The Amazon Business Model of Change
For the foreseeable future, Amazon’s business model will be included in academic textbooks as an example of an innovative e-business that braved the ups and downs of the Internet and continued to grow, adapt, and diversify its services. When Amazon opened its online store in July 1995, it defied all those who said it would never succeed. Its mission was to completely transform the book-buying concept by using online technology to enhance customer service, ease, and speed. The company soon expanded by adding many other products, such as movies, music, computer software, video games, electronics, clothing, toys, and even diamond rings. “Change” is the catchword for the Internet, and Amazon has followed this direction since its beginning. The business has regularly revamped its opportunities — trying out new ventures and expanding successful ones.
Many of the opportunities in this book were added or revised this past year. As with many Web ventures, men and women of all ages, backgrounds, experience levels, and geography have the ability with Amazon to open, develop, and grow a business right from their home office. As the information and case studies in this book demonstrate, Amazon offers a variety of opportunities, from incremental and long-tail money sources to main income generators, based on an individual’s personal goals and level of participation and commitment. The customer is a No. 1 priority for Amazon, and so are its business partners.
Jeff Bezos and Customer-Centrism
By now, the story of Amazon founder Jeff Bezos, as described on www.Amazon.com, is quite well-known. In 1994, he was quickly climbing the top rings of the ladder as the youngest senior vice president in the history of D. E. Shaw, a Wall Street–based investment bank. He heard about a new record-breaking medium called the Internet, which was expanding at a remarkable 2,300 percent a year, and left Wall Street behind. Bezos decided to target books on this new Web platform, which was not the norm at that time. He relocated to Seattle, Washington, near the largest wholesalers, and began working out of his garage. His vision contained two main points. The first goal was to construct the largest and most customer-centric venture. The second goal was to establish an online location where customers could buy anything they wanted. As noted in a report in Journal of Advertising Research, he summed up this vision of customer-centrism as:
“Our goal is to be Earth’s most customer-centric company. I will leave it to them to say if we’ve achieved that. But why? The answer is three things. The first is that customer-centric means figuring out what your customers want by asking them, then figuring out how to give it to them, and then giving it to them. That’s the traditional meaning of customer-centric, and we’re focused on it. The second is innovating on behalf of customers, figuring out what they don’t know they want and giving it to them. The third meaning, unique to the Internet, is the idea of personalization: Redecorating the store for each and every individual customer.”
Many thought that Bezos was way off the mark when saying he wanted to give customers the opportunity to shop for millions of books. He quickly proved them wrong. Within its first month of business, Amazon filled orders for customers in 50 states and 45 countries — all shipped out of his garage. In 1996, its first full fiscal year, Amazon produced $15.7 million in sales. This number jumped by 800 percent the following year. However, selling books was just the foundation. His customer-centered innovations made the business all the more unique. These included many of the services now taken for granted, such as shopping carts, personalized shopping, and 1-click® shopping.
At this time, Amazon also pioneered affiliate marketing, with hundreds of thousands of sites linking to Amazon, including Yahoo!, AOL®, and MSN™. Amazon became the first Internet retailer to operate an affiliate program that allowed owners of other Web sites to refer customers to Amazon in return for a referral fee. To protect its unique proprietary technology, Amazon received a patent for a “1-click” shipping procedure and contributed to 600,000 affiliates by the first quarter of 2001. Since then, Amazon has teamed with its affiliates to expand its market reach well beyond its own domain and focus its strength on order fulfillment and distribution.
In 1997, the Economist declared, “Companies around the world are studying it [Amazon.com] as perhaps the best model for tomorrow’s successes in electronic commerce.” The Wall Street Journal® ranked the e-business among the top five firms “shaping the new age.” In a nationwide survey of nearly 11,000 people conducted online by Harris Interactive Inc. and the Reputation Institute, Amazon was named among the top 25 best-regarded and most-visible U.S. companies in 1999 and 2000.
The Ups and Downs of the Internet Business
Amazon’s first decade soared and spiraled downward like a rollercoaster. By the end of 1999, annual sales had grown to $1.6 billion. In December, Time magazine named Bezos “Person of the Year,” calling him the “King of Cybercommerce.” Yet, only a short month later, this same celebrated person had to dismiss 150 employees, mostly at the Seattle headquarters, as part of an internal reorganization. Then, just five days later, Amazon reported a loss of $323 million for the fourth quarter and promised that future losses would be lower.
By the summer of the new century, Amazon’s stock price had dropped by more than two-thirds, and analysts began to loudly criticize Bezos for venturing into too many product categories and spreading the business too thin. The industry was filled with truths and gossip about Amazon, and everything in between. One report by BBC™ News at the time reported that the investment bank Lehman Brothers® was warning investors that Amazon was running extremely low in cash and advised them to avoid the company’s stock. Rumors abounded about Amazon filing for bankruptcy or selling out to another company. Negative nicknames about the business arose, such as “Amazon.bomb” and “Amazon.toast.”
At the beginning of 2001, Amazon reported a loss of $1.4 billion, but Bezos did not give up. He got back on the horse — if he ever dismounted at all — and took a different approach. He promised analysts that Amazon would report a profit by year’s end by cutting expenses and restructuring the business model. 2002 was welcomed in by 1,300 layoffs or 13 percent of the workforce, closing two warehouses, shutting down a Seattle customer-service center, and eliminating all unprofitable products. Simultaneously, Bezos focused on better managing the merchandise Amazon continued to carry. This included delivering packages to postal hubs presorted by geography and developing complex algorithms to analyze items that people buy to group them in the same warehouse. An additional tactic was selling products in other companies’ warehouses. Amazon switched from a specialty retailer to an online shopping portal. The site started selling products from companies such as Toys “R” Us® and Target®, and it added merchandise from smaller retailers. The emphasis was now on person-centric metrics, such as “time saved” and “money saved.”
The Focus on Continuous Improvement
From the start, Bezos saw that success will come from constantly enhancing repeatable processes or “big-time process management.” The marketer’s role is to clearly identify what customers most want to improve and to deliver it to them. Bezos explains in the company’s 2003 Annual Report, “Amazon’s marketing strategy is designed to strengthen and broaden the Amazon.com brand name, increase customer traffic to our Web sites, encourage customers to shop in many product categories, promote repeat purchases, and develop incremental product and service revenue opportunities.” As will be seen in this book, such a customer-centric approach strongly supports those who team up with Amazon to sell their own products.
Partnering with Associates
By the end of 2001, Bezos kept his promise about a personal comeback. The company reported its first profit, with fourth-quarter earnings of $5 million. This growth was backed up with additional changes. In support of its extremely high-volume business, Amazon developed a sophisticated, scalable, and reliable technology infrastructure. On its own, Amazon is extremely successful, but an important part of its business strategy now involves the company’s efforts to go beyond its direct sales and to include its affiliates, which it calls Associates, and its partners.
For example, Amazon allows other online individuals and organizations to use its infrastructure to sell their products and services in return for it receiving a small commission on each sale. This arrangement proves to be beneficial for both Amazon and its Associates. An individual or business can quite easily set up an electronic storefront, which features Amazon’s e-commerce capabilities. This would be much more difficult and expensive to create independently. The mechanism that Amazon uses for expanding its online e-business activities is based on its Web Services™ function. Using Web Services technologies described in this book, Amazon provides access to its technical infrastructure. There are now a variety of different ways that people like yourself can cash in on Amazon’s success by leveraging the power of the e-commerce platform. In addition, through the self-publishing companies, you can publish books, movies, and music and then sell them on Amazon. As one of the vendors says in this book: “Regardless of your needs, you can find a way to make money on Amazon.”