Amazing Amazon

1. Amazing Amazon Tomorrow never dies? ECON519 Mary Man Hill Chan Kevin Xu Yilin Zheng Mar. 12, 2005 HKUST

2. Content • Introduction • Business Model • Bookselling and An Online Business Model • Factors of Amazon’s Success • Strategy Analysis • Two-sides market • Patents • Pricing Structure • Prospect • Competitors • Conclusion

3. Questions What are the advantages of online bookstores compared to traditional ones? Why Amazon.com using dynamic pricing?

4. Introduction

5. Overview: Amazon.com • “Launched in 1995, Amazon.com began as an online book-selling company but has now branched off into many other areas, including DVD, music CDs, computer software, video games, electronics, apparel, furniture and more.” -- en.wikipedia.org • “We are not a retailer and we are not a technology company. We are a customer company.” -- Jeff Bezos, 2001 Jeffery P. Bezos Founder, CEO, Amazon.com Time’s Man of the Year, 1999

6. GBF: Get Big Fast • 1995 Founded as online bookstore • 1997 IPO (AMZN:Nasdaq) • 1997 Launched “one-click” service • 1998 Started selling music, videos, and DVDs • 1998 Expanded overseas • 1999 Electronics, toys and software • 2000 Slowed down in Dotcom collapse • 2001 Amazon Marketplace (C2C) • 2002 Gained profit! (Q4, $1c per share) • 2003 First full-year net profit • 2004 Launched search engine a9.com • 2005 DVD rental service?

7. Change in sales structure • Wild Wild West: Hotter Rivals • 98- Vs. Barnes & Noble: “One-click” lawsuit • 00- Vs. Wal-Mart. com, bluelight.com(Kmart) • 01- Vs. eBay: C2C e-commerce • 04- Vs. Google: a9.com (search engine) • 04- Vs. Overstock.com ?

8. SWOT • Hard Times: • Rough waters for Amazon.com Businessweek, Feb.03, 2005 • Murky waters for Amazon.com Businessweek, Oct.22, 2004 • Missed profit expectation for Q4, 2004 by about 13% (stock price plummeted 15%) • Intensifying Competition • Increased marketing costs (increased by 44% compared to 26% growth in sales) • Investors’ suspicions on e-commerce giants (similar fate for eBay) Opportunity: Harry Potter Year

9. Business Model

10. Screenshot of the Amazon home page

11. Bookselling and An Online Business Model Advantages: • Unlimited online shelf space • Offer customers a vast selection through an efficient search and retrieval interface • Realize significant structural cost advantages • Sources product from a network of book distributors and publishers which can give a decent discount. • Personalized service

12. Bookselling and An Online Business Model Negative Operating Cycle • Shift inventory risk to its vendors in the process. • Generate interest on the full sale price for over a month. In addition, Amazon introduced co-branded auctions and zShops Marketplaces. In this new model, Amazon acted as an agent by facilitating transactions and taking a fee.

13. Factors of Amazon’s Success • Brand • By 2000, Amazon.com became the forty-eighth most valuable brand in the world. • Personalization would be a hallmark of the Amazon brand. • Customers • Listen • Invent • Personalize • Amazon’s Mission: To be the earth’s most customer-centric company. • Distribution Capability • Bezos: We will have a competence in distribution that will be hard to compete with.

14. Factors of Amazon’s Success • Technology ＆ E-commerce Expertise • Customized Information Systems • Amazon Commerce Network (ACN) • One-Click Process • Search Engine System • Customers • Listen • Invent • Personalize • Amazon’s Mission: To be the earth’s most customer-centric company. • The ability to continually innovate • A great team with a passion for innovation and A passion for serving customers well • Other Marketing Strategies

15. Strategy Analysis

16. Two-Sides Market • Network effect- value of a network depends on the number of users • Amazon faces a Two sides market: • Buyers/customers want to visit/buy for a website with more books available • Book sellers/publishers choose the website that has large customer bases • An example of Chicken and Egg Problem

17. Ways to attract Suppliers • Amazon: a platform to provides valuable and accurate, real-time customer information, lower display costs and low return rate .. • Amazon offers attractive returns to publishers/title owners, usually <10% • Provides space to smaller independent publishers • Cheap credit card clearance

