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Bezos, Amazon & the Lean Grownup

October 6, 2011

Brad Svrluga

I wrote this yesterday morning, and for whatever reason hadn’t gotten around to posting it yet. It seems somehow disrespectful to be posting anything other than Steve Jobs tributes this morning. But I decided that a post touring the genius of any American entrepreneur today can be counted as honoring Jobs. And so I submit this post, which acknowledges the brilliance of the man who was, yesterday, my 2nd favorite living entrepreneur. Unfortunately, today he is my favorite.

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As I sit here this morning, still lingering in the glow of a warm Fire (Kindle Fire, that is) out in Seattle, I thought it was time for a little lovefest. A big one, actually.

I’ve been a huge Jeff Bezos booster for quite awhile now. Those who know me can certainly attest that it I’ve been a booster of his vision and strategic genius since long before the recent bandwagonning, as the techno-press seeks a new messiah for a post-Steve Jobs world. This post is inspired by a story I heard recently that increased my admiration for Bezos tenfold. That story below, but first some backdrop.

Bezos’ key genius, in my mind, is that he has managed to maintain seemingly every ounce of entrepreneurial flair that led to his early success as ecommerce innovator, despite the fact that he now presides over an e-commerce Godzilla worth $100 billion. Amazon has for years now been on an apparent mission to define itself as the official rebuttal to Clay Christensen and his silly little Dilemma.

Nowhere has this been more impressive than in the ebook market. I think Amazon’s innovative work with the Kindle is in many ways more impressive than Apple’s work with the iPod. Sure, the iPod completely blew up the music business, but when Apple arrived at that party they had nothing to lose – every ounce of havoc they wreaked was going to be additive to their business, and if it didn’t work out it would have no damaging strategic impact on their core.

Amazon, on the other hand, faced the classic innovator’s dilemma. They had become the biggest bookseller in the world, and ebooks were merely the pathetically unrealized dream of Sony and others. But then, in 2007, Bezos took a shot across his own industry’s bow by introducing the first truly viable e-reader. And he took an incredibly aggressive and completely disruptive approach to making the product successful, selling most ebooks at a 40% loss in the early years so as to ensure that he offered a compelling pricepoint ($9.99) to the consumer. A mere four years later, the world’s biggest seller of books sells more ebooks than print books.

Have we ever seen someone so skillfully and unblinkingly stare in the face of their own potential irrelevance? If there’s a comparable example, I can’t think of it (the jury is decidedly still out on Netflix, of course).

But the Kindle was merely one in a series of genius and non-obvious strategic moves. Expanding beyond books & CDs/DVDs seemed an audacious strategic move a dozen years ago – go head to head with Best Buy? Are you crazy? General merchandise, the core of which is electronics, now represents roughly 2/3 of Amazon’s market value.

Amazon Web Services – the web hosting and rentable compute power business launched in 2006 – seemed preposterously off focus. Five years later AWS has almost single-handedly powered the Web 2.0 revolution while establishing a multi-billion dollar business unit for Amazon. A business unit with gross margins that are >2x the mother ship’s core ecommerce business. Nice.

While the Kindle and AWS are amazing for the scope of their impact, I think an equally fascinating stroke of disruptive entrepreneurial genius was the introduction of Amazon Prime – the $79/year membership program that offers members “free” 2-day shipping on every order they place.

I’ve been fascinated by Prime since it launched. It seemed like such a complex and risky strategic move. Clearly, I thought, the guys out in Seattle with the green visors must have known that they’d be instantly cannibalizing lots of highly profitable paid express shipping. And certainly there would be frequent-ordering, freight-paying customers who would shift their activity to Prime and instantly become less profitable.

The stakes around how Prime was priced and launched, it seemed to me, were pretty darn high.

