Entrepreneurship

Amazon 1997–2003: An Insight into the Rise of the E-Commerce Giant

Everyone is aware of the ripples Amazon sends throughout the world. On a personal level I use it for 99 percent of my shopping. There are many reasons for doing so — convenience, saving of time, but most of all, the trust I have in the brand. I know I can buy something and if I don’t like it for whatever reason, I can return it with no questions asked. But this article isn’t about my shopping preferences, rather one hopes to provide a detailed insight into the mind of Bezos and the vision behind the success of the company.

A friend recently asked me to review an Amazon shareholder letter for analytical purposes. I regularly study and analyse many different documents, articles etc but never thought to review shareholder letters. What I discovered was the shareholder letters at Amazon (and I guess other companies) provide is a great insight into the mind of the CEO and the vision behind the company’s actions. Amazon, a company known for superb logistics always intrigues me and hence why I was hooked on the letters dating back to 1997.

There is a lot of data and information so the best way possible to share the details would be to summarise the key metrics and take-home points from the letters dated 1997–2003. Why 2003? Though there is a huge amount to learn, one believes the highest value is derived from the first few years and hopefully a pattern will start to emerge.

1997: Customers Served: 1.5 million / Sales: $147.8 million

Key Points:

Goal is for the long term: “We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.

Customer Focus: “Word of mouth remains the most powerful customer acquisition tool we have, and we are grateful for the trust our customers have placed in us. Repeat purchases and word of mouth have combined to make Amazon.com the market leader in online bookselling.

1998: Customers Served: 6.2 million / Sales: $610 million

Key Points:

Customer Focus: “I constantly remind our employees to be afraid, to wake up every morning terrified. Not of our competition, but of our customers. Our customers have made our business what it is, they are the ones with whom we have a relationship, and they are the ones to whom we owe a great obligation. And we consider them to be loyal to us — right up until the second that someone else offers them a better service.

Building a Great Team: “Working to create a little bit of history isn’t supposed to be easy, and, well, we’re finding that things are as they’re supposed to be! We now have a team of 2,100 smart, hard-working, passionate folks who put customers first. Setting the bar high in our approach to hiring has been, and will continue to be, the single most important element of Amazon.com’s success.

1999: Customers Served: 17 million / Sales: $1.64 billion

Key Points:

Customer Focus: “…this remains Day 1 for e-commerce, and these are the early days of category formation where many customers are forming relationships for the first time. We must work hard to grow the number of customers who shop with us, the number of products they purchase, the frequency with which they shop, and the level of satisfaction they have when they do so.

Product / Service Expansion: “Each new product and service we offer makes us more relevant to a wider group of customers and can increase the frequency with which they visit our store. So, as we expand our offering, we create a virtuous cycle for the whole business. The more frequently customers visit our store, the less time, energy, and marketing investment is required to get them to come back again. In sight, in mind.

Operational Excellence: “Often, the best way to drive one of these is to deliver the other. For instance, more efficient distribution yields faster delivery times, which in turn lowers contacts per order and customer service costs. These, in turn, improve customer experience and build brand, which in turn decreases customer acquisition and retention costs.

Goal for the Long Term: …consider this most important point: the current online shopping experience is the worst it will ever be. It’s good enough today to attract 17 million customers, but it will get so much better.

2000: Customers Served: 20 million / Sales: $2.76 billion

Key Points:

Stock Price Worries: “So, if the company is better positioned today than it was a year ago, why is the stock price so much lower than it was a year ago? As the famed investor Benjamin Graham said, ‘‘In the short term, the stock market is a voting machine; in the long term, it’s a weighing machine.’’ Clearly there was a lot of voting going on in the boom year of ’99 — and much less weighing. We’re a company that wants to be weighed, and over time, we will be — over the long term, all companies are. In the meantime, we have our heads down working to build a heavier and heavier company.

Goal for the Long Term: “As I usually do, I’ve appended our 1997 letter, our first letter to shareholders. It gets more interesting every year that goes by, in part because so little has changed. I especially draw your attention to the section entitled “It’s All About the Long Term.”

2001: Customers Served: 25 million / Sales: $3.12 billion

Key Points:

Customer Focus: “I’ll just point out that one of the most important things we’ve done to improve convenience and experience for customers also happens to be a huge driver of variable cost productivity: eliminating mistakes and errors at their root. Every year that’s gone by since Amazon.com’s founding, we’ve done a better and better job of eliminating errors, and this past year was our best ever. Eliminating the root causes of errors saves us money and saves customers time.

2002: Customers Served: Not Shared / Sales: $3.9 billion

Key Points:

Understanding the Business Model: “One of our most exciting peculiarities is poorly understood. People see that we’re determined to offer both world-leading customer experience and the lowest possible prices, but to some this dual goal seems paradoxical if not downright quixotic. Traditional stores face a time-tested tradeoff between offering high-touch customer experience on the one hand and the lowest possible prices on the other. How can Amazon.com be trying to do both? The answer is that we transform much of customer experience — such as unmatched selection, extensive product information, personalized recommendations, and other new software features — into largely a fixed expense. With customer experience costs largely fixed (more like a publishing model than a retailing model), our costs as a percentage of sales can shrink rapidly as we grow our business. Moreover, customer experience costs that remain variable — such as the variable portion of fulfillment costs — improve in our model as we reduce defects. Eliminating defects improves costs and leads to better customer experience.

