In the spring of 1994, I came across a startling statistic: Web usage was growing at 2300 percent a year. I had never seen anything grow so fast, and I don’t think many people had, except for perhaps in a petri dish.
So the question was: What’s the first best product to sell online? I made a list of 20 different products and force-ranked them according to several different criteria. I was looking for something that you could only do online, something that couldn’t be replicated in the physical world.
I picked books. Books are incredibly unusual in one respect, and that is that there are more items in the book category than there are items in any other category by far. There are more than 3 million different titles available and active in print worldwide. Music is the number two category, and there are about 300,000 active music CDs. When you have this huge number of titles, a couple of things start to happen.
First of all, you can use computers to sort, search and organize. Second, you can create a super-valuable customer proposition that can only be done online, and that is selection. There are lots of categories where selection is proven to be important: books, in particular, with the book superstores, but also in home construction materials, with Home Depot, and toys with Toys ‘R Us. Online, you can have this vast catalog of millions of titles, whereas in the physical world, the largest physical superstores are only about 175,000 titles, and there are only three that big.
So, what is Amazon.com today? In addition to this large catalog, we’ve worked on having constantly-changing editorial features. This is to keep people coming back to our website, giving them fresh content, and making the experience enjoyable.
People don’t just buy books because they need books. There are products like that: Pharmaceuticals are that way. Nobody enjoys browsing the Preparation H counter. But people will gladly spend hours in a bookstore, so you have to make the shopping experience fun and engaging.
We’ve added convenience and ease-of-use features, things like one-click shopping. We’ve got over 2,000 different bestseller lists; we’ve got discounts on about 400,000 of the best-selling titles that make it so that even if you buy a single hardback title, even after shipping, you’re saving money. If you’re buying paperbacks, you generally have to buy two or three before that becomes true, after shipping costs.
Instant recommendations are one of the more interesting things we’ve added lately. These are the very tiny baby steps towards personalization and customization of the store for each and every customer. I’ll talk a little bit more about that later.
We opened the store in July of 1995, and we have experienced very rapid growth. Today, our sales are the equivalent of more than 100 big-chain superstores. What’s really interesting about that growth rate is that about 29 of those superstores, those equivalent superstores, were opened in just the last quarter. We regularly ship books to more than 160 different countries.
When we do make a customer unhappy at some point, these people come out of the woodwork and say, “Well, actually that wasn’t my experience.” Word-of-mouth is very powerful. In our first year of being online, we didn’t spend a dollar on paid advertising. In the second and the third years – we’ve been online for three years now – we spent a significant amount of money on paid advertising, but still, the majority of our customers come to us by word-of-mouth.
Everyone is a Publisher
One of the other interesting things about the Internet, and the fact that everybody is a publisher, and everybody can talk to everybody on the Internet, is how much feedback you get from running a business online. I think that in the three years that we’ve been online, we’ve probably gotten more feedback from our customers in the form of e-mail messages than most businesses get from their customers in 20 years.
There’s a great thing about e-mail, which is that it has some magical ability to turn off the politeness gene in the human being. So as a result, you get these very candid pieces of feedback that tell you exactly how you can improve your service. If I walk into a restaurant and am served a bad meal, I just leave; I never go find the chef and grab him by the collar and say, “You know, you really shouldn’t be cooking.”
But online, people would do that in a heartbeat. In fact, I was having a conversation with a friend the other day and I said restaurants, to get that kind of candid feedback, should probably put an e-mail address on their menus. So that when the soup does have too much salt, you could go home and semi-anonymously tell them what you really thought.
I’m going to back up a little bit and tell you how Amazon.com got started. After finding that web usage was going up 2300 percent a year and selecting books as the first best product to sell online, I talked to my wife about this idea, and she agreed that she was up for giving it a try. We were living in New York City at the time, so we had to pick a place. We wanted a place that had a large pool of technical talent, and also a place nearby a major book wholesaler.
It turns out the largest book warehouse in the world is in Roseburg, Oregon. We picked Seattle, because Seattle has lots of great technical talent and is close to Roseburg, so we moved. We drove across the country and actually went through San Francisco; I interviewed a few VPs of engineering there.
Frugality & Success
At Amazon.com, one of the cultural attributes that we try to reinforce is frugality. We want to spend money on things that matter to customers and not money on things that don’t matter to customers. So all of our desks are homemade: we build them out of doors and four-by-fours. We actually have, at this point, a carpentry firm in Seattle that makes them. They cost $130 each: $70 for the desks, the tabletops, which are doors, and the other materials, and $60 for labor.
I built the first of these desks myself, and after finally working for three months to convince our chief technology officer, a guy named Shel, to accept this job offer, I almost blew it in those early days by calling him the next day and saying, “Hey, I’m building your desk right now. How tall would you like it to be?”
The first name for the company was actually created on the ride to Seattle, and it was Cadabra. When I called the lawyer who was going to do the incorporation papers, it was by a cell-phone, and when I said, “Cadabra,” and he said, “Cadaver???,” I thought, “Oh boy, that’ s not going to work.” So that name didn’t last long. Probably the question I get asked most frequently is why “Amazon.com?” I want to let you know right now that it has absolutely nothing to do with single-breasted female warriors. It’s Earth’s biggest river, Earth’s biggest bookstore.