18. Ways to attract Customers • Broad variety, from books to DVD • Low price and personalized services • Build loyal customer bases • Reviews and recommendation: convenience and reduce cost of searching of the customers/potential customers • Create an unique community experience

19. Community – the value of a network • Community experience in order to building a loyal customer base: the good community should bring reputable and in return, more business • Not only a platform for the business to take place, but also a community, an experience for the customers • “We’re determined to offer both world-leading customer experience and the lowest possible prices”, 2002 Amazon Annual report

20. Community • Community is extremely important in the internet business- the value of a network depends on the users community) it already and expects to connect. • IM, such as QQ( in China), ICQ, MSN, and EBay, Amazon are examples • The ability of Amazon to build the community is the most important and the next problem is how they could profit from the community

21. Patents • “1-Click ordering is turned on immediately after you place your first order, provided you've paid for that order with a credit card. You can place an order to any address you've shipped to before by clicking just one button. We will automatically reference your account for shipping and billing information.” – Amazon Website

22. 1-Click Patent • convenience for the customers , personalized services • although the technology is somewhat simple, the granted patent block the competitors to use the similar technique in their websites

23. Another Patent- Amazon Associate Program • “Starting in 1996, Amazon Associates program was the first online affiliate program of its kind.  Today, it is the largest and most successful online affiliate program, with over 900,000 members joining world wide.  If you are a Web site owner, Amazon seller, or Web Developer, you can start earning money today and earn up to 10% in referral fees……Start making money today.Click here for easy registration ” – Amazon Website

24. Another Patent- Amazon Associate Program • Participation in the scheme is free • Could earn return up to 10%, depends on the performance • attractive for websites, almost no cost but only put the Amazon items on their websites • Patent also granted for the program, block again the competitors using similar program to build the customer base. • The patents owned to Amazon put its competitors at a disadvantage

25. Dynamic Pricing • Definition: Charging the same products on different price for different customers-> Max Profit • Technology enables company to measure price elasticity more accurately and more real-time • "Amazon.com acknowledged that it's been presenting different prices to different customers in its DVD store, but denied that it does so on the basis of any past purchasing behavior at Amazon. "We want to measure what impact price has on a customer's purchasing patterns. It's a limited test," Amazon spokeswoman Patty Smith said. "Different customers will see different prices." - PCIN Issue 101

26. Dynamic Pricing • Dynamic Pricing is common in the off-line world • Priceline.com, for example, tends to accept lowball bids from first-time bidders to draw them into the service, then gradually raises the bar in future bids. - Wired news, 2000 • Dynamic Pricing/ Price discrimination requires customer information, including purchase pattern • With internet, information is obtained more easily and less expensive; much easier to implement • The problem is, when the customers know the practice: some pay more, some pay less, the customers will dislike the practice and destroy the customers’ loyalty

27. Prospect

28. Competitors • Internet Retailers • Barnes&Noble.com • eBay • Half.com (ebay) • Wal-Mart • Bluelight.com • Brick & Mortar Retailers • Wal-Mart • Toy R’Us • Barnes & Noble • Sears • Target • Circuit City • Kmart

29. eBayDifferences • Amazon • Standard online sale method • Mainly business-to-consumer based business model (expanded to user-to-user) • Started as an online bookstore • eBay • Fixed time / Fixed price auction • User-to-user based business model (driven by users, not the company) • “Your success is eBay’s success”

30. eBay Similarities • Amazon & eBay • Internet retailers • Sells everything in any quantity (especially things not found locally) • Repeat customers are important, thus they have ways to promote repeat purchases (Amazon Gold box, eBay points and feedback)

31. Amazon.com Barnes&Noble Barnes&Noble

32. Amazon Vs Barnes&NoblePrice Comparison

33. Acquisition LiveBid Bookpages Telebook Back to Basic Toys Accept.com Exchange.com …... Strategic Investment Drugstore.com Living.com Gear.com Kozmo.com Ashford.com Della.com … … Acquisitions and Strategic Investment

34. First-mover advantage All-you-can-buy Virtual store Low cost Easy to use Conclusion

35. Questions What are the advantages of online bookstores compared to traditional ones? Why Amazon.com using dynamic pricing?