Customer Focus: “Our pricing objective is not to discount a small number of products for a limited period of time, but to offer low prices everyday and apply them broadly across our entire product range. To illustrate this point, we recently did a price comparison versus a major well-known chain of book superstores. We did not hand pick a choice group of books against which we wanted to compare. Instead, we used their published list of their 100 bestsellers for 2002. It was a good representation of the kinds of books people buy most, consisting of 45 hardcover titles and 55 paperbacks across many different categories, including Literature, Romance, Mystery and Thrillers, Nonfiction, Children’s, Self-Help, and so on. We priced all 100 titles by visiting their superstores in both Seattle and New York City. It took us six hours in four of their different superstores to find all 100 books on their list. When we added up everything we spent, we discovered that: • At their stores, these 100 bestselling books cost $1,561. At Amazon.com, the same books cost $1,195 for a total savings of $366, or 23%. • For 72 of the 100 books, our price was cheaper. On 25 of the books, our price was the same. On 3 of the 100, their prices were better (we subsequently reduced our prices on these three books). • In these physical-world superstores, only 15 of their 100 titles were discounted — they were selling the other 85 at full list price. At Amazon.com, 76 of the 100 were discounted and 24 were sold at list price.

2003: Customers Served: Not Shared / Sales: $3.9 billion

Key Points:

Goal for the Long Term: “Long-term thinking is both a requirement and an outcome of true ownership. Owners are different from tenants. I know of a couple who rented out their house, and the family who moved in nailed their Christmas tree to the hardwood floors instead of using a tree stand. Expedient, I suppose, and admittedly these were particularly bad tenants, but no owner would be so short-sighted. Similarly, many investors are effectively short-term tenants, turning their portfolios so quickly they are really just renting the stocks that they temporarily “own.”

Customer Focus: “We emphasized our long-term views in our 1997 letter to shareholders, our first as a public company, because that approach really does drive making many concrete, non-abstract decisions. I’d like to discuss a few of these non-abstract decisions in the context of customer experience. At Amazon.com, we use the term customer experience broadly. It includes every customer-facing aspect of our business — from our product prices to our selection, from our website’s user interface to how we package and ship items. The customer experience we create is by far the most important driver of our business.

As we design our customer experience, we do so with long-term owners in mind. We try to make all of our customer experience decisions — big and small — in that framework. For instance, shortly after launching Amazon.com in 1995, we empowered customers to review products. While now a routine Amazon.com practice, at the time we received complaints from a few vendors, basically wondering if we understood our business: “You make money when you sell things — why would you allow negative reviews on your website?” Speaking as a focus group of one, I know I’ve sometimes changed my mind before making purchases on Amazon.com as a result of negative or lukewarm customer reviews. Though negative reviews cost us some sales in the short term, helping customers make better purchase decisions ultimately pays off for the company.

Our pricing strategy does not attempt to maximize margin percentages, but instead seeks to drive maximum value for customers and thereby create a much larger bottom line — in the long term. For example, we’re targeting gross margins on our jewellery sales to be substantially lower than industry norms because we believe over time — customers figure these things out — this approach will produce more value for shareholders.

Final Thoughts

What we can see is the relentless focus Bezos has on growth but look a little closer and a pattern emerges. In almost all of the letters the original 1997 letter was attached which explained the ‘long term goal’. This is very important as Amazon’s focus is not on the usual figures of the stock price, a point brilliantly explained in the letter of year 2000 — the goal being to become a ‘weighty company’. But also, it reminds the shareholders and interested parties that there is a long term vision in place, and each year, bit-by-bit, they are getting closer to that goal.

Coupled with the above, every letter has interesting points on a customer experience culture which is nothing short of ‘obsessive’. Bezos is extremely articulate in explaining is business decisions and why a particular model is chosen but even more he drives home the endless pursuit of customer satisfaction. The two-most important elements in relation to this are the fact that he mentions every day is ‘day one’ which pushes a couple of points — firstly, the company is learning and there is always room for growth and secondly, it takes a long-time to gain a customer but only a second to lose one. The second element can be seen in the year 2003 where he explains why they have chosen to take a hit on potential earnings to provide a better value for the customer.

Amazon is a great example of a company that remains rooted to its original goals and yet still shows no signs of slowing down. The above shows the significance of creating a ‘brand’ that is trusted by its customers because it has earned it. It also shows that there will be doubts by investors, shareholders, competition and others but one must remain focused on the end goal without forgetting that every day is ‘day one’ — there is always room for improvement.

I would recommend a read through all the letters which can be found at: http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual

This article was first published here and has been reproduced here with the permission of Author.

Featured image via Business Insider

Waqar Mohammad

Waqar Mohammad

Head of a Web Development Agency and has keen interest in web technologies, business models and politics. You can reach out to him on Twitter.
Waqar Mohammad

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