeling the heat, if not from Amazon then from others who have got online right.

The paradox is that Amazon is also vulnerable to the same market forces as other sellers – in terms of prices, everyone is in a race to the bottom. So how does it stop Boiúna, (the mythical snake-god personification of the eponymous river) becoming Ouroboros, the snake that ate its own tail?

Firstly, if you are going to survive in a marginal revenue world you need scale; your fixed costs need to be as low as possible. Amazon has spent the last two decades and countless billions doing just that. It is now so far ahead that it seems immune to challenge. It is interesting to see how the Amazon share price has closely tracked revenue rather than profits; further evidence of the value of critical mass under this business model.

Secondly, Amazon is not a retailer any more – it is a service provider. Although only accounting for around 15% of turnover, its Web Services division accounts for nearly 90% of profits. Meanwhile, profits in the retail division are driven by added value services. I’ll routinely happily pay slightly more for the Prime option, content in the knowledge it will arrive tomorrow even when I know I won’t open it until the weekend. It’s also increasingly likely that my package will be Fulfilled by Amazon – the seller will simply list their product and Amazon will do everything else from warehousing to delivery.

It increasingly makes little difference to Amazon whether it makes any money on the actual sale, it’s the services wrapped around the sale that are important. For businesses trying to compete this creates real challenges. Those with a truly differentiated proposition are likely to survive and, in all likelihood, thrive. Those who are simply moving commodity items based on a nebulous notion of customer loyalty are looking increasing vulnerable.

The last twenty years have seen a homogenisation of high streets across the country with the same shops selling the same stuff to hordes who have raised the status of shopping to that of a national pastime. Perhaps more vibrant and varied city centres delivering a richer experience to counter the online challenge will emerge from the present carnage but it’s not going to be an easy transition.

Out of interest, I thought I’d take a look at what the Encyclopaedia Britannia of 1990 had to say about the internet. I blew the dust off the relevant volume and prised open the virgin pages. There was no mention of Internet. Not one of the forty million words mentioned the threat that would overwhelm the business just six years later.

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