Online Exclusive: Al Ries on Marketing

AMAZON.COM: A CHAMPION ONLINE MONEY LOSER

How an Internet Marketing 'Wizard' Went Wrong

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As part of its 75th anniversary celebration, Business Week is profiling the greatest innovators of the past seven-and-a-half decades.
The Dec. 20 'Business Week' hailed Jeff Bezos as 'The Wizard of Web Retailing.'

In its Dec. 20, 2004 issue, the magazine spotlighted “The Wizard of Web Retailing,” Jeff Bezos, founder of Amazon.com. Which prompted us to take a closer look at Amazon.com

In the decade since its founding in 1994, Amazon.com has racked up $17.5 billion in sales. Currently its stock market value is $16 billion. And according to Business Week’s annual survey of the world’s 100 top brands, Amazon.com is No. 66 with an estimated value of $4.2 billion.

$3 billion loss
Not bad, except for one thing. Amazon.com doesn’t make any money. In the past decade, the wizard of Web retailing has managed to lose $3 billion. That works out to an astounding 17.1% loss on each dollar of sales.

(Note to venture capitalists: You stake us for the next decade and let us lose $3 billion and we’ll build you a brand even Donald Trump might envy.)

A retailing wizard? When you look at the numbers, Amazon.com looks more like Kmart than Wal-Mart. As a matter of fact, in the last decade, Kmart managed to lose only 1.8% on each dollar of sales and Kmart went bankrupt.

What kept Amazon.com alive? It was the Internet bubble that allowed the company to sell stock and float bonds to raise the billions needed to finance a decade of fiscal extravagance.

Stock value justified?
Will Amazon.com ever make money? The company made $35.3 million last year (at that rate, it would take another 85 years for Amazon.com to break even), and the company is likely to accelerate its profits in the years ahead. But whether Amazon.com will make enough money to justify its $16 billion stock value is another matter.

It’s too bad. We think Jeff Bezos is a marketing wizard. His strategy was brilliant. His timing was brilliant. And his brand name was brilliant. (Amazon: Earth’s biggest bookstore.)

The first megarule of marketing is: “Set up a new category you can be first in.” Amazon.com was the first bookseller on the Internet. (When we say first, we mean first in the mind, not first in the marketplace. Powells.com was first on the Internet, but made the mistake of using a line-extension name, a bad name at that, and then not launching the site with a major marketing program.)

Brilliant book strategy
Some critics have complained about Bezos' choice of books as his first product to sell, but again we think the choice was brilliant. The best physical products to sell on the Internet need to meet three criteria.

(1) The product should be available in more variations than a physical store can stock. Amazon.com carries 23 times as many books as a typical Barnes & Noble superstore and 57 times as many books as a typical large independent bookstore.

(2) Profit margins should be large enough so that Internet prices seem cheap in comparison with those found at physical stores. Amazon.com got off the ground by offering books at 30% off list price. (Since a $25 book costs less than $2 to manufacture, books leave a lot of room to cut prices.)

(3) Fashion should not be a factor. Selling apparel, shoes and other fashionable products on the Internet is difficult. No one has ever returned a book because it didn’t fit or it was the wrong color.

Lost focus
The second, third and fourth megarules of marketing are: “Focus, focus and focus.” Here is where Bezos went off the track, in our opinion. If you want to get into a second or third business, then invent a second or third brand name.

When the Gap wanted to sell less expensive apparel, they didn’t call their new chain “Cheap Gap,” they called the chain Old Navy, which has become quite successful.

Amazon.com pioneered a number of Internet innovations including one-click shopping, product ratings, recommendations based on previous purchases, etc. They could have used of all these innovations on their second and third brands, much the same way that Toyota used all of its automotive expertise when it launched its Lexus brand.

Instead, Amazon.com loaded up its site with apparel, arts and hobbies, auctions, automotive, home furnishings, baby supplies, beauty supplies, cameras, cellphones, computers, computer software, electronics, gourmet food, hardware and tools, health/personal care, jewelry and watches, kitchen supplies, lifestyle, magazines, medical supplies, musical instruments, office products, outdoor living, pet supplies, scientific supplies, sporting goods, toys and video games.

Yahoo, Google & eBay
Well, you might be thinking, it takes a decade or so to turn a Web site into a money maker. How about Yahoo, an Internet site that has been in operation only nine years? Yahoo has made $320 million net profits after taxes, a healthy 6% of revenues. And Google, a site in operation only four years, has made $185 million, or 9.7%. And eBay, a site in operation only eight years, has made $845 million, or an incredible 17.6%.

“There’s no reason for Amazon not to sell other merchandise,” wrote Bill Gates in his book, Business @ The Speed of Light. “You’ll see more Amazon-like cases in which a company that is strong in one online area expands its product offerings.”

Sure you will, Bill. That’s the conventional wisdom and the conventional wisdom, from a marketing point of view, is always wrong.

“Ultimately, Bezos, 40, wants to create something that transcends his own company,” writes Robert D. Hof in Business Week. “He points to Sony Corp., whose co-founder, Akio Morita, aimed to make Japan known for quality.”

Nintendo instead of Sony
Bezos should emulate Nintendo instead of Sony. A single product, focused company, Nintendo had one-thirteenth the revenues of Sony in the past decade, yet managed to make more money, $5.9 billion or 13.9% net profit after taxes.

Sony, the world’s best electronics brand, but a company that sells everything, managed to make only $4.9 billion, or a miserable 0.9% net profit after taxes.

If you want to make money, keep your brand focused. If you want to make the pages of Business Week, be our guest, get into everything.

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Al Ries is the author or co-author of 11 books on marketing, including his latest, The Origin of Brands. He and his daughter Laura run the Atlanta-based marketing strategy firm Ries & Ries.

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