Amazon’s Bezos shares e-commerce lessons learned

Jeff Bezos, founder and CEO of Inc., is one of the most famous e-commerce entrepreneurs in the world – but his keynote Tuesday at the Retail Systems 2003 conference didn’t really sound like an e-commerce keynote.

“E-commerce will be a fraction of total retail sales,” he said. “The vast majority of sales will (still) be done in the physical world (that is, in stores). It’s still the best way to buy a whole range of products.”

Nonetheless, he began with a sales pitch. He stepped onto a model of two-wheeled, powered Segway “people mover,” which looks somewhat like an oversized golf-bag carrier, and zipped up and down the aisles with remarkable speed. “It’s FUN to ride,” he shouted. “And it’s available, exclusively, on”

In a keynote liberally sprinkled with corporate and personal anecdotes, Bezos focused on debunking a number of lurid, dot-com-era myths about e-commerce, to clarify the real business and technology issues facing his audience. In effect, he said the Internet was here to stay in retail, and for many traditional retailers would become simply one more channel for selling to consumers. But e-commerce is different from brick-and-mortar retailing, and calls for different skills, and, often, different technologies, he said.

He pointed out that Amazon’s stock price in six years had increased from US$1.50 to about US$20. “But it got there by way of US$113,” he said, drawing laughter. Pointing to what he called the “real business fundamentals,” Bezos said that during the same period, Amazon’s active customers grew from 14 million to over 30 million.

But not all online efforts will garner that level of consumer buying. The critical question facing retail executives, Bezos said, is deciding what percentage of their retail sales will be from e-commerce. There are different strategic implications depending on whether that percentage is 50 per cent or five per cent, in terms of re-engineering business processes and technology investment.

But no matter what the percentage, online retailing has different challenges than traditional retailing. Bezos said one e-commerce myth is that the fulfillment – the complex set of processes that actually get a purchased item into a customer’s hands – is the biggest expense for online retailers. In the past five years, Amazon has spent US$300 million on fulfillment technology, including mechanized distribution centres. But during that same period, the company spent US$600 million on marketing and related areas.

And it spent US$900 million on technology, the lion’s share of that in custom software development and much of the rest in buying servers from HP. The company’s entire e-commerce software architecture is based on its own code.

“A lot of our marketing money has been misspent,” he said. And he estimated that based on lessons learned, Amazon could have cut its fulfillment spending nearly in half.

But he expressed no regrets about the technology spending, nor about the US$200 million a year the company continues to spend on software development and hardware purchases. When Sony allotted 4,000 of its hotly anticipated PlayStation 2 game stations to, they were sold out in 37 seconds after being posted.

Amazon recently reorganized its team of computer scientists, and formally named its first chief algorithms officer. The scientists are constantly writing and refining the algorithms that govern so much of what Amazon is able to bring to its Web site interactions. These interactions include the way the Web site reads and remembers a customer’s every purchase and then recommends other items the customer is likely to be interested in.

Other algorithms let Amazon “redecorate the store” each time a customer logs in – adjusting what’s featured on the page based on the customers past viewing and buying patterns. Bezos said that during another speech, he showed his own login page, which featured an Amazon recommendation for a new DVD called “Slave Girls from Beyond Infinity.” The recommendation was based on his recent purchase of the science-fiction cult classic “Barbarella,” starring Jane Fonda.

Amazon leans heavily on customer self-service, and has designed numerous interactions that customers can use easily. One is the ability to cancel an Amazon order. The idea ignited a debate within Amazon over whether this would cut into sales. Bezos said that executives concluded that indeed there was some slight negative effect in the short term. But that was more than offset by the improved quality of service aimed at giving customers what they want.

One early experience showed how far Amazon was willing to go to keep customers happy. In the first 30 days of operation, Amazon shipped books in English to 45 different countries.

A few months later, the company received an order from Bulgaria, from a man who lacked a credit card. He mailed Amazon the cash: two crisp US$100 bills secreted inside the casing of a computer floppy disk. He included a note, in English: “The money is inside the floppy disk. The custom officials steal money but they can’t read English.”

Talking to reporters later, Bezos reiterated that Amazon had wasted money. “But we didn’t waste our focus; it didn’t affect the core business,” he said.

“The only defence we have (for wasting the money) is that there were a lot of very savvy investors right there with us,” he said.