This case was written by Professor Sandra Vandermerwe, and Dr. Marika Taishoff, Imperial College Management School, London. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.
The case was compiled from published sources.
Amazon.com:
Marketing a New Electronic Go-Between Service
Provider
© 1998 S. Vandermerwe, Imperial College Management School, London, UK
This case was written by Professor Sandra Vandermerwe, and Dr. Marika Taishoff, Imperial College Management School, London. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.
The case was compiled from published sources.
Amazon.com:
Marketing a New Electronic Go-Between Service
Provider
© 1998 S. Vandermerwe, Imperial College Management School, London, UK
ECCH Collection
Distributed by The European Case Clearing House, England and USA.
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Case No. MS9808
The debate in the executive classroom had raged on for over an hour, despite the end-of-term Christmas party in full swing just down the corridor. All the other classrooms in the London-based business school had emptied out long ago, as the participants rushed to the party, or to do their last minute Christmas shopping. But not the class debating the strategy Jeff Bezos, founder and CEO of Amazon.com, one of the flag bearers and icons of the e-commerce era, had used to achieve success so fast since he had created the company in 1995.
Did the secret to Bezos’ success (he was worth after all, now at the end of 1998, a neat $2 billion) lie in his having spotted a golden technological opportunity, and riding its wave as some executives argued? Or, as others believed, had he come up with the new electronic service business model, which others would have to learn from and in some cases copy in their own businesses areas? Was his strategy fundamentally price based as some participants insisted? Or was there a completely new set of market and economic dynamics at work, which is what another group of delegates believed?
Certainly Bezos had effectively created a new way of buying and selling books, and so forever transformed and reshaped the industry. But what would Bezos have to do to sustain its success? The competition had belatedly, yet aggressively, entered the field--especially the two biggest players, Barnes & Noble and Bertelsmann, jointly trying to topple Amazon from its lead position in the on-line book battle. Could the small upstart, which had yet to show a profit despite rapid sales growth, be able to survive the combined competitive onslaught of these leaders from the global publishing and retail worlds?
The Early Wake-Up Call
Jeff Bezos probably hadn’t figured on sore knees and an aching back when he had decided, in late 1994, to leave his high-powered job on Wall Street and begin an entirely new career and business. Just thirty, he had until then followed the classic path of the Wall Street whizzkid: a summa cum laude Princeton University graduate in computer science and electrical engineering; the youngest ever
AMAZON.COM: MARKETING A NEW ELECTRONIC GO-BETWEEN SERVICE
PROVIDER
This case was prepared by Professor Sandra
Vandermerwe & Dr. Marika Taishoff, as a basis for class discussion rather than to illustrate either effective or ineffective handling of a business situation.
Case No. MS9808
The debate in the executive classroom had raged on for over an hour, despite the end-of-term Christmas party in full swing just down the corridor. All the other classrooms in the London-based business school had emptied out long ago, as the participants rushed to the party, or to do their last minute Christmas shopping. But not the class debating the strategy Jeff Bezos, founder and CEO of Amazon.com, one of the flag bearers and icons of the e-commerce era, had used to achieve success so fast since he had created the company in 1995.
Did the secret to Bezos’ success (he was worth after all, now at the end of 1998, a neat $2 billion) lie in his having spotted a golden technological opportunity, and riding its wave as some executives argued? Or, as others believed, had he come up with the new electronic service business model, which others would have to learn from and in some cases copy in their own businesses areas? Was his strategy fundamentally price based as some participants insisted? Or was there a completely new set of market and economic dynamics at work, which is what another group of delegates believed?
Certainly Bezos had effectively created a new way of buying and selling books, and so forever transformed and reshaped the industry. But what would Bezos have to do to sustain its success? The competition had belatedly, yet aggressively, entered the field--especially the two biggest players, Barnes & Noble and Bertelsmann, jointly trying to topple Amazon from its lead position in the on-line book battle. Could the small upstart, which had yet to show a profit despite rapid sales growth, be able to survive the combined competitive onslaught of these leaders from the global publishing and retail worlds?
The Early Wake-Up Call
Jeff Bezos probably hadn’t figured on sore knees and an aching back when he had decided, in late 1994, to leave his high-powered job on Wall Street and begin an entirely new career and business. Just thirty, he had until then followed the classic path of the Wall Street whizzkid: a summa cum laude Princeton University graduate in computer science and electrical engineering; the youngest ever
AMAZON.COM: MARKETING A NEW ELECTRONIC GO-BETWEEN SERVICE
PROVIDER
This case was prepared by Professor Sandra
Vandermerwe & Dr. Marika Taishoff, as a basis for class discussion rather than to illustrate either effective or ineffective handling of a business situation. P lease not e that you are not permit ted to reproduce or redist ribut e it for any ot her purpose. Y ou are permit ted to view the mat erial on-line and print a copy for your personal use unt il 14-May-2016. P urchased for use by Z ulf i B hut to on 14-May-2015. O rder ref F 250215. E ducat ional mat erial supplied by T he Case Cent re Copyright encoded A 76HM-JUJ9K -P JMN9I O rder ref erence F 250215
senior vice president in a Wall Street investment bank; and fast becoming one of the city’s leading money and hedge fund managers, he was seemingly destined for the corporate fast track. And yet in 1994, everything changed. During a casual read, Jeff Bezos came across a statistic. A statistic which not only led him to radically change careers, but also convinced him that he had to make the big move from the East Coast all the way to Seattle on the West Coast.
The Growth of the Internet
The statistic had to do with the Internet: usage of the new medium, according to the statistic, was growing at 2300% per annum. Bezos’ reaction was quick and decisive: “Anything that is
growing that fast is going to be ubiquitous very quickly. It was my wake-up call.”i
Thanks to the bonuses he had made in his brief yet successful Wall Street career, Jeff Bezos decided to quit his job in order to dedicate himself fully to what he perceived to be a major new market opportunity. The next few months he spent studying the key factors necessary for success on the Net, and investigating the kinds of products which fulfilled those criteria. He soon narrowed his list down from about 20 potential offerings --including videos, computer
hardware, and computer software--to just two: music and books.ii Both, he thought, had a
competitive advantage for “virtual”, Internet-based selling as opposed to “physical”, retail sales. Possibly because he himself loved reading, possibly because his wife was an aspiring novelist, and definitely given the innumerable hassles involved in the book buying process encountered in any traditional retail outlet by customers, Bezos ultimately decided to start his
Internet-based business with books.iii
Bezos Moves to Seattle
In July 1995 Bezos settled in Seattle. It wasn’t that he had wanted to leave New York; he felt he had to. Not only was Seattle home to Microsoft and its numerous suppliers, thriving with software talent, but also the site of one of the world’s biggest book warehouses. And its location on the West Coast gave him proximity to the computer industry gurus and venture capitalists of Silicon Valley, whose combined expertise and funding, he felt, could prove essential to his fledgling business.
