Marginal analysis involves the examination of a company’s cost benefit analysis, as relayed to a particular activity or business market. When a company is considering the addition of a marketing or strategy activity to its daily operation, they would normally analyses the benefits of that activity compared against the costs that come with it before moving forward with the decision to adopt it (Karl et al., 2019). Companies will usually make the marginal analysis concept to act as a decision making tool in order to maximize the profits that would come from any of their activities or ventures.
As an e-commerce giant, Amazon has perfected the art of the marginal analysis. Being one of the globe’s most valuable companies, the profits that amazon sees come from an accumulation of tiny activities and products put together (Zhu & Liu, 2018). The scale at which it operates then magnifies these profits into what we know the company’s numbers to be. The success of amazon the company is a sublime argument for the principle of marginal analysis. Several bite sized activities add up into what has grown into a giant profitable ecommerce company. Amazon has clearly cracked the code for adding onto its operations the right number of profitable activities and products, in just the right quantities to be profitable in the long term.
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In a business operation, each activity will have an independent marginal benefit and an independent marginal cost. It is upon the business managers to conduct an analysis for what the right action to take would be, presented with the potential benefits and costs of every operational activity (Saad, 2015). In a letter to shareholders earlier in the year, the CEO of Amazon, Jeff Bezos explained the company’s move to increase the subscription fee for Amazon Prime members to nearly $119 annually.
This single business move, which represented a $20 increase in subscription fee for the nearly 100 million members was able to earn the company billions in revenue. The marginal analysis therefore clearly indicated that the benefits for a move like this would clearly outweigh the costs. The boost of revenue would also positively impact the majority of the company’s profitable operations across the board. Although the normal operating margin for Amazon is a 3.8% margin on a total of $51 Billion in sales, the narrow margin is perhaps an indication of the company’s numerous different marginally beneficial activities, no matter how small each of them may be (Zhao et al., 2015).
Other marginally beneficial activities that Amazon has ventured into include expanding its e-commerce franchise in India and other emerging international markets, the Amazon Web Services, its cloud-computing operation (Lehrig et al., 2018), the Echo subsidiary which is a line of voice activated gadgets and its web video service. All these activities have somewhat contributed to the recently rising share price of Amazon, which has also made Jeff Bezos the richest man in the world. Such activities, although they may temporarily eat into the company’s profits in the short run, often make for excellent business moves that turn out to be immensely profitable for Amazon in the long run.
Overall, if Amazon would be able to cut its investment spending, it would have higher chances of becoming a much more profitable company. This however, is not the best marginally beneficially move that the company can make at the moment. It would rather focus on investments for the future, at which the point the company would stand higher chances to reap more, bigger profits.in as complex an organization as Amazon, the law of marginal analysis is also used to examine how minor tweaks and changes affect the whole system in totality. Each comprising variable is changed and tweaked independently, yet the effects of the tiny changes observed across the whole board.
The main goal of marginal analysis is to determine whether the benefits of a given financial or policy decision in a company are sufficient enough to offset the costs associated with the same decision or financial move. Marginal analysis in the business world has also often helped in the process of decision making where two or more options exist for consideration. They both could be beneficial, but the art of marginal analysis allows the management to compare the costs and the benefits of each move, thus eventually determine the overall profitability of each compared against the other. This especially applies in the event that resources that exist are only sufficient for only one of the decisions to be implemented.
The potential for marginal analysis is clear now in Amazon, as formerly nondescript business moves, like cloud computing and the Echo service have begun paying off big time. For five quarters in a row now, Amazon has turned a profit, with the latest profit much bigger than the previous one. This shows that when carried out effectively, marginal analysis has the capacity to turn any company’s fortunes around. The most beneficial moves that Amazon seems to have made, apart from international business retail, seem to be the Amazon Web Services, together with other new flagship services like video streaming and food delivery services (Wang, 2018).
In conclusion, the principle of marginal analysis has advised the majority of Amazons business moves in the last few decades. It is now clear that it works, since each additional venture is projected to introduce profit into the whole model at some point in the future. Despite the international shipping and logistics core business not turning a profit for large tracts of the past, it appears that the management of Amazon was well aware of the benefits of operating like that, until such a time when the markets were ripe to obtain profits from.
References
Karl, E., Case, F ., Oster, R ., & Sharon, E . (2019). Principles Of Microeconomics . Pearson.
Lehrig, S., Sanders, R., Brataas, G., Cecowski, M., Ivanšek, S., & Polutnik, J. (2018). CloudStore—towards scalability, elasticity, and efficiency benchmarking and analysis in Cloud computing. Future Generation Computer Systems , 78 , 115-126.
Saad, D. A., & Hegazy, T. (2015). Microeconomic optimization and what-if analysis for facilities renewal. Journal of Facilities Management , 13 (4), 350-365.
Wang, H. (2018). Pricing used books on Amazon. com: a spatial approach to price dispersion. Spatial Economic Analysis , 13 (1), 99-117.
Zhao, Q., Zhang, Y., Friedman, D., & Tan, F. (2015, September). E-commerce recommendation with personalized promotion. In Proceedings of the 9th ACM Conference on Recommender Systems (pp. 219-226). ACM.
Zhu, F., & Liu, Q. (2018). Competing with complementors: An empirical look at Amazon. com. Strategic Management Journal , 39 (10), 2618-2642.
