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Amazon.com: Marching Towards Profitability
Haim Mendelson
Class 7:Electronic Commerce
Case Summary by: Mahavir Gill
Main Takeaways
Fulfillment is central to customer experience in online shopping.
Personalization was the key to customer loyalty.
The transparent pricing on the net provided customers with power to compare prices costlessly
thus lower price variations.
Amazon tried to be a convenience brand with books music and videos.
There's no tradeoff in internet business between increasing service and lowering cost.. The
reason for that has a lot to do with the Internet's ability to scale infinitely. There is little
incremental cost to spread an innovation over more customers, once you have developed it.
Not important to be the cheapest but to provide the best value proposition.
More in-depth Summary
Amazon started in July 1995 just as bookstore carried no inventories and acted just like a
middleman which offered a storefront to customers focused on personalization to drive repeat
sales . The company’s stated focus was customer and revenue growth, brand loyalty and it was
least bothered by “short term profitability” .It tended to differentiate through massive
selections ,service quality ,simplicity and pricing.
In the second phase , around 1998 it started venturing into new product categories starting with
music and videos then going into video games ,toys , tools and electronic products .Also 1998
onwards it launched websites in different countries UK , Germany.
It realised that order fulfillment and was key to customer satisfaction .It expanded it’s
infrastructure by building distribution centers as it realized that to control its customer
experience it had to manage it’s fulfillment process and make fulfillment and logistics among it’s
core competencies .
In third phase starting around mid 2000 the focus shifted to profitability even at the cost
sacrificing growth. There more product categories were added in order to induce the network
effect ,but this was mostly through co branding . New sites were launched in Japan and
Canada .More By 2002 ,30% of amazon’s revenue came from non us websites.
Focus was on profits and fulfillment was now done through a combination of in-house and
outsourced efforts. It launched “Amazon outlet” to manage its own inventory to dispose
overstock ,discontinued and factory-reconditioned merchandise .
Personalization
To achieve profits companies needed to provide unique value through customer intimacy
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20
Amazon.com: Marching Towards Profitability
Haim Mendelson
Class 7:Electronic Commerce
Case Summary by: Mahavir Gill
(key to customer loyalty) using past purchase history ,products viewed , wish list and other data
thus effectively providing unique stores for each individual.this helped in targeted marketing .
Pricing
Transparent pricing by the web gave unqualified benefits to the customer who could costlessly
compare prices of items charged by sellers .When the prices were weighted by market
share ,price dispersion was lower for web retailers because of the dominance of heavily branded
web retailers. Dyanamic pricing on the net was next to impossible.
Branding
Amazon has placed more importance on selection and convenience than price and strove to be
provide customer satisfaction . It did extensive marketing expenditure to gain brand
recognization . It through personalization tended to be different things to different people ,rather
than being a book brand it tended to be a convenience brand with books music and videos
auctions thus locking into higher state need. Using these ideas it captured 80% book market
despite the fact that it is not the cheapest player in market .
Growth through acquisitions
To grow during boom days Amazon not only expanded its own service offerings but also
invested in and partnered a host of other companies.It’s investments included e- retailer like
(Pets .com and Drugstore.com), service and infrastructure companies using cash transactions ,
stock swap and cross-promotions. Though the retailers like pets.com
went bust but technology &solution companies helped it in backend operations ,selection and
personalization which helped it a lot in creation of experience.
Growth through partnerships
Amazon Associates.
Amazon was the first internet retailer to have an affiliate program that allowed owners of other
websites to refer customers to Amazon in return for a referral fee. This was patented to Amazon
in Feb 2000. It was free to join with hidden quotas or performance tiers. By end of 2002 it had
nine hundred thousand affiliates.
Virtual Middlemen
In 1999 , Amazon introduced co-branded auctions and zShops Marketplaces, where Amazon
acted like an agent facilitating interactions and taking fee.
It also leveraged its “ Amazon Commerce Network” platform, a portal for other retailers through
which Amazon could take fee and equity in addition to direct investments.
It has also started to manage vitual storefronts for Toys “R” Us , AOL’s shopping
network ,Target and its associated stores, in most of these deals amazon managed the store and
provided customer service and order fulfillment while remaining stuff like
merchandising ,procurement and inventory were managed by the companies who stores it
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20
Amazon.com: Marching Towards Profitability
Haim Mendelson
Class 7:Electronic Commerce
Case Summary by: Mahavir Gill
managed in return for a combination of fixed payments ,per unit payments , percentage of
revenue.
In Nov 2001 It started offering in-store pick up option for electronics in partnership with circuit
city ,with customers having option of having stuff delivered to their door or picking it from store.
For orders picked up at the store , Amazon received a percentage of revenues . In Sept 2002 ,
Amazon launched an online office store with Office Depot on similar lines.
It also launched apparel store with leading brands where it managed front end while partners
dealt with merchandising and fulfillment.
Finally it launched a partnership with Borders Books, under which borders relauched it’s
Website co-branded with Amazon. Amazon managed order fulfillment ,inventory ,site content
and customer service while Borders used it for online customer relationships and to drive traffic
to stores.
These service partnerships are much more profitable than average profits across the company.
Case Discussion / Digest Questions
Based on a comparison of Amazon.com to a physical book retailer like Borders Books,
discuss the advantages and disadvantages of online B2C vis-à-vis traditional bricks and
mortar book retailing.
Advantages
Mass Personalisation
Access to customer data
Lower labour and capital costs
Short cash to cash cycle
Global access
Scalability
Lower prices
Personalized recommendations
Instant bundling
Co-branding and Cross sales
Ability of sellers to try Pricing experiments
Access to product info ( Editorials amd customer reviews)
Less pilferage
Disadvantages
No impulse sales
Lack of Social Contacts ( No Border’s Experience )
Pricing discounts
Complex Logistics
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