At about the same time, on the other side of the Atlantic, Darryl Mattocks, a British computer games specialist, also had the idea of creating an on-line bookstore. Because UK venture capitalists at that time saw little potential in the Internet, and so refused to back him, Mattocks financed his business with his credit card and an $80,000 loan from the Blackwell family,
founders of the booksellers of the same name.iv
From his home in Oxford, the thirty year old set up the Internet Bookshop. He had lived most of his life in the small university town, and didn’t want to leave. However, Oxford was miles away from the nearest book warehouse or distribution centre. Internet Bookshop prices were initially about the same as those of the traditional high street bookstores and, similar to these physical retailers, the Internet Bookshop didn’t sell titles until their British publication dates, in many cases months after the US publishing dates. Still, open 24 hours a day, seven days a week, the Internet Bookshop felt it served a need for time-pressed readers, many of whom were European, not just British, who couldn’t or didn’t want to go to bookstores. Rather than use advertising, the Internet Bookshop relied on word of mouth and Net browsing to create awareness and interest in the site.
senior vice president in a Wall Street investment bank; and fast becoming one of the city’s leading money and hedge fund managers, he was seemingly destined for the corporate fast track. And yet in 1994, everything changed. During a casual read, Jeff Bezos came across a statistic. A statistic which not only led him to radically change careers, but also convinced him that he had to make the big move from the East Coast all the way to Seattle on the West Coast.
The Growth of the Internet
The statistic had to do with the Internet: usage of the new medium, according to the statistic, was growing at 2300% per annum. Bezos’ reaction was quick and decisive: “Anything that is
growing that fast is going to be ubiquitous very quickly. It was my wake-up call.”i
Thanks to the bonuses he had made in his brief yet successful Wall Street career, Jeff Bezos decided to quit his job in order to dedicate himself fully to what he perceived to be a major new market opportunity. The next few months he spent studying the key factors necessary for success on the Net, and investigating the kinds of products which fulfilled those criteria. He soon narrowed his list down from about 20 potential offerings --including videos, computer
hardware, and computer software--to just two: music and books.ii Both, he thought, had a
competitive advantage for “virtual”, Internet-based selling as opposed to “physical”, retail sales. Possibly because he himself loved reading, possibly because his wife was an aspiring novelist, and definitely given the innumerable hassles involved in the book buying process encountered in any traditional retail outlet by customers, Bezos ultimately decided to start his
Internet-based business with books.iii
Bezos Moves to Seattle
In July 1995 Bezos settled in Seattle. It wasn’t that he had wanted to leave New York; he felt he had to. Not only was Seattle home to Microsoft and its numerous suppliers, thriving with software talent, but also the site of one of the world’s biggest book warehouses. And its location on the West Coast gave him proximity to the computer industry gurus and venture capitalists of Silicon Valley, whose combined expertise and funding, he felt, could prove essential to his fledgling business.
At about the same time, on the other side of the Atlantic, Darryl Mattocks, a British computer games specialist, also had the idea of creating an on-line bookstore. Because UK venture capitalists at that time saw little potential in the Internet, and so refused to back him, Mattocks financed his business with his credit card and an $80,000 loan from the Blackwell family,
founders of the booksellers of the same name.iv
From his home in Oxford, the thirty year old set up the Internet Bookshop. He had lived most of his life in the small university town, and didn’t want to leave. However, Oxford was miles away from the nearest book warehouse or distribution centre. Internet Bookshop prices were initially about the same as those of the traditional high street bookstores and, similar to these physical retailers, the Internet Bookshop didn’t sell titles until their British publication dates, in many cases months after the US publishing dates. Still, open 24 hours a day, seven days a week, the Internet Bookshop felt it served a need for time-pressed readers, many of whom were European, not just British, who couldn’t or didn’t want to go to bookstores. Rather than use advertising, the Internet Bookshop relied on word of mouth and Net browsing to create awareness and interest in the site.
P lease not e that you are not permit ted to reproduce or redist ribut e it for any ot her purpose. Y ou are permit ted to view the mat erial on-line and print a copy for your personal use unt il 14-May-2016. P urchased for use by Z ulf i B hut to on 14-May-2015. O rder ref F 250215. E ducat ional mat erial supplied by T he Case Cent re Copyright encoded A 76HM-JUJ9K -P JMN9I O rder ref erence F 250215
New Name, New Game
Back in Seattle, Bezos decided on “Amazon” as the name of his new business, after the name of the world’s longest river, for what he intended to be the world’s biggest bookstore. Using some of the $11 million he had managed to raise thanks to his contacts on Wall Street and
through his intensive networking amongst the West Coast venture capitalists,v he set up his
headquarters in a 400 square foot storeroom, three floors above an art gallery in a slightly
seedy street in Seattle.vi It was furnished with a refrigerator-sized box running the computer
hardware for the Amazon.com Web site which he had just launched, and with packing tables. But it soon turned out that there were not enough packing tables.
And so it was that, in the second half of 1995, Bezos and his workers would kneel on the floor, late into the night, packing books to ship off to the growing number of customers
buying from the Amazon.com Web site.vii The result was aching backs and sore knees, but
Bezos was now convinced that his earlier hunch about buying and selling books differently, and of using the Internet as a “go between” vehicle—linking those who had books, with those who wanted books—had been accurate.
