Amazon Departs Incentive Fulfillment?

UPDATE 2:40 PM April 7, 2010

Through an anonymous source who has had conversations with someone at Amazon I have heard that, although profitable, the decision was made to drop fulfillment through incentive programs due to customer service issues.  Specifically, the recipient, if they had problems with their order, would call Amazon for resolution but Amazon would have to refer them back to the incentive company - who in turn would do the due diligence to fix the problem.  From Amazon's point of view this created a negative impression of their customer service.

If that is truly the case, that speaks volumes about how fundamental the culture of service is at Amazon - willing to drop a profitable line of business because it negatively impacts their core values.  Kudos to Amazon if true.  With their recent purchase of Zappos (and their zeal-like attention to customer service) I can almost believe it.  Time will tell.

Original post follows.

Late on Tuesday April 6 a story broke on Incentive Magazine that Amazon may be getting out of merchandise fulfillment for incentive programs.  

It is still somewhat a “rumor” in that no one so far has returned calls to the magazine or verified the story.  I shot a note to my contact at Amazon and got a “no longer a valid email” so I’m scratching my head along with the rest of us.

A History Lesson

For those that may have not heard the story, Amazon came into the incentive arena about 2006/2007 as a merchandise fulfillment option for incentive program fulfillment.  Their plan was to allow incentive companies to connect with their online catalog –via an API (application programming interface), price items in “point values” and complete the transaction behind the scenes.  The participant in the program wouldn’t really know that Amazon was the engine until the box hit the doorstep.  

The benefit was that participants were now able to get all of Amazon’s items with their incentive points.  Traditional incentive companies, with their print and online catalogs of 2,000 or so items, would look pale by comparison.  Not to mention, smaller incentive companies, without the resources to create a catalog on their own, would now be able to hook into arguably the largest incentive merchandise catalog in the world.  The concept was pretty ingenious.

The kicker was - Amazon sold their merchandise to the incentive companies at their normal retail price.

That was HUGE!  

Merchandise has traditionally been the profit generator at almost every incentive company.  Some margins on incentive merchandise exceed 50% (that’s a 100% markup for your math folks.)  I know some companies have shopped incentive merchandise in their program catalog against prices as Wal-Mart and Target and have seen incentive items 40%–50% higher in the incentive catalog.  For many incentive companies – losing merchandise margin could mean going at out of business.

I for one loved, loved, loved the idea.  

But then again, I love disruption.  I love new thinking and challenges to the status quo.  

Evolution only occurs when something changes.  Sometimes they are good changes and the species survives.  Sometimes they are bad changes and the deviation dies.  I thought this was one that would be a game changer.  So much so in fact that I met with the folks at Amazon to discuss how to take it to the next level and use their predictive modeling algorithms within a program to help participants set goals and drive performance.  Unfortunately, I couldn’t make that happen.

Say It Ain’t So Joe…

But I sit here now and asked what happened?  Where was my thinking off-base?  I don’t mind being wrong.  I just don’t like being wrong and not knowing why.  

Some speculate that the application was outside their “core” business model.  I don’t see that.  Fulfilling merchandise is their core business model.

Some speculate that the issue of sales taxes may have been a problem.  That has a little validity but not a ton IMHO.  

Others speculate that the customer service issues did them in.  I find that exceedingly unlikely since they handle more customer service calls in a day than most incentive companies do in a year.

I hope someone comments and lets me know what the real scoop is.  

 I like disruption – but I don’t like being wrong and being ignorant at the same time.

Anyone have any information?  Anyone, anyone, Bueller, Bueller?

Anonymity is guaranteed if you want to chat.  

5YY7B7JBDEDV

Comments

[Chuck]

Original model for Amazon was to capture and build robust database from shipping data of potential new users to Amazon from Incentive Award recipients. Too many middle parties skewed Incentive pricing way up in points...creating serious pricing problems for middle parties -
State sales tax issue was continuing to grow - and is much bigger issue than you have considered. Amazon's solution was simply not to ship to states claiming taxes - Incentive model crashes and burns.
Customer Service bigger issue than you have considered - middle parties must provide warm contact interface and do all of the grunt work - very resource intensive - especially for smaller users.

[Paul Hebert]

Thanks for stopping by Chuck. Some great points.

The pricing issue is one I didn't think Amazon would care about (unless of course they are using the data in their normal "retail" models.)

I knew they were considered about the sales tax issue - it does create a problem but one they will have to face eventually so I figured it just accelerated it - but you can't run a national incentive and only have fulfillment in certain states.

The Customer Service side didn't seem that big to me - most incentive companies have a customer service department to handle their travel (or before amazon their merch issues). I know that Amazon wouldn't handle the "incentive program" customer service but they would have to handle from shipping out, no? I didn't see that as a big deal.

I guess I'm not seeing any of those issues as that big a deal for Amazon so I'm still thinking there is something else here.

But I've been wrong before (until I found out I was mistaken.)

Thanks for your point of view on this - I'm sure you're not crying.