The name was picked because it had to start with the letter “A” and it had to be short and easy to spell. One of the things that people don’t think about but is really important is that online, you get to places by being able to spell their name. If you want to go to McDonald’s and have a hamburger, you never have to know how to spell “McDonald’s” to get there, but to get to Amazon.com, you do have to know how to The very first office back in late ’94 - early ’95 was in my garage in Bellevue, which is just across the lake from Seattle proper.
We really wanted to start the company in a garage; we thought it was important for that garage start-up legitimacy. Unfortunately, it was an enclosed garage, so we didn’t get the full legitimacy. But it did have no insulation and a huge, black, pot-bellied stove for heat right in the center of the garage.
Now I’ve figured out also why most companies move out of garages at a certain stage. I think that in some cases, it’s because they get too many people, but in our case, the first thing we got constrained by was not enough electric power. We kept tripping all the circuit breakers every time we added a new computer to the garage. So finally, we would siphon power from all the rooms in the house with these big orange electric cables, these extension cords, into the garage. By the way, at that point, neither my wife nor I could run a vacuum cleaner or any other electrical appliance, lest every circuit breaker in the house flip. So these weren’t very attractive offices.
But we weren’t selling any books yet; we were still setting up all the operations. There were programmers coming in and out. When we would go to do negotiations with companies like UPS and Federal Express, we didn’t really want them to see our offices. You can imagine why. Fortunately, just about a mile from our house there was a nice cafe, and all of our negotiations with our third-party vendors during that period were done in that cafe. It was a cafe inside a Barnes & Noble superstore. I have to say, perhaps partially in gratitude for that, I still buy a lot of my books from both the superstores and a great store in Seattle called Elliott Bay.
When the power thing got to be a little too much to bear, we moved into an office where we got about 1000-square feet of office space, just above a Color Tile. Then we had our warehouse, which was a 400-square foot warehouse, which is about the size of a two-car garage, in the basement. We actually had someone working down there who was about 6’ 4”, and the basement ceilings were only about six feet tall; it didn’t work very well. Fortunately, he’s still with the company and has no lasting effects.
Back in software systems, one of the things that many people don’t realize is that a lot of our software development actually went into the back-end, figuring out how to make the distribution systems and the customer service systems work. We put a huge amount of effort into that when we were going to launch the store. When we first launched the store, we knew that the only people buying from us would basically be our parents and family. So it’s actually very exciting – to any of you that have started businesses, you’ll relate to this – when you get your first stranger to place an order. You say, “Who knows this guy? Do you know him? No? I don’t know him either.”
Online Book Orders
We wanted to be sure to exercise our systems even though the sales volumes at that point were small enough that we could have run to any local bookstore, got the books, and packed and shipped them off. But we didn’t want to do that because we’d built EDI systems and all sorts of complex systems to interface with the wholesalers.
The problem was, the wholesalers had 10-book minimum orders. I tried to negotiate with them and said, “Let us just pay a small fee, and you waive the 10-book order,” and so on. But they wouldn’t go for it. So we figured out a loophole. It turned out that you just had to place an order for 10 books; you didn’t actually have to get 10 books. We found an obscure book on lichens that none of our wholesalers actually carried.
So whenever we wanted to order one book, we ordered the book we wanted, and then nine copies of this lichen book. They would deliver the one that we wanted, along with a very sincere apology about not having been able to fulfill the nine copies of the lichen book order. That worked very well for exercising our systems. I’ve since talked and joked at length with the people at these companies about this. They actually think it’s very funny.
When we first launched, we programmed the system so that every computer terminal in the company would ring a bell when we got an order. That worked pretty well for the first few days, but the thing caught on by word-of-mouth much more quickly then you might have expected.
A big piece of this came from being listed on Yahoo’s What’s Cool site, which in 1995 was very important. Yahoo, of course, is still an extremely important site, but in particular, the Yahoo What’s Cool page was a big deal back then. We got an e-mail message from Jerry Yang, who is one of the chief Yahoos – but at that time that title hadn’t even been created and it was still mostly a hobby – and Jerry said, “We think your site is pretty cool; would you like us to put it on the What’s Cool page?” We thought about it some, and we realized it might be like taking a sip from a fire hose, but we decided to go ahead and go for it.
That was an incredible period; it took a month or so, but the sales level built more quickly than we could actually staff up and gear up for it. So everybody in the company – including all of the developers, really everybody – would work some during the day and then everybody would stay until two or three in the morning packing books. We didn’t have any time to think or improve things. The most poignant example of this is that when we set up this little miniature distribution center, one of the people who looked at it the day before it opened said, “I can’t talk. This is either incredibly optimistic or hopelessly pathetic.”
When the books start coming in fast and furious, it’s easy to forget to improve things – first you have to get the work done that’s coming in. So there has to be enough bandwidth; somebody has to step back and think about how to improve things.