Creating the New Electronic Service Business Model
From the outset, Bezos’ objective was to build an on-line store that was customer-friendly and easy to navigate. He was convinced that the Internet had a fundamental edge over traditional retailing: constrained neither by available shelf space nor physical locations, on-line stores could be infinitely big, and so virtually overpower their “bricks and mortar” counterparts. As Bezos reflected in an interview:
“The idea of having an exhaustive selection…when Amazon.com started there were smaller on-line bookstores, but none of them had the goal of having every book in print in stock, and that certainly has been our goal from day one…That’s something
that matches the on-line environment very well.”viii
Creating a Virtual Shopping Experience
Also, the idea behind Amazon.com was not just to replicate, or even do better, on the Web what traditional, “bricks and mortar” bookstores did: sell books. It was to provide a different and enhanced experience for customers interested in books, one in which the hassles of book-buying were identified, and removed. These included: getting to the store; looking for a book; waiting to be served; standing in queues to pay; waiting for weeks for out-of-stock books; not being informed when these books arrived; and, last but not least, paying inflated prices for
physical and personnel infrastructures which were doing customers no favours.ix
Proximity to Ingram Book in Seattle, one of the world’s largest warehouses—which Amazon.com used as its virtual store--not only meant that Amazon could quickly get its hands
on 2.5 million books (more than ten times that of the biggest, “physical” book shopx), but also
that volumes could be shipped out to customers in record time. In other words, customers were no longer confined by what was “in stock” or “on the retailer’s floor”. Amazon.com itself kept within its own warehouse the top selling +/-400 titles. Out-of-print or obscure titles were ordered directly from publishers and then routed through its warehouse.
Getting Beyond Price
As Amazon saw it, the traditional, physical bookstore was riddled with activities and expenses that had nothing to do with what the customer wanted: these ranged from teams of employees
New Name, New Game
Back in Seattle, Bezos decided on “Amazon” as the name of his new business, after the name of the world’s longest river, for what he intended to be the world’s biggest bookstore. Using some of the $11 million he had managed to raise thanks to his contacts on Wall Street and
through his intensive networking amongst the West Coast venture capitalists,v he set up his
headquarters in a 400 square foot storeroom, three floors above an art gallery in a slightly
seedy street in Seattle.vi It was furnished with a refrigerator-sized box running the computer
hardware for the Amazon.com Web site which he had just launched, and with packing tables. But it soon turned out that there were not enough packing tables.
And so it was that, in the second half of 1995, Bezos and his workers would kneel on the floor, late into the night, packing books to ship off to the growing number of customers
buying from the Amazon.com Web site.vii The result was aching backs and sore knees, but
Bezos was now convinced that his earlier hunch about buying and selling books differently, and of using the Internet as a “go between” vehicle—linking those who had books, with those who wanted books—had been accurate.
Creating the New Electronic Service Business Model
From the outset, Bezos’ objective was to build an on-line store that was customer-friendly and easy to navigate. He was convinced that the Internet had a fundamental edge over traditional retailing: constrained neither by available shelf space nor physical locations, on-line stores could be infinitely big, and so virtually overpower their “bricks and mortar” counterparts. As Bezos reflected in an interview:
“The idea of having an exhaustive selection…when Amazon.com started there were smaller on-line bookstores, but none of them had the goal of having every book in print in stock, and that certainly has been our goal from day one…That’s something
that matches the on-line environment very well.”viii
Creating a Virtual Shopping Experience
Also, the idea behind Amazon.com was not just to replicate, or even do better, on the Web what traditional, “bricks and mortar” bookstores did: sell books. It was to provide a different and enhanced experience for customers interested in books, one in which the hassles of book-buying were identified, and removed. These included: getting to the store; looking for a book; waiting to be served; standing in queues to pay; waiting for weeks for out-of-stock books; not being informed when these books arrived; and, last but not least, paying inflated prices for
physical and personnel infrastructures which were doing customers no favours.ix
Proximity to Ingram Book in Seattle, one of the world’s largest warehouses—which Amazon.com used as its virtual store--not only meant that Amazon could quickly get its hands
on 2.5 million books (more than ten times that of the biggest, “physical” book shopx), but also
that volumes could be shipped out to customers in record time. In other words, customers were no longer confined by what was “in stock” or “on the retailer’s floor”. Amazon.com itself kept within its own warehouse the top selling +/-400 titles. Out-of-print or obscure titles were ordered directly from publishers and then routed through its warehouse.
Getting Beyond Price
As Amazon saw it, the traditional, physical bookstore was riddled with activities and expenses that had nothing to do with what the customer wanted: these ranged from teams of employees
P lease not e that you are not permit ted to reproduce or redist ribut e it for any ot her purpose. Y ou are permit ted to view the mat erial on-line and print a copy for your personal use unt il 14-May-2016. P urchased for use by Z ulf i B hut to on 14-May-2015. O rder ref F 250215. E ducat ional mat erial supplied by T he Case Cent re Copyright encoded A 76HM-JUJ9K -P JMN9I O rder ref erence F 250215
having to spend time, effort and money looking for prime sites, and then decorating, redesigning and promoting them, to the need for a huge sales staff, distribution network and stock clerks just to man a physical store equivalent to Amazon’s size.
Because Amazon had effectively done away with activities and expenses that were not adding value to the customer experience, initially it was able to charge 30% off select hardbacks, and 20% off paperbacks. While being able to offer books for less was an important element in the Amazon strategy, it wouldn’t be enough, Bezos was certain, to ensure that customers came back to the site over and over again. To achieve that meant customers had to feel they were getting superior value. The Amazon.com site not only had an extensive catalogue, but also an assortment of information about the catalogue entries. For instance, clicking onto the Amazon Web site (see Exhibit 1 for an illustration of a sample page) allowed browsers to search for books by author, title, subject, or keyword. More general searches could be done by browsing in predefined subject areas, such as Biographies, History, Recent Fiction, etc. Typically, a brief synopsis of the book selected would be included, as well as reviews—both from the leading journals, such as The New York Times, as well as from other readers.
Visitors to the Amazon.com Web site were encouraged to write and submit reviews of books they had read. These reviews then became part of the overall information surrounding the books in the Amazon.com catalogue. Similarly, Amazon included for certain of its books “Author Interviews”. In this case, authors were robotically interviewed by Amazon’s
specially designed software.xi
For customers with no particular book in mind, but just wanting to see what was available—a typical reason for entering a “physical” bookstore—there was the ability to click on the “Reviewed in the Media” section of Amazon, to see which books were currently in the limelight. Alternatively, they could check out the “Best-sellers” virtual aisle at Amazon, for the hottest books on the market, or the “Award Winners” section to keep track of the literary greats in a variety of fields.
