What to do when Amazon decides to jump into your business

Amazon’s recently introduced Elastic Transcoder service makes it relatively easy to encode video at scale for web distribution. It’s a great addition to Amazon’s service portfolio. It’s also yet another example of AWS competing against the very customers that rely on its infrastructure to power their developer-targeted services.

When Amazon introduced its new service, there were cries that it would put Zencoder, another cloud transcoding provider, out of business with low pricing. I think this concern is overblown, because Zencoder solidly beats AWS on a number of key dimensions besides price that are important to its customers (more on that below).

Similarly, Sendgrid, a cloud-based email delivery provider, went up against Amazon after the company introduced its transactional email service in January 2011. Well, it’s been three years and not only is Sendgrid still in business, it’s thriving. It counts companies like Pinterest and Foursquare as customers, and it raised a further $21 million even after some had pronounced it dead. (Note: My company,  Screenlight, is a paying customer of Zencoder and Sendgrid, but we have no other financial or advisory relationship; I chose them for this piece only because they’re examples with which I’m intimately familiar.)

There are plenty of other pain points in the cloud where developers have staked a claim that may tempt Amazon. The question then is what can a company do when suddenly matched up against an 800-pound gorilla? Here’s a look at the successful strategies employed by Zencoder and Sendgrid.

Give your target customer better options

Elastic Transcoder is a fairly representative example of how AWS launches a new service: It starts with a bare-bones offering that appeals to a broad base of customers in different industries. Amazon then rounds it out and adapts the service based on customer feedback.

You can win by knowing exactly who your target customer is (it may not be the typical AWS customer) and delivering the full suite of features that they value. By that I don’t mean a laundry list of features, but rather the key features that they need and are willing to pay for. All of the things you learned through customer development and talking with your customers will pay off here. You understand your customer’s problems better than anyone else, right?

In Zencoder’s case, it offers a much richer feature set than AWS Elastic Transcoder (ie, HLS streaming support, closed captioning, live-streaming and so-on). All of these features are likely of high enough value to Zencoder customers that it’s somewhat protected from price-based competition. For customers to switch to Amazon, they have to be willing to give up these core features to save money. For many companies that makes it a non-starter.

Likewise, Sendgrid continues to differentiate its service from AWS SES by offering far more features (dedicated IP addressees, advanced tracking and deliverability features, advanced API features , etc). All of this is backed by phone, email, chat, and forum support. For basic, low-cost, highly scalable email-sending, AWS may work for a lot of customers. But for those with more advanced deliverability needs (and a willingness to pay), Sendgrid is one of several superior options.

Create a better user experience

With Amazon, a new service like Elastic Transcoder is just another API that is offered alongside many others. With AWS, support is a paid-service offering. When customers are getting started or are experiencing problems, their only recourse is to pore over the documentation and dig through forums.

By contrast, companies like Zencoder and Sendgrid offer premium support services. In my experience with both companies, there has always been a real human ready to help answer a question or solve a pressing problem. Thus to differentiate your business, you need to offer the care and attention that Amazon simply can’t lavish on a single service.

The opportunity to differentiate through customer experience goes well beyond offering support when things go wrong. Every touch point offers an opportunity. For example, as someone goes through the sales funnel, there is room to provide videos and clear marketing material that educates customers  and outpaces the static efforts of Amazon. Likewise, the customer on-boarding process can be addressed with timely emails and outreach that helps resolve common stumbling blocks when getting started. (For ideas around this, check out Customer.io.)

Design of the user interface provides another powerful differentiator, and since most customers interact with infrastructure services through an API, it’s particularly important. Here Zencoder does an excellent job with a clean and well-documented API that includes a request builder that simplifies integration and testing.

Price based on value – and communicate it

Price is only one of the 4P’s. The only way to sustainably differentiate your service based on price is if you are the lowest cost provider: When you are competing against your infrastructure provider, that’s not going to happen.

In a response to a discussion on Hacker News about entry level prices that were 50 percent lower than Zencoder’s, CEO John Dahl made a great point by explaining why 50 percent lower prices don’t necessarily translate to 50 percent more value.

He’s absolutely right. Whether AWS is 1/2 or 1/10 the price per unit of your service, your potential customers need to know that Amazon vs. You is an apples-to-oranges comparison. Furthermore, they need to clearly understand why your oranges taste better and deserve a higher price.

In some industries, particularly perfectly competitive ones, price is the dominant attribute that matters to customers. However, in most other markets, there are additional value drivers for your customers. The key to competing against AWS is to ensure that your value proposition delivers against these attributes, and is priced accordingly. When Amazon shows up, instead of panicking, slashing prices and getting into a price war you’re bound to lose — accelerate innovation and double down on the customer experience.

Chris Potter is co-founder of cloud-based video collaboration and sharing service Screenlight. Follow him on Twitter @potta.