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Jeff Bezos, founder and CEO of and master of one-to-one relationships, reveals how to keep online users happy....

Jeff Bezos, founder and CEO of and master of one-to-one relationships, reveals how to keep online users happy. Interview by Malcolm Wheatley.

Bezos (laughing): " Well, that was hard one to predict! I was shocked - shocked, I tell you! Seriously, I'm very happy to see the stock market start to discriminate with respect to these different kinds of companies. If our stock has to suffer in order that those companies whose business plans don't make sense are no longer able to get funding, then that's probably a good thing in the long-term.

But what differentiates you? What do you do better, that will enable you to escape the same fate?

Bezos: Firstly, our finances are more robust. We've $1bn in cash, and we'll end the year with more than when we started it. Secondly, we aim to be the place where you can buy anything on-line. We're still in transition towards that, but that's the destination. With our brand, technology, know-how and customer relationship skills, we've built a selling and distribution platform. Now, we need to leverage that platform, and amortise the investment with more and more products. is still very similar to here in the US a year or so back. But here, we now sell electronics, software, toys and video games, lawn and patio products, health and beauty, kitchenware, tools and hardware, home furnishings - and more. That's the future, and that's why the infrastructure that we've put in place is on the scale that it is - seven distribution centres across the US, five call centres around the world and so on.

Won't capturing this market this prove expensive? Even niche dot-coms are finding customer acquisition costs excessive.

Bezos: We know that more than half of our new customers come to us through word-of-mouth. In our first year, we didn't do a dollar of paid advertising, and we still grew incredibly rapidly, shipping books to 150 countries. Today, we do a significant amount of paid advertising, but it still accounts for less than half of our new customers. Our customer base is now over 20 million.

And here's something else: two years ago, we were US and books only. We weren't selling music, or videos, or any of the other product categories, and we didn't have, or in Germany. Two years later, although our US books business has continued to grow rapidly, more than half of our revenues come from these new categories and businesses. And a lot of that has also been word of mouth.

And what do these customers tell each other? That your prices are good?

Bezos: We've studied this, and there are several things that are important to Amazon customers. People care about selection, price and service. They also care about rich information - so that they can make a better purchase decision - and about ease-of-use.

But most of all, it's the end-to-end customer experience, which is even more important on-line than it is in the physical world. On-line, the word-of-mouth impact is amplified. Every Internet customer has a big megaphone, and if we make a customer unhappy, they don't tell five friends, they tell 5,000. And the reverse is true. You create evangelists who also tell 5,000 friends. On-line, your marketing dollars are best spent building great customer experiences.

Isn't that easier said than done, particularly as the complexity of your product offerings increase?

Bezos: What people often miss is that e-commerce is a scale business. Your costs are largely fixed, and so as your business grows, you are able to not only offer lower prices, but also the best service. And that is counter-intuitive, because in the physical world, which is a variable cost business, you intuitively know that you can't offer the best service and the lowest prices - there's a trade-off. But that trade-off breaks down in the on-line world.

There's something else, too. One of the things that differentiates us from other retailers is the way we hold inventory as a network. It's uneconomic to hold all the items we stock in each of our distribution centres. Think about how much a digital camera, or a hi-fi, or a top-end barbecue costs. So our objective is to get much better at predicting which items people buy together. At present, if we predict wrongly, we try and buy it to meet a particular shipment, but if we can't do this in the timeframe that we promised the customer then we'll split the shipment. And we'll pay for the split, which is a cost to us.

But how can Amazon gain enough leverage to make manufacturers want to deal with you in the first place? Books was one thing, but you're aiming to take on giants like Wal-Mart - and globally, too.

Bezos: From the manufacturer's perspective, they don't have to send people to maintain a merchandising display at the store, and they don't have to send their people to count and shuffle inventory. Nor do they have to ship us point-of-sale display advertising. We don't want or need any of that. Plus, we can share with them a lot of information about how their products are selling, to whom, and where, and in conjunction with which other products. And that's very valuable information, and not readily available from physical retailers, particularly those that don't carry the range of products that we do.

But surely there's more to the wealth of customer buying data than that?

Bezos: Absolutely. Our vision is that if we have 20 million customers, then we should have 20 million stores: if you never buy romance novels, then we shouldn't clutter your view with them. If you like literary fiction, then we should tilt your store towards literary fiction. And if you like John Irving, we should have the capability to say, look, there's this new author who you're going to love.

We do it with technologies like collaborative filtering. We look at all the things that an individual customer has purchased from us, and then we look at all our other customers to identify those who have similar tastes and purchase histories. Then, statistically, we merge those customers into something that you can think of as being an electronic soulmate. And then we look at the things that that electronic soulmate has purchased, but that this particular individual customer has not. And then we recommend those things.

Looking back, would you have done anything differently? Were there any particularly striking learning experiences?

Bezos: Most of the early mistakes we made turned out in retrospect to be lucky good decisions. Even when we should have been wrong, we were in some cases accidentally right. For example, we launched the store with 1.1 million book titles, against all the advice from people who knew the book industry and told us to launch with 300,000 titles and gradually grow. Although foolhardy, it turned out to be a good decision, because that's the thing that became known for.

And the layoffs earlier this year? In hindsight, could that have been handled differently?

Bezos: Yes, I think it could have been handled differently. But while it was happening - and even afterwards - you could look at it mathematically, and say we hired 5,000 people in the year, and we laid off 150, which is just 2% of the company, which didn't seem like very much. But in fact, it was very hard on all of us, and I don't think we understood when we did it how personally distressing it was going to be for all of us. So yeah, there probably is a better way to handle that, even though what we did is the traditional way that companies handle these things. But some of the costs of that are hidden.

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