Personalising the Offering
In addition to the extensive and easy-to-use catalogue, the Amazon site also invited readers to sign up for its personal notification services, called “Eyes”. Readers would indicate what kinds of book - either in terms of subjects or authors - they liked to read. Once signed up for this service, they would receive regular e-mails with reviews of what Amazon’s editors considered “exceptional” books in the categories they were interested in. Customers could modify or add to their personal reading profiles whenever they wanted simply by e-mailing to Amazon’s customer service desk.
Paying for books was done by entering credit card information, which was specially encrypted to ensure privacy and security. The customers’ orders were processed as soon as received, with books in stock packaged and mailed the same day; orders for those not in stock were immediately placed with the appropriate publisher. Customers were then notified by e-mail as soon as their order had been shipped.
Leveraging Network Externalities
In July 1996 Bezos pioneered the “Associates” program. He knew that network externalities, one of the precepts of the modern economy, meant that the value of a network increased exponentially as more members joined it. In other words, more meant more--for everyone,
including customers.xii The object was to get as many others as possible to join his
network,
having to spend time, effort and money looking for prime sites, and then decorating, redesigning and promoting them, to the need for a huge sales staff, distribution network and stock clerks just to man a physical store equivalent to Amazon’s size.
Because Amazon had effectively done away with activities and expenses that were not adding value to the customer experience, initially it was able to charge 30% off select hardbacks, and 20% off paperbacks. While being able to offer books for less was an important element in the Amazon strategy, it wouldn’t be enough, Bezos was certain, to ensure that customers came back to the site over and over again. To achieve that meant customers had to feel they were getting superior value. The Amazon.com site not only had an extensive catalogue, but also an assortment of information about the catalogue entries. For instance, clicking onto the Amazon Web site (see Exhibit 1 for an illustration of a sample page) allowed browsers to search for books by author, title, subject, or keyword. More general searches could be done by browsing in predefined subject areas, such as Biographies, History, Recent Fiction, etc. Typically, a brief synopsis of the book selected would be included, as well as reviews—both from the leading journals, such as The New York Times, as well as from other readers.
Visitors to the Amazon.com Web site were encouraged to write and submit reviews of books they had read. These reviews then became part of the overall information surrounding the books in the Amazon.com catalogue. Similarly, Amazon included for certain of its books “Author Interviews”. In this case, authors were robotically interviewed by Amazon’s
specially designed software.xi
For customers with no particular book in mind, but just wanting to see what was available—a typical reason for entering a “physical” bookstore—there was the ability to click on the “Reviewed in the Media” section of Amazon, to see which books were currently in the limelight. Alternatively, they could check out the “Best-sellers” virtual aisle at Amazon, for the hottest books on the market, or the “Award Winners” section to keep track of the literary greats in a variety of fields.
Personalising the Offering
In addition to the extensive and easy-to-use catalogue, the Amazon site also invited readers to sign up for its personal notification services, called “Eyes”. Readers would indicate what kinds of book - either in terms of subjects or authors - they liked to read. Once signed up for this service, they would receive regular e-mails with reviews of what Amazon’s editors considered “exceptional” books in the categories they were interested in. Customers could modify or add to their personal reading profiles whenever they wanted simply by e-mailing to Amazon’s customer service desk.
Paying for books was done by entering credit card information, which was specially encrypted to ensure privacy and security. The customers’ orders were processed as soon as received, with books in stock packaged and mailed the same day; orders for those not in stock were immediately placed with the appropriate publisher. Customers were then notified by e-mail as soon as their order had been shipped.
Leveraging Network Externalities
In July 1996 Bezos pioneered the “Associates” program. He knew that network externalities, one of the precepts of the modern economy, meant that the value of a network increased exponentially as more members joined it. In other words, more meant more--for everyone,
including customers.xii The object was to get as many others as possible to join his
network, P lease not e that you are not permit ted to reproduce or redist ribut e it for any ot her purpose. Y ou are permit ted to view the mat erial on-line and print a copy for your personal use unt il 14-May-2016. P urchased for use by Z ulf i B hut to on 14-May-2015. O rder ref F 250215. E ducat ional mat erial supplied by T he Case Cent re Copyright encoded A 76HM-JUJ9K -P JMN9I O rder ref erence F 250215
therefore, rather than keep it exclusive. That way, customers could find exactly what they wanted irrespective of its location on the Web, and get to that site quickly and seamlessly, at the click of an icon. For example, for readers interested in cooking, Amazon provided a direct link to Starchefs, which specialised in books for gourmets.
Through this collaborative marketing concept, Web site owners also recommended books to be purchased at Amazon.com. In return, these Amazon.com associates earned referral fees of up to 15%. The Associate program was free to join, and Amazon.com deliberately did not require that its associates meet any sales quotas.
Up Up and Away
By the end of 1995, Amazon’s staff reached 110, of which 14 did nothing but answer e-mail from customers. According to company records, average daily visits to the site by December of that year were approximately 2200. Initially, Amazon.com’s revenues doubled in size every 2.4 months. By August 1996, book sales were growing at 34% a month, and Amazon.com’s inventory was turning 150 times a year, compared to the three or four times a
year that physical bookstores turned their inventory.xiii The company was also beginning to
pick up some accolades in the press and general market. Time Magazine, for example, rated Amazon one of the “Ten Best Web Sites of 1996”. When Bezos was asked why customers visited and purchased from his site, he responded:
“Bill Gates laid it out in a magazine interview. He (Bill Gates) said, ‘I buy my books at Amazon.com because I’m busy and it’s convenient. They have a big selection, and they’ve been reliable.’ Those are three of our four core value propositions: convenience, selection, service. The only one he left out is price: we are the broadest discounters in the world in any product category…These value propositions are
interrelated, and they all relate to the Web…”xiv
By the end of 1996, average daily visits to the Amazon.com web site had grown to 50,000, and repeat customers then accounted for 40% of orders. Company headquarters had by now expanded to two floors: on one, about 25 editorial staff writers wrote the book reviews, and another 25 or so programmers kept the software running smoothly. The next floor was basically a room full of computers, and a classroom full of people being trained to run them. Concentrating on Service
One area where Amazon had to spend just as much on staff and overheads as its physical
counterparts was in the domain of customer service.xv As Bezos observed:
“If you make customers unhappy in the physical world, they might each tell six friends. If you make customers unhappy on the Internet, they can each tell 6000 friends with one message to a newsgroup. If you make them really happy, they can tell 6000 people about you. You want every customer to become an evangelist for you... (Being on-line is the same as) a restaurant who has to treat every diner who comes
through the door like a potential reviewer for the Michelin guide.” xvi
Accordingly, Bezos sought to get to know individuals better. Amazon employees were trained to spend as much time, money and energy on service and building relationships as they did on selling books. They were encouraged to go to greater lengths to exceed expected standards when a customer needed assistance on, say, a query title, a mistaken address and so
therefore, rather than keep it exclusive. That way, customers could find exactly what they wanted irrespective of its location on the Web, and get to that site quickly and seamlessly, at the click of an icon. For example, for readers interested in cooking, Amazon provided a direct link to Starchefs, which specialised in books for gourmets.
