Why Amazon Started With Selling Books?

As I started working on “why Amazon could make it big?” I thought it would be most useful to understand their strategy right from the beginning. That brought me to some very basic questions about how Amazon began. Why did they start with selling books? What was the market size and potential that they saw? Was expansion to other categories planned or did it just happen?

I found some of the answers while going through their IPO prospectus and other articles and interviews. Let us begin by answering why Amazon started with selling books.

As it turns out, it was no coincidence. Selling books was a well thought out decision and Amazon had a lot of compelling reasons to start with selling books.

1. Amazon had figured out early that those products that were dependent primarily on information for making a purchase decision were easier to sell online. Come to think of it, all the bean bags and sofas in physical book stores are nothing but a means of letting the buyers discover that information in a comfortable environment by reading excerpts and sampling books.

Amazon provided synopses, excerpts, reviews, author interviews, and personalized recommendations – online. That is all you would need to make up your mind whether you want to purchase a book and this information is far more than what you will ever find in a physical bookstore.

2. Breadth of titles that an online retailer can offer is endless. In 1997, less than 2 years after website was launched, Amazon was offering 2.5 million titles, including most of the estimated 1.5 million English books that were in print and about 1 million that were out of print but in circulation.

Compare this with maximum of about 350,000 titles that a distributor would carry and 175,000 titles that largest bookstore could carry.

Amazon had a strong value proposition in offering wide range of books and making it possible for users to discover and find titles of their choice. It had opportunity to capture the long tail in the books industry.

3. Economic advantages of selling online – Amazon saved on real estate costs, personnel costs, and inventory costs. It had publisher tie ups and most of its orders were communicated to publishers who shipped the books directly.

4. Publishers liked Amazon because Amazon had significantly lower returns. Traditionally, publishers were generous in offering returns to their customers. This meant that if their customers erred in forecasting the demand, the inventory would end up at publisher’s door. This also encouraged over-ordering by bookstores.

Amazon on the other hand, would mostly ship books already sold and hence had much lower return rates. Combined with high volume, it helped them create solid supplier relationships.

5. Low procurement and operational costs enabled them to pass on economic benefit to the buyer which further strengthened their value proposition.

6. Convenience of shopping from home and having it delivered at your door step was additional advantage to the buyer that enhanced value proposition of selling books online.

7. Potential for direct marketing and personalized services – traditional bookstores did not have demographic information of their customers or an understanding of their individual needs. Amazon could easily collect and mine this data to create direct marketing offers and build personalized services both of which were of value to the buyer.

8. Market commonality between online users and book buyers. Those were the early days of internet and, as it seems intuitively correct and, as Amazon had figured out then, there was significant overlap in the population that was online and the population that bought books.

9. Global reach – Being an internet retailer gave Amazon access to customers around the world. In 1995, (the website debuted in 1995), international sales accounted for 39% of their sales. In less than 2 years they had customer accounts in over 100 countries. Amazon had started with an eye on international market.

10. Worldwide book industry was large, growing, and relatively fragmented.

U.S. book sales were estimated to be approximately $26 billion in 1996 and were expected to grow to approximately $30 billion in 2000, while worldwide book sales were estimated at approximately $82 billion in 1996 and were expected to grow to approximately $90 billion in 2000.

Seems like Amazon made a smart choice by starting with books. What do you think?

Why Amazon Could Make it Big?

While I was working on “Would Reliance enter e-tailing”series on SBR, I did some research on internet retailers in US and in the process, stumbled upon some interesting facts.

•          Top 10 online retailers list is dominated by offline retailers – only Amazon and Netflix are pure play internet companies.
•          Top most internet retailer, Amazon, is a pure play which is greater in volume than combined online revenues of other 9.

Why no other pure play online retailer could make it big? 

What did Amazon do right that made it attain e-tailing volume greater than next 9 combined – and this list of 9 includes formidable retailers such as Walmart, Staples, Sears etc.? These giants had money, supplier relationships, retail experience far beyond what Amazon had in its early days and they too had entered online retailing early.

And yet Amazon somehow managed to beat them all at selling online – How? And why no other online retailer could do the same?

These are some very interesting business questions that caught my fancy and I shall try and answer – Why Amazon could make it big?

As we did for answering the Reliance e-tailing question, I began with looking up on Google for any ready answers (shortest possible way is always worth a try), and surprisingly, even though the question had been asked and there were several opinions and thoughts, there was no concerted effort to figure out why Amazon clicked and everyone else flopped.

What do you think, “Why Amazon could make it big?”

What it takes to reach the top?

How often do we fail to notice things that are right in front of our eyes? I was a successful mid-level manager at a leading company, and I thought I knew it all, but I have come to realize that even though business is simple, it is not as simplistic as we often assume it to be. Over the last one year, I have gained tremendous perspective about how CXO’s think, how businesses run, how they deliver value and just.. how does it all come together.

All of us think about leaps in our careers. I realise now that this jump starts from within. We develop capabilities and confidence, that makes us start expecting more out of ourselves, these expectations turn into belief and finally into achievement.

An year back, I had almost a decade of software industry experience, engineering education in computers from an IIT, a good understanding of how software was built, comfortably set at mid-level of an organization – but what next?

I had often thought about pursuing an MBA, but, (there is always a but – isn’t there?) I am married, had bought a home and hence had an EMI to pay. I could not afford to sell my house, draw out a huge loan for MBA, disrupt my family life and leave for 1-2 years. The opportunity cost was just too high for me to even consider it as an option.

That was my state of mind when my friend Ankur introduced me to Dinesh, co-founder of Sunstone, who was in the process of putting together the first batch for SBS – by reference only. At first glance, I had mistakenly thought of it as another run of the mill part time MBA program. Thankfully, I quickly realised my mistake in my first meeting with Dinesh.

SBS was not affiliated to any university – they were going out on a limb trying to build a management education brand in open market, there were no academicians on board, there were no text books to read (that was one big reason I joined), curriculum was devised by industry people, delivered by people who were walking the talk already, and mix of contact programs, online delivery, and workshops made it possible for me to pursue it without leaving my job. It was the best possible solution for me.

Working on creating annual budgets for a large IT services company, creating go to market strategy for a large mobile handset manufacturer, and similar large and real business problems gave me the right exposure for developing a deep understanding of business.

I went from being stuck in my career to being able to take on a problem of the magnitude of “Should RIL enter e-tailing” where I am discussing retail business with CXOs of the businesses and have created a platform that is engaging enough to be tracked by industry stalwarts and contributed to by Dilip Modi I feel a sense of pride and direction.

Finally, I see what it takes to reach the top.