Amazon.com's Success

Whatever one may think of its long-term prospects,Amazon.com clearly stands in today's front rank ofonline businesses. It can legitimately claim to be the first of the Web bookstores to reach a global massmarket, to be "Earth's largest bookstore" and to havedelivered significant value to shareholders, with aneighteen-month stock-price return in excess of 1,300%.These superlatives aside, Amazon continues to helpdefine the Internet as a consumer environment, withrules, limits, and opportunities often different fromthose experienced in physical channels. Operatingunder assumptions at variance with conventionalretailers, Amazon is a harbinger of successful businesspractices in a connected economy.

Amazon.com, a Fortune 500 company based in Seattle, opened on the World Wide Web in July 1995 and today offers Earth's Biggest Selection. Amazon.com seeks to be Earth's most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices. Amazon.com and other sellers offer millions of unique new, refurbished and used items in categories such as health and personal care, jewelry and watches, gourmet food, sports and outdoors, apparel and accessories, books, music, DVDs, electronics and office, toys and baby, and home and garden. Amazon.com operates four international Web sites: http://www.amazon.co.uk/, http://www.amazon.de/, http://www.amazon.fr/ and http://www.amazon.co.jp/.

Amazon.com has redefined what it means to be a successful company. Withunprecedented growth, the company is defining the Internet and giving structureto this new channel of communication and transaction. With limited inventory onhand at any given time, Amazon has mastered its close ties with wholesalers. Mostof Amazon’s products—books, music, videotapes, and even holiday gifts—are“information goods” and thereby require a different kind of strategy, one basedon invoking emotion in customers

“We’re different from other online retailers inthat we have a technology base that allowscustomers to find, discover and glean out ofhundreds of millions of products, those thatreally interest them,” remarked Rick Dalzell,Amazon.com’s chief information officer.“We have one of the largest datawarehouses in the world. It’s in the top five.And if you look at it in terms of raw data, it has to be number one or number two!”

How Amazon.com succeed in E-Commerce?

Amazon has consciously built a four-fold value proposition,each dimension of which directly relates to anunderstanding of the leverage uniquely generated bythe online medium.

1. Convenience: The Internet is open for business allthe time, across time zones. The Amazon websiteoffers multiple paths to a given book: via reviews,categorical browsing lists, multiple dimensions ofsearch capability, referral from a previous search,email notification, a variety of recommendationengines,10 or personalized messages on the webinterface. The site is designed to minimize downloadtime for users on modems. (While the site isdesigned for home shoppers, Amazon logs significanttraffic bursts at lunch hour as customers connect over their employers corporate networks)

2. Selection: The 1.5 million new books, combinedwith roughly a million used and out-of-print titles,provides access to inventory roughly 100 times thesize of a typical mall bookstore. Visualized differently,the printed Amazon catalog would be thesize of 40 New York City phone books

3. Price: Amazon owns inventory for a much shortertime than physical retailers. As of late 1998, thefirm was estimated to average 26 inventory turnsa year to approximately 2.7 for traditional competitors.13 Labor contributes less to selling price:AmazonÕs revenue per employee is $300,000 vs.$100,000 for traditional booksellers. Rent anddepreciation (4% vs. 13% for retail) are significantlylower for the virtual merchant.14 Even with shippingadded to an order of three books (which many shoppers mentally discount as the cost ofconvenience), Amazon comes out to be roughly 8-10% cheaper than a physical retailer, with costsavings increasing with order size.

4. Customer Service: Amazon's shopping basket application lists estimated time to delivery reasonably and reliably. Proactive notification of new booksof interest, real-time shipping and backordernotices, and customer interaction (via readerreviews) all exploit the communications capabilitiesof the Web and email, and result in greater customer "touch" than is typically possible for booksellers , particularly if they offer discountpricing to a mass market.

For all of the hype surrounding it, Amazon has successfully reinvented its industry, introduced newstrategies and behaviors to online commerce, andreturned in excess of 1,000% to its investors. The firmhas consistently surprised its observers and competitors,and satisfied its customers. Just as Lou Gerstner successfully brought lessons from branded consumer products to IBM, so may Jeff Bezos and similar leadersbe applying the principles of software economics tonew sectors of the economy. Many observers will bewatching the race between Amazon's quest for marketshare and the capital markets' demand for profitabilityto see if investing in promises of increasing returnsis indeed viable. If it is, the implications for bothbusiness leaders and investors will be significant asold yardsticks are made obsolete.