Through this collaborative marketing concept, Web site owners also recommended books to be purchased at Amazon.com. In return, these Amazon.com associates earned referral fees of up to 15%. The Associate program was free to join, and Amazon.com deliberately did not require that its associates meet any sales quotas.
Up Up and Away
By the end of 1995, Amazon’s staff reached 110, of which 14 did nothing but answer e-mail from customers. According to company records, average daily visits to the site by December of that year were approximately 2200. Initially, Amazon.com’s revenues doubled in size every 2.4 months. By August 1996, book sales were growing at 34% a month, and Amazon.com’s inventory was turning 150 times a year, compared to the three or four times a
year that physical bookstores turned their inventory.xiii The company was also beginning to
pick up some accolades in the press and general market. Time Magazine, for example, rated Amazon one of the “Ten Best Web Sites of 1996”. When Bezos was asked why customers visited and purchased from his site, he responded:
“Bill Gates laid it out in a magazine interview. He (Bill Gates) said, ‘I buy my books at Amazon.com because I’m busy and it’s convenient. They have a big selection, and they’ve been reliable.’ Those are three of our four core value propositions: convenience, selection, service. The only one he left out is price: we are the broadest discounters in the world in any product category…These value propositions are
interrelated, and they all relate to the Web…”xiv
By the end of 1996, average daily visits to the Amazon.com web site had grown to 50,000, and repeat customers then accounted for 40% of orders. Company headquarters had by now expanded to two floors: on one, about 25 editorial staff writers wrote the book reviews, and another 25 or so programmers kept the software running smoothly. The next floor was basically a room full of computers, and a classroom full of people being trained to run them. Concentrating on Service
One area where Amazon had to spend just as much on staff and overheads as its physical
counterparts was in the domain of customer service.xv As Bezos observed:
“If you make customers unhappy in the physical world, they might each tell six friends. If you make customers unhappy on the Internet, they can each tell 6000 friends with one message to a newsgroup. If you make them really happy, they can tell 6000 people about you. You want every customer to become an evangelist for you... (Being on-line is the same as) a restaurant who has to treat every diner who comes
through the door like a potential reviewer for the Michelin guide.” xvi
Accordingly, Bezos sought to get to know individuals better. Amazon employees were trained to spend as much time, money and energy on service and building relationships as they did on selling books. They were encouraged to go to greater lengths to exceed expected standards when a customer needed assistance on, say, a query title, a mistaken address and so
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on. When a customer needed help, the humans took over from the machines in full force-- and 20% of Amazon staff did nothing but answer queries from the e-mail centre.
Bezos’ belief in how the business should be run was almost religious. From the very beginning he had dispensed with traditional corporate status symbols. “When I worked at Bankers Trust people measured their self worth by how many ceiling tiles they had in their office. It was counter productive.” At Amazon’s headquarters everyone has desks made of old doors, and their computer monitors were propped up on phone directories. “The door
desk is a symbol of the fact that we spend money on things that matter to customers.”xvii
“Getting Big Fast”
By the end of 1996-- Amazon.com’s first full year of operations-- sales had grown to almost $16 million. (See Exhibit 2 for operating results for 1995 and 1996). At the same time, and into the first two quarters of 1997, Bezos began building his executive structure. Seven individuals joined the company during that period in top executive positions. For information systems and logistics he found the Vice President in charge of those functions at Wal-Mart, considered the best in this field in the US. By the summer of 1998 this executive had taken 15 employees from Wal-Mart with him. (see Exhibit 3 for a listing and brief biography of the executive officers in addition to Jeff Bezos). Later, Bezos said:
“The constraint on our growth is not capital but people bandwidth...smart people, working hard, passionately and smartly...What excites them is changing the world in an important and fundamental way. Our motto is: work hard, have fun, make
history.”xviii
As 1997 dawned, Bezos was convinced that this was the year he needed to accelerate growth, announcing his mantra as “GBF”, for “Get Big Fast”. Bezos explained:
“This is scale business. And what happens is that the fixed costs of doing this business are very high, and the variable costs of doing this business are extremely low. As a result, our major strategic objective has always been GBF….We need that in order to operate successfully what is a scale business.
At the same time, we are investing significant amounts of money in advertising and marketing in order to introduce ourselves to as many customers as possible, as soon as possible, as part of this Get Big Fast strategy. We spend marketing dollars at a level which is disproportionate to a company of our size. And we do that because we believe this is a critical category formation time where, roughly speaking, maybe a
dollar spent on advertising today is worth $10 spent on advertising next year….”xix
Throughout 1997 and into 1998, Amazon.com worked on several levels in order to achieve this objective. It also began tapping outside sources of finance in order to fund its “GBF” growth objectives.
Going Public
In May 1997, Amazon.com went public with an initial public offering of 3,000,000 shares at a price of $18 per share. Keen demand on the first day of trading prompted Deutsche Morgan Grenfell, the IPO’s underwriters , to increase the size of the offer by 20%. The shares then opened 63% higher than the $18 offer price. They closed the day at $23.50. Within a week,
on. When a customer needed help, the humans took over from the machines in full force-- and 20% of Amazon staff did nothing but answer queries from the e-mail centre.