Forgive the exposure of my inner geekdom, but I spent some amount of time imagining how enormously complex the spreadsheet must have been that took in all of their assumptions of the impact of Prime’s introduction on consumer behavior and how that would vary across different segments of Amazon’s customer base. The choice of that price had huge implications, it seemed. Get it right and you’ve got a bonanza on your hands. Get it wrong and you could seriously damage overall profitability.

Given that geeky fantasizing, you can imagine my excitement when I recently was introduced to John, a key member of the Prime launch team. We had a couple of minutes of normal conversation and then I couldn’t wait any longer. “OK, you gotta tell me. . .I’m fascinated by Prime. How did you come up with $79? How big and complicated was the spreadsheet that justified that pricing to the CFO? Did you test a bunch of prices? And how angst-ridden were you all when it launched about whether or not you got it right?”

He looked at me like I was some kind of over-eager freak and then said “I hate to disappoint you, but there was no spreadsheet.”

I couldn’t believe it. No spreadsheet?! No endless hours of analysis? No complex simulation models? How could they know they weren’t about to blow a hole in the side of their business??

He went on to tell the whole story of Prime’s invention.

Like a lot of companies, Amazon has a process by which any employee at any level can submit creative ideas to a sort of innovation committee. That cross-functional committee meets periodically and reviews everything that comes in. Some of the best ideas get pushed into active product development, and some are ultimately released to the market.

The idea for Prime came through that process and was dismissed unanimously by the committee. But apparently Jeff Bezos occasionally reviews everything that has come to the committee. In one such review he came across Prime and immediately recognized its genius. The holiday season was approaching, and he wanted it implemented immediately. So he ordered a team assembled and gave them a 6 week timeframe for fleshing out the offering and launching it. The team worked round the clock, and Amazon Prime was born.

So where’d the $79 price come from? John confessed, “Kind of out of the air. Amazon has always had a strange corporate culture obsession with prime numbers, and 79 was the prime number that felt closest to the right price. But we had no idea if it was actually right.”

The point that the committee missed, but which Bezos realized, was that Prime was not simply an incremental change in shipping options. Bezos realized that, if successful, Prime would massively impact the entire Amazon business by fundamentally changing consumer decision-making. For customers who joined, it would make Amazon suddenly, and without question, the first place they thought of for virtually any online purchase. It became, effectively, a source of everyday free shipping (there’s powerful psychology in our ability to forget the money we’ve already spent on the membership). For partner merchants, it created a powerful incentive to use Amazon’s fulfillment services, so their goods were eligible for Prime shipping.

John said, “We knew that it could be as fundamental a change as when photo printing went from one week turnaround to one hour. It completely changed the interaction between consumers and the photo printers, and the near-immediate turnaround expanded the relevant occasions for photo taking. We wanted to fundamentally change the mentality around online shopping, to expand the occasions where Amazon was the relevant merchant.”

Man, were they right. My wife and I resisted for awhile, but we became Prime addicts a couple years after it launched. It has had a steadily growing impact on our shopping behavior, and now nearly every thought process on where to purchase something starts with Amazon. Why get off the couch on Sunday when you can get it sent to your door at no cost on Tuesday? Early this year I really knew they had me when I found myself unscrewing a dead light bulb one Thursday night and, rather than making a note to go to the hardware store on Friday, I went to Amazon right then and ordered four new bulbs for delivery on Saturday.

I said to my wife at the time, “I think our bank account is fast becoming a mere small subset of Jeff Bezos’s bank account.” You win, Jeff.

While Prime is an ingenious business strategy, I think the real genius is what Joe’s story tells us about Amazon’s nimbleness. Now #78 on the Fortune 500, the company has not lost the core agility and nimbleness that defines all great startups. It’s impossible for me to imagine someone like Microsoft or IBM or Wal-Mart or Verizon making such a bold and, ultimately, intuition-driven decision as Bezos’ launch of Prime. They would have first required the McKinsey report and the parade of presentations up the chain of command and then six months or more of carefully calculated market testing. They might have gotten there, but in the process