I remember that the worst thing was that we hadn’t put in any packing tables, so we were putting boxes around all these books down on our hands and knees on a cement floor in this basement. Then I would drive them to the post office late at night. But I remember thinking, “Boy, we’ve got to get kneepads.” It never occurred to me that we should get packing tables! Then, finally, somebody said, “No, we shouldn’t get kneepads, we should get packing tables.” A few days later, when we finally scraped up the bandwidth to go to Home Depot to buy some tables and bring them in, I remember stretching my back and thinking, “Ahh, boy that feels good! We should have done this weeks ago!”
About this time, things were going very well, order volume was building much faster then we had ever predicted it would, and we were featured on the front page of The Wall Street Journal. This was both a blessing and a curse. It was blessing because we got to introduce ourselves to a whole bunch of new customers. That was always a big deal for us, especially since we weren’t able to do any paid advertising. It was also a curse, because it alerted our competitors – of which there were many and large – to our existence. In particular, Barnes & Noble started to take notice of what we were doing. About a year later, they launched their website in May of 1996, about a week before we did our initial public offering.
At that time, Amazon.com was basically an untested company against competition; we had had lots of small competitors, but we hadn’t had any of the big guys with established brand names and the purchasing power that the big chains have. People were a little bit pessimistic about how we would do. In particular, there was one person who was on the lecture circuit, a well-known guy, actually a very nice guy as it turns out. But he was going around saying that we were “Amazon.toast.” At the same time, Fortune magazine wrote an article entitled “Why Barnes & Noble May Crush Amazon.com.” This was sort of the tone.
Now, what’s actually happened is somewhat different from that. We’ve grown from having a revenue run rate of about $60 million a year to having a revenue run rate today of more than $460 million a year; from 340,000 customers to 3.1 million customers. And from having something like 50 percent of our orders come from repeat customers to having 63 percent of our orders be from repeat customers.
Why did this happen and how could it happen? I believe the primary factor is obsession over customer. In particular, one of the things that we have tried to do, especially under such intense competition – our competitors are smart and aggressive, well-funded, clever business people – is to stay focused on our customer. We know that if we can keep our competitors focused on us, while we stay focused on the customer, that ultimately we’ll turn out all right.
Now, we also pay attention to what our competitors do. I tell people back at the ranch not to forget about that. The reason is, they’re also watching our customers, so we have to pay attention to what they do. But that customer obsession and focus is what we’re all about. We know from asking people, both quantitatively and in focus groups and anecdotally, that there are three things that matter most to our customers, in this order: Selection is number one, ease-of-use is number two, and price is number three. But all three of them are important. We make sure everyday that we are the best in those three things, and that’s the only way, I believe, that we’ve been able to compete against these large competitors.
It's Still Day One
That’s the story, but the most interesting thing is that this is still absolutely Day One. We know two percent today. I think Amazon.com may know as much as any other company about e-commerce, but I bet you we know two percent of what we will know 10 years from now. This is the Kitty Hawk era of e-commerce, and most of the interesting stuff hasn’t even begun to be invented yet.
I believe a lot of it is going to revolve around two things: One is discovery and the second is customer-to-customer interaction. By discovery, I mean the ability to help individuals find the things that blow them away as individuals. By customer-to-customer interaction I mean building a community that lets our customers help other customers find things and make purchase decisions. We have customer reviews on out website, and this is extremely helpful to people making purchase decisions.
Often, publishers are surprised to find out that we allow negative reviews to appear on our website. You should read the reviews for the book Tenth Justice, which is a new beach book. Our customers have just destroyed that poor book. If you were thinking of buying it and you came to our website, you’d think, “Well, maybe I’ll look for something else.” On the other hand, there’s a book called Endurance; it’s a book about a guy named Shackleton, whose boat, while on an Arctic expedition, got crushed in an ice flow. He had to spend six months with his men, 28 men, hiking out of Antarctica, and they made it. Not a single man was lost.
It’s one of the greatest stories of all time of endurance and human spirit. There are dozens and dozens of customer reviews about it; this is an old book, originally published in 1956. For months, this book has been on the top 100 best-selling books on Amazon.com, strictly fed by these customer reviews. I challenge you to read the customer reviews on that book and see if you can resist buying it.
“Discovery,” the second thing, is going to be incredibly important. Each of us here in the audience has three, four or five books that we’ve read in our lifetimes that have blown us away, made some important difference in our lives. I believe that there are probably 500 books for each of us in the Amazon.com catalog right now, that could have that sort of effect on you. But finding them is very hard.
So what we think we can do is use advanced technology, like collaborative filtering and other things, to accelerate that discovery process. So that, if today you have a 1-in-1000 chance when you go in a bookstore of stumbling on something that blows you away, we want to use technology to get to know you as an individual and then make that a 1-in-300 chance. Then a 1-in-100 chance. And then work a few more years on it and make it a 1-in-50 chance and so on and so on. That will create huge value for people. Great merchants have never had the opportunity to understand their customers in a truly individualized way. E-commerce is going to make that possible.