Bezos’ belief in how the business should be run was almost religious. From the very beginning he had dispensed with traditional corporate status symbols. “When I worked at Bankers Trust people measured their self worth by how many ceiling tiles they had in their office. It was counter productive.” At Amazon’s headquarters everyone has desks made of old doors, and their computer monitors were propped up on phone directories. “The door
desk is a symbol of the fact that we spend money on things that matter to customers.”xvii
“Getting Big Fast”
By the end of 1996-- Amazon.com’s first full year of operations-- sales had grown to almost $16 million. (See Exhibit 2 for operating results for 1995 and 1996). At the same time, and into the first two quarters of 1997, Bezos began building his executive structure. Seven individuals joined the company during that period in top executive positions. For information systems and logistics he found the Vice President in charge of those functions at Wal-Mart, considered the best in this field in the US. By the summer of 1998 this executive had taken 15 employees from Wal-Mart with him. (see Exhibit 3 for a listing and brief biography of the executive officers in addition to Jeff Bezos). Later, Bezos said:
“The constraint on our growth is not capital but people bandwidth...smart people, working hard, passionately and smartly...What excites them is changing the world in an important and fundamental way. Our motto is: work hard, have fun, make
history.”xviii
As 1997 dawned, Bezos was convinced that this was the year he needed to accelerate growth, announcing his mantra as “GBF”, for “Get Big Fast”. Bezos explained:
“This is scale business. And what happens is that the fixed costs of doing this business are very high, and the variable costs of doing this business are extremely low. As a result, our major strategic objective has always been GBF….We need that in order to operate successfully what is a scale business.
At the same time, we are investing significant amounts of money in advertising and marketing in order to introduce ourselves to as many customers as possible, as soon as possible, as part of this Get Big Fast strategy. We spend marketing dollars at a level which is disproportionate to a company of our size. And we do that because we believe this is a critical category formation time where, roughly speaking, maybe a
dollar spent on advertising today is worth $10 spent on advertising next year….”xix
Throughout 1997 and into 1998, Amazon.com worked on several levels in order to achieve this objective. It also began tapping outside sources of finance in order to fund its “GBF” growth objectives.
Going Public
In May 1997, Amazon.com went public with an initial public offering of 3,000,000 shares at a price of $18 per share. Keen demand on the first day of trading prompted Deutsche Morgan Grenfell, the IPO’s underwriters , to increase the size of the offer by 20%. The shares then opened 63% higher than the $18 offer price. They closed the day at $23.50. Within a week,
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the shares had fallen below the offer price, and throughout the next two months tended to stay
at that level even when other high tech were gathering record-breaking gains.xx By early
August, however, its price had jumped to $28.75.xxi
A few months later, Amazon.com negotiated a $75 million, three year credit facility from a bank consortium led by Deutsche Morgan Grenfell.
Creating Presence and Accessibility
Throughout 1997, in order to grow the customer base, Amazon.com signed a variety of multi-million dollar agreements with leading Internet media and search engine gateway sites, which provided access to Internet services and activities, such as Excite, Yahoo!, and AOL (America On-Line)—three of the six top visited sites. The aim of these agreements was to further expand the reach and visibility of Amazon.com, and to enhance its strategy of providing
customers with as many points of access to the Amazon.com store as possible. xxii
These exclusive agreements established Amazon.com as the number one bookseller on these sites by giving Amazon.com a permanent, “above-the-fold” front screen button (visible without scrolling down) on the home pages of these Web sites. The button linked users directly to Amazon.com. so that they didn’t have to type in “amazon” and then wait for the searching and connecting to happen. The partnership with AOL gave Amazon.com access to the more than eight million members of AOL; in return, AOL was paid $19 million over three years, with the possibility of additional payments in the event Amazon.com sales revenues
exceeded thresholds specified in the agreement. xxiii At about the same time Amazon.com
announced a similar, three year, multi-million dollar advertising spot on the Excite search network. (see exhibit 4 for an example of the AOL advertising)
Between the last quarter of 1997 and the first quarter of 1998, the Amazon.com Associates program more than doubled, and by February there were more than 30,000 members in the program. By 1998, Amazon.com had also signed multi-year exclusive or premier associate relationships with another two of the six top visited sites on the Web, Netscape and GeoCities, to broaden its access to more customers.
Ongoing Innovation
In addition to working with Gateway sites, Amazon also worked more closely with other players to provide superior value to customers. For example in 1998 it had launched Amazon.comAdvantage, a program designed to increase the visibility and sales of books from independent, smaller, publishers. The objective was to help these smaller publishers, by ensuring that their books appeared prominently throughout Amazon.com’s catalogue, something which the commercial realities of traditional bookstores didn’t always allow. Bezos was also concerned about offsetting the counter-revolution to his electronic marketing concept. For example, in the early 1990s Borders, a newcomer to the US book scene, was instrumental in creating what would become known as the “cultural superstore”. The idea behind the concept was that the bookstore serve as a sort of social centre, or literary salon, complete with cafes, comfortable sitting areas, music sections, desks, and crèches. In addition to a broad range of books, magazines and periodicals, they also sold videos, CDs, and computer games. Musicians would come into play and writers read from their works. Borders had not only grown multi-fold since its inception, but had rapidly expanded globally in a business long considered to be highly localised. It expected to have 450 stores by the
year 2003, designed to appeal to the reading, and music tastes of the over-30’s.xxiv
the shares had fallen below the offer price, and throughout the next two months tended to stay
at that level even when other high tech were gathering record-breaking gains.xx By early
August, however, its price had jumped to $28.75.xxi
A few months later, Amazon.com negotiated a $75 million, three year credit facility from a bank consortium led by Deutsche Morgan Grenfell.
Creating Presence and Accessibility
Throughout 1997, in order to grow the customer base, Amazon.com signed a variety of multi-million dollar agreements with leading Internet media and search engine gateway sites, which provided access to Internet services and activities, such as Excite, Yahoo!, and AOL (America On-Line)—three of the six top visited sites. The aim of these agreements was to further expand the reach and visibility of Amazon.com, and to enhance its strategy of providing
customers with as many points of access to the Amazon.com store as possible. xxii
These exclusive agreements established Amazon.com as the number one bookseller on these sites by giving Amazon.com a permanent, “above-the-fold” front screen button (visible without scrolling down) on the home pages of these Web sites. The button linked users directly to Amazon.com. so that they didn’t have to type in “amazon” and then wait for the searching and connecting to happen. The partnership with AOL gave Amazon.com access to the more than eight million members of AOL; in return, AOL was paid $19 million over three years, with the possibility of additional payments in the event Amazon.com sales revenues
exceeded thresholds specified in the agreement. xxiii At about the same time Amazon.com
announced a similar, three year, multi-million dollar advertising spot on the Excite search network. (see exhibit 4 for an example of the AOL advertising)
Between the last quarter of 1997 and the first quarter of 1998, the Amazon.com Associates program more than doubled, and by February there were more than 30,000 members in the program. By 1998, Amazon.com had also signed multi-year exclusive or premier associate relationships with another two of the six top visited sites on the Web, Netscape and GeoCities, to broaden its access to more customers.
