I was in Seattle a couple of weeks ago, visiting an RSR client and attending a meeting of the RAIN Alliance, a group dedicated to standards for RFID technologies (for my take on that meeting, see my post from the July 25 Retail Paradox Weekly). The RAIN meeting was held at one of Amazon‘s buildings, and since it had been some time since I was up in that area, I was amazed at how the eCommerce giant had pretty much taken over an entire section of the city. If physical presence is any indicator of market dominance, then it’s pretty clear that Seattle is no longer just a “Boeing ” or a “Microsoft ” kind of place.

And that’s an apt parallel to what’s become of U.S. Retail as well. Let’s face it, it’s an “Amazon ” kind of business nowadays. I was struck by that realization while standing outside of the much-hyped Amazon Go store (I couldn’t go in because of course I didn’t have an employee badge). The store reminded me forcibly as a big giant prepared food vending machine. Those contraptions aren’t especially innovative (they’ve been around for years), but what was innovative is that Amazon employees can walk right in, grab what they want, pay automatically, and walk out. Then it hit me: what’s all the fear-and-loathing about? It’s just a radical expansion of something we’ve all seen before.

Of course the answer to my question is that Amazon did it, it’s big and it’s bold… and so the industry shuddered with uncertainty. But beyond that visceral reaction to anything coming out of Seattle, the company gives the rest of the industry some clues for moving forward. This is especially true in spite (or because) of the company’s recent weak earnings report. Looking at U.S. operations particularly, Amazon reported sharply weakened earnings per share coming from impressive top line growth of almost 27%. Huh, you say? Looking at one level of detail down, Amazon’s operating income dropped from 3.92% a year ago to 1.95% now. That change comes from two things: aggressive prices and aggressive spending on innovation.

Let’s get “prices ” out of the way first. Amazon knows that its web services business will continue to be attacked by very credible competition in the marketplace from companies that are every bit as good (or even better) than it is at delivering low cost cloud computing capabilities. That puts pressure on the “retail ” side of the business to be more profitable. But Amazon also knows that it has a huge advantage when it comes to retail consumers, that it needs to leverage now. Investment house UBS’s Eric Sheridan explained on a CNBC broadcast on 7/28/17 that the secret of Amazon’s success is in what he called “the Amazon Prime flywheel ” – once a consumers joins Prime, the velocity of shopping purchase rises. The analyst stated that Prime customers spend 2-3X more than non-Prime customers.

Of course, that’s why Amazon Prime Day was important. Sheridan said that “is playing a long game, and talking about re-accelerating revenue growth – in food, consumer products, private label, and in new markets (particularly India). ” They are doing that with aggressive pricing and continually attacking traditional retailers’ fallback position – that stores offer “immediacy ” – with very fast and reliable fulfillment services. By continuing to build its dominance in retail, the company lessens its reliance on its web services division to underwrite profitability, i.e. it’s a “long game “, not a quarter-by-quarter struggle.

As the company’s CFO Brian Olsavsky explained last week during a call with Wall Street analysts, Amazon has four distinct advantages: customers love them, they can grow to be large, they deliver strong financial returns, and they are durable and can last for decades.

Where does innovation fit into this story? The company’s 2016 Annual Report recounted a discussion between CEO & Founder Jeff Bezos and employees about “Day 1 ” vs. “Day 2 “. Bezos uses that analogy to talk about where Amazon – and for that matter, all companies – should be. Said Bezos, “I’ve been reminding people that it’s Day 1 for a couple of decades … I spend time thinking about this topic. Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death… An established company might harvest Day 2 for decades, but the final result would still come. I’m interested in the question, how do you fend off Day 2? What are the techniques and tactics? How do you keep the vitality of Day 1, even inside a large organization? “

That’s where innovation comes in. According to Bezos, “Staying in Day 1 requires you to experiment patiently, accept failures, plant seeds, protect saplings, and double down when you see customer delight. A customer-obsessed culture best creates the conditions where all of that can happen. “

The lesson to be learned is that retailers must change their attitudes about innovation through experimentation. In RSR’s sales enablement program called “Selling Technology Value to Retailers “, we’ve joked for years that the one line you’ll rarely see in any retailer’s P&L is the one labelled “research & development “. But it’s not funny anymore; retailers need an innovation agenda.

With that need in mind, I’ll remind readers of Geoffrey Moore. Many will remember Moore’s big hit book, Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers. But my favorite of his books was entitled, Dealing with Darwin: How Great Companies Innovate at Every Phase of Their Evolution. In that book, the author offered a very simple-to-understand model for every company’s innovation agenda. Here it is:

I won’t review the whole book (you can buy it … on Amazon!), but it basically illustrates how Amazon approaches any innovative idea (starting at the lower left quadrant). The point is, this model isn’t exclusive to Amazon or anyone else. All companies can and should support an innovation agenda, learning how to (as Bezos said), “…experiment patiently, accept failures, plant seeds, protect saplings, and double down when you see customer delight. “

Those are the rules for the competitive battle now. It’s still Day 1 for Amazon – what day is it for you?