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Friday, November 12, 2004

Amazon's Invisible Innovations -Part I

David Kirkpatrick writes in Fortune that Amazon CEO Jeff Bezos is committed to improving customer service and says it doesn't have to lead to higher prices. Excerpts:

Amazon.com is one of the Internet's emblematic companies, a great surviving pioneer. Amazon's success clearly owes a huge amount to Bezos' intelligence and analytical skills. He had an enormous amount to say in the recent NY meet. Bezos always believed his company would prove the doubters wrong. Remember all those articles that said Amazon would never make money, or would collapse under the weight of its debt? Well, the company reported $54 million in profits last quarter, and announced that operating cash flow for the preceding 12 months was $490 million. Not bad. What's more, Amazon recently was awarded the highest customer satisfaction score ever recorded in any service industry online or off, by the American Customer Satisfaction Institute at the University of Michigan. Many of Bezos' remarks throughout the evening could be taken as explanations for why.

Perhaps the most profound comment he made, and one that in some ways goes to the root of the advantages of Internet business, was this: "There's no tradeoff in our business between increasing service and lowering cost." The reason for that has a lot to do with the Internet's ability to scale infinitely. There is little incremental cost to spread an innovation over more customers, once you have developed it. This is also true of software, but becomes more powerful in the Net services age. "Eliminating defects at the root," he explained, "then allows us both to reduce costs and to lower prices." He said that Amazon's improvements over the years had not even been directly visible to users of its site. "About 90% of innovation has been on the back end," he explained. The company has five giant fulfillment centers in the U.S. alone, each of which is 600,000 to 700,000 square feet. It is able to get any two items in those facilities, however disparate, into the same shipping box with great efficiency, using software and processes it developed entirely itself. Another innovation we've never seen as customers (except in improved service): Now 28% of the company's products are "drop-shipped" by companies other than Amazon, from their own warehouses or affiliated stores. He explained how hard the company works to ensure that these third parties provide service that seems to come from Amazon. (Amazon provides them its own boxes to complete the illusion of a seamless fulfillment system.)

He believes that what the Internet is best at distributing is low margin products to a small group of customers. Those are exactly the kinds of things that, pre-Web, were so difficult to find and acquire. "People use Amazon disproportionately to find things they couldn't find any other way," he said.
(Part II shall be published shortly.)
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