Ongoing Innovation
In addition to working with Gateway sites, Amazon also worked more closely with other players to provide superior value to customers. For example in 1998 it had launched Amazon.comAdvantage, a program designed to increase the visibility and sales of books from independent, smaller, publishers. The objective was to help these smaller publishers, by ensuring that their books appeared prominently throughout Amazon.com’s catalogue, something which the commercial realities of traditional bookstores didn’t always allow. Bezos was also concerned about offsetting the counter-revolution to his electronic marketing concept. For example, in the early 1990s Borders, a newcomer to the US book scene, was instrumental in creating what would become known as the “cultural superstore”. The idea behind the concept was that the bookstore serve as a sort of social centre, or literary salon, complete with cafes, comfortable sitting areas, music sections, desks, and crèches. In addition to a broad range of books, magazines and periodicals, they also sold videos, CDs, and computer games. Musicians would come into play and writers read from their works. Borders had not only grown multi-fold since its inception, but had rapidly expanded globally in a business long considered to be highly localised. It expected to have 450 stores by the
year 2003, designed to appeal to the reading, and music tastes of the over-30’s.xxiv
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One of the drawbacks of an on-line bookstore like Amazon.com was that it could not offer comfy sofas and cappuccinos to those who browsed through its virtual aisles. So Bezos determinedly set about finding innovative ways to enhance the overall customer experience, and get customers to feel “involved” with Amazon.com as a company and brand. For example in announcing the July 1997 agreement with Pulitzer-Prize winning author John Updike—whereby visitors to the Amazon.com Web site would jointly create a story, on the Web, with the best selling novelist over 44 days. The project entailed that Updike write the beginning of an original story (entitled “Murder Makes the Magazine”) exclusively for Amazon.com. Over the next 44 days, visitors to the site could write and submit their own paragraphs to continue the story. The writers of paragraphs selected by the Amazon.com editorial staff to continue the story each received $1000.
Enhancing the Customer Interface
Hand in hand with such customer involvement, “fun” initiatives, Amazon.com continuously enhanced and upgraded its customer interface technologies and infrastructures. In the summer of 1997, for example, it launched a new “recommendation center” on its Web site. Features ranged from offering customers personalised book recommendations based upon their specific profiles and interests, and other customer ratings. Since many people didn’t know precisely what they wanted to read next, an “If You Like This Author” selection gave them a suggested list of other authors. Bezos and his team also began working on systems that would help individuals find the precise books that would change the world for them: “If you can do that
you are creating real value for the world.”xxv
Also, Amazon.com developed and launched a proprietary technology called 1-Click which for the first time gave customers the ability to make purchases on the Web with just one click of the mouse, eliminating the need for customers to fill out order information every time they returned to the site. Bezos claimed that the 1-Click represented a “new standard for ease of
buying on or off the Web”.xxvi
Readers were not the only ones benefiting from Amazon’s innovations. Authors (accustomed to getting royalty statements once a year from publishers) could check to see how their new book was doing on a daily basis from a globally assembled listing, updated continuously, prepared by Amazon, for what Bezos termed a global “literary stock market.” And students were also using the Amazon lists as reference sites (as one student involved with a project put it, “it’s so much easier than going to the library!”)
Stretching the Brand
In the early spring of 1998, Amazon.com invited customers, artists, music industry professionals, and music lovers everywhere to help build “the music store of their dreams”. As David Risher, VP of Product Development, put it: “Every day customers give us suggestions about how to improve our bookstore. Many of our most popular features are the result of those suggestions. Our music team is completely focused on building a store that
addresses the desires of music lovers.”xxvii Some of the questions visitors to the site answered
included “Tell us about your dream music store.: how does it help you find music you like? How does it help you avoid music you won’t? What makes it unique?” Customers were also asked to publish their opinions—both positive and negative-- by reviewing and rating CDs which other potential customers could then read as they made their decisions about what to buy. In appreciation for these suggestions, Amazon.com entered all visitors who offered input
One of the drawbacks of an on-line bookstore like Amazon.com was that it could not offer comfy sofas and cappuccinos to those who browsed through its virtual aisles. So Bezos determinedly set about finding innovative ways to enhance the overall customer experience, and get customers to feel “involved” with Amazon.com as a company and brand. For example in announcing the July 1997 agreement with Pulitzer-Prize winning author John Updike—whereby visitors to the Amazon.com Web site would jointly create a story, on the Web, with the best selling novelist over 44 days. The project entailed that Updike write the beginning of an original story (entitled “Murder Makes the Magazine”) exclusively for Amazon.com. Over the next 44 days, visitors to the site could write and submit their own paragraphs to continue the story. The writers of paragraphs selected by the Amazon.com editorial staff to continue the story each received $1000.
Enhancing the Customer Interface
Hand in hand with such customer involvement, “fun” initiatives, Amazon.com continuously enhanced and upgraded its customer interface technologies and infrastructures. In the summer of 1997, for example, it launched a new “recommendation center” on its Web site. Features ranged from offering customers personalised book recommendations based upon their specific profiles and interests, and other customer ratings. Since many people didn’t know precisely what they wanted to read next, an “If You Like This Author” selection gave them a suggested list of other authors. Bezos and his team also began working on systems that would help individuals find the precise books that would change the world for them: “If you can do that
you are creating real value for the world.”xxv
Also, Amazon.com developed and launched a proprietary technology called 1-Click which for the first time gave customers the ability to make purchases on the Web with just one click of the mouse, eliminating the need for customers to fill out order information every time they returned to the site. Bezos claimed that the 1-Click represented a “new standard for ease of
buying on or off the Web”.xxvi
Readers were not the only ones benefiting from Amazon’s innovations. Authors (accustomed to getting royalty statements once a year from publishers) could check to see how their new book was doing on a daily basis from a globally assembled listing, updated continuously, prepared by Amazon, for what Bezos termed a global “literary stock market.” And students were also using the Amazon lists as reference sites (as one student involved with a project put it, “it’s so much easier than going to the library!”)
