20
Amazon.com: Marching Towards Profitability
Class 7: Electronic Commerce
Haim Mendelson
Case Summary by Olga Bezryadina
"Amazon.com: Marching Towards Profitability"
Amazon’s Value Discipline: Customer Intimacy. Plus now Amazon is also moving towards operational
excellence.
Main Takeaways
 Electronic commerce offers new business models, revenue opportunities, cost savings, and
distribution channel (it allows broadening limits of market and attracting more diverse customers
due to lower prices, diverse and hard-to-find products, easy access, and personalized services) …
 … but it has limitations, e.g., fulfillment
 How do you exploit the advantages, while mitigating the limitations?
o Think of Internet as a “complement”
 There remain serious roadblocks to future growth of eCommerce (Congestion, Security, and
Privacy)
o How do you overcome them in your company?
Case Discussion / Digest Questions
Question 1. Based on a comparison of Amazon.com to Borders Books, discuss the advantages and
disadvantages of online B2C vis-à-vis traditional bricks and mortar book retailing. Identify 6-10
measures or criteria, and for each you should state what are the advantages of Web-based selling over
bricks and mortar retailing and vice versa. Sometimes the answer is "it depends," in which case you
should specify what it depends on and in what way.
Advantages
Search.
Dynamic pricing.
Lower menu cost.
Easier to track demand
Variety.
Hard to find books.
Ease to customers.
Can shop 24/7, convenient purchase.
Global market.
Ability to capture customer data => Direct Marketing.
Personalized service.
Transferring part of the inventory burden to suppliers.
Prices are lower (is that really true?)
Can talk online to people and get a review on items
(social experience).
 Impulse buying (some items are suggested for your
attention when you look at something else).
 Cross selling (links to other departments are provided).
 Faster cash to cash cycle.
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Disadvantages
 Fulfillment takes time (as order should be
shipped to the customer) and it is uncertain.
 Harder to return stuff.
 Harder to talk to a real person.
 Cannot “kick the tires” (feel, test a product)
=> Quality uncertainty.
 Privacy issues.
 Inventory: expensive distribution centers.
 Lack of social experience (?) (there are online
discussions) as there are no (physical)
interactions with people
 Cross selling (can smell/see something and go
check other department)
 Lack of impulse buying.
 More complex logistics.
Advantages of online B2C:
1. Attraction of customers from different regions and not being limited by physical (location) boarders
due to variety of products and hard to find items.
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20
Amazon.com: Marching Towards Profitability
Class 7: Electronic Commerce
Haim Mendelson
Case Summary by Olga Bezryadina
2. Ability to use technology to (a) search, sort and organize titles; (b) create super-valuable customer
proposition; (c) keep a vast catalog of millions of titles. This opens the gates for Direct marketing.
3. Collection of demographic and behavioral data about customers opened doors for direct marketing
and personalized services, developed customer loyalty. Fast, easy, and fun service: “1-Click”.
“Inline messages”. Not waiting until customer comes to the Web site, but rather targeted marketing.
4. Lower inventory due to transferring the burden of inventories to the suppliers. Faster cash
collection. Lower need for real estate.
5. Easiness of marketing experiments and price elasticity calculations.
6. Reduction of the seasonality was enabled by diversification.
7. Easiness of co-marketing with other brands and companies.
Disadvantages of online B2C:
1. The temptation to grow beyond initial business niche by expanding into numerous categories and
countries.
2. Transferring the burden of currying inventories to the suppliers requires relaying on rapid
fulfillment from major distributors and wholesales and causes difficulty in supply chain
management. Fulfillment (and return) become corner-stone issues.
3. Need for expansive distribution centers in order to keep up with the intensity of orders.
4. Due to transparency of prices, “bargain bazaar” and price competition.
5. Huge investments into advertising of the web-site in order to grab bigger market share (if not, risk
of losing it all).
6. Inability to provide a unique, high-quality in-store experience based on a wide selection, a
knowledgeable and friendly salesforce, convenient chairs and couches, a café and a variety of daily
events (what can be provided by a bricks and mortar book retailer).
Question 2. What were the three major periods in Amazon's evolution? What data in the case best
delineate them?
Stage 1. Started as Books only store which did not carry own inventory (Amazon took orders and
transferred them to suppliers).
Main characteristics of the stage 1: No own inventory. Customer loyalty (main product). Low cost. No
stores. No people. Huge variety.
Strategy: Grow customer sales and invest into customer base.
Stage 2. Amazon broadens its products and becomes BMV store: Books, Music, Video.
Started building inventories and distribution centers. More product categories.
Strategy: Growth thru sales in new categories.
Stage 3. Expanding products, but optimizing combinations. Focusing on profits. Reducing fulfillment
costs. Optimizing fulfillment (some is done in house, some is outsourced). Super saver shipping (free but
5-7 days shipping: reduces fulfillment costs due to more time available for order assembling).
Question 3. Should Amazon do its own order fulfillment? Why or why not?
Some of the order fulfillment should be done by Amazon, some should be outsourced.
In-home fulfillment: More control over orders and customer relations. Decreases time for order
fulfillment and provides guarantee that order will be fulfilled (while there is no such guarantee when third
party is involved).
Outsourcing: Reduces quantity of inventories on hand, reduces risk of carrying “undesired” (by
customers) inventories. Eliminates shipping cost (instead of Supplier -> Amazon -> Customer, only
Supplier -> Customer).
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20
Amazon.com: Marching Towards Profitability
Class 7: Electronic Commerce
Haim Mendelson
Case Summary by Olga Bezryadina
Question 4. In January 2002, Amazon offered free "super-saver" shipping for orders of $99 or more; the
buyer agreed to wait 3-5 additional days for the order to ship. The "super-saver" order threshold was
then lowered in June and August, 2002 to $25. Does "super-saver" shipping make sense for
Amazon.com?
The studies show that consumers are very sensitive to the shipping costs. So by eliminating the cost of
shipping for consumers, Amazon increases number of orders. Also, “super-saver” requires customer to
wait 5-7 days what gives Amazon more time and allows to more efficiently assemble the order and thus
reduces fulfillment costs.
On the other hand, make the minimum order only $25 seems to be too low. If the minimum order
requirement was at least $50, this “super-saver” would encourage customers to spend more money.
Different ways Amazon makes money:
1. Selling own goods
2. Auctions
3. Asset: 44M Customer accounts
Commission: “Middleman” for small shops
Alliances: selling for partners (Target, Boarders, etc.)
Overall assessment of the company: Is Amazon a good company
to invest?
Amazons financials are bad (in trouble). However, trend is
positive: reducing of losses.
Total Liabilities are 3.2B while total assets are only 2.2B! This
means that Stockholders Equity is negative. => Book value of
Amazon is negative.
On 12/31/03 the book value is BV = A – L = -$1.04B.
On 12/31/03 the market value is MV = (# shares)*(stock price) =
403.4 M * 52.62 = $ 21.22B
On 11/09/04 the MV = $15.26B.
Why is there such a big difference between profits (losses) and the
stock performance?
This difference in BV and MV is due to intangibles (44M customer
accounts, brand name, customer data, and technology platform).
That is why evaluation of Amazon is pretty complicated.
Cash to cash cycle = Inventory days + Receivable days – Payable days =
= (Inventories $) / (COGS / 365) + (Receivables $) / (Revenues / 365) – (Payables $) / (COGS / 365) =
= 27 + 9 – 76 = - 40 (And that is cool!)
Acquire
materials
Pay for
materials
Sell output
Receive
payment
Time
Inventory
Payable
Days
Receivable
Days
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