Stretching the Brand
In the early spring of 1998, Amazon.com invited customers, artists, music industry professionals, and music lovers everywhere to help build “the music store of their dreams”. As David Risher, VP of Product Development, put it: “Every day customers give us suggestions about how to improve our bookstore. Many of our most popular features are the result of those suggestions. Our music team is completely focused on building a store that
addresses the desires of music lovers.”xxvii Some of the questions visitors to the site answered
included “Tell us about your dream music store.: how does it help you find music you like? How does it help you avoid music you won’t? What makes it unique?” Customers were also asked to publish their opinions—both positive and negative-- by reviewing and rating CDs which other potential customers could then read as they made their decisions about what to buy. In appreciation for these suggestions, Amazon.com entered all visitors who offered input
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into a drawing for a $1000 gift certificate, redeemable on-line for a purchase of music, books, or both.
Bursting into Song
Then in June of that year, Amazon.com expanded into music. More than 125000 CDs were offered, ten times the selection of the average music store, at discounts of up to 40%. Similar to the book searching facilities, music fans could search by CD title, artists, song title, or label, and also listen to more than 225,000 songs. There were also expert and customer reviews, interviews with artists, essential lists, news and an updated index of the hottest CDs. A few weeks later the site, at customer request, was expanded to include 42000 classical and opera CDs. The Amazon.com music store now had more than 200,000 CDs, 25 times the selection of the average physical music store. More than just the selection, Amazon underscored that the real difference with the physical stores was that, especially with classical music, “customers want to be able to choose from all the available recordings, yet quickly
find the one they want.”xxviii
Also based on demand and feedback from customers, the company launched a “mini store” within the Amazon.com Web site, aimed specifically at children. It was called Amazon.com Kids, and featured a catalogue of more than 100,000 books for children, teens and their parents. In addition, the mini-site had in-depth articles, reviews, interviews, and targeted search and recommendation services. Children’s books had always been amongst the most popular items at Amazon.com.
In the second half of 1998, Amazon.com spent $250 million to purchase two Internet companies: PlanetAll, a provider of highly personalised online services for 1.5 million subscribers which enabled customers to automatically update their address books, calendars and reminders on a minute-for-minute basis, and Junglee Corp., a maker of database systems which let customers find any kind of merchandise they were looking for on the Net, and
which shared its revenues with the portals who co-branded its services.xxix
In reflecting on these purchases, Paul Gillin from Computerworld Magazine had the following to say:
“I joined the faithful last month when Amazon magically tracked down a mint edition of a book my father wrote in the 1960s. It had been out of print for 20 years. Barnesandnoble.com had never even heard of the title. Amazon had it for me in a month…..
The Junglee technology will let Amazon become the middleman between consumers and a wide variety of products consumers might want to buy on the Web. The analogue to Wal-Mart's sprawling discount stores could be Amazon's widely respected brand. Once consumers do business with Amazon, they tend to come back again and
again. And there's no reason they'll buy only books.” xxx
Said another analyst from a research firm: Amazon is ''a lot more personal than a Wal-Mart is ever going to be”:
“Amazon’s ability to expand beyond its collection of 3 million books and CDs demonstrates one of the Internet's most alluring qualities. On one hand, consumers are attracted to its tremendous convenience. They can shop when it's raining out, don't need to gas up or face grouchy sales clerks. But even more important for business
into a drawing for a $1000 gift certificate, redeemable on-line for a purchase of music, books, or both.
Bursting into Song
Then in June of that year, Amazon.com expanded into music. More than 125000 CDs were offered, ten times the selection of the average music store, at discounts of up to 40%. Similar to the book searching facilities, music fans could search by CD title, artists, song title, or label, and also listen to more than 225,000 songs. There were also expert and customer reviews, interviews with artists, essential lists, news and an updated index of the hottest CDs. A few weeks later the site, at customer request, was expanded to include 42000 classical and opera CDs. The Amazon.com music store now had more than 200,000 CDs, 25 times the selection of the average physical music store. More than just the selection, Amazon underscored that the real difference with the physical stores was that, especially with classical music, “customers want to be able to choose from all the available recordings, yet quickly
find the one they want.”xxviii
Also based on demand and feedback from customers, the company launched a “mini store” within the Amazon.com Web site, aimed specifically at children. It was called Amazon.com Kids, and featured a catalogue of more than 100,000 books for children, teens and their parents. In addition, the mini-site had in-depth articles, reviews, interviews, and targeted search and recommendation services. Children’s books had always been amongst the most popular items at Amazon.com.
In the second half of 1998, Amazon.com spent $250 million to purchase two Internet companies: PlanetAll, a provider of highly personalised online services for 1.5 million subscribers which enabled customers to automatically update their address books, calendars and reminders on a minute-for-minute basis, and Junglee Corp., a maker of database systems which let customers find any kind of merchandise they were looking for on the Net, and
which shared its revenues with the portals who co-branded its services.xxix
In reflecting on these purchases, Paul Gillin from Computerworld Magazine had the following to say:
“I joined the faithful last month when Amazon magically tracked down a mint edition of a book my father wrote in the 1960s. It had been out of print for 20 years. Barnesandnoble.com had never even heard of the title. Amazon had it for me in a month…..
The Junglee technology will let Amazon become the middleman between consumers and a wide variety of products consumers might want to buy on the Web. The analogue to Wal-Mart's sprawling discount stores could be Amazon's widely respected brand. Once consumers do business with Amazon, they tend to come back again and
again. And there's no reason they'll buy only books.” xxx
Said another analyst from a research firm: Amazon is ''a lot more personal than a Wal-Mart is ever going to be”:
“Amazon’s ability to expand beyond its collection of 3 million books and CDs demonstrates one of the Internet's most alluring qualities. On one hand, consumers are attracted to its tremendous convenience. They can shop when it's raining out, don't need to gas up or face grouchy sales clerks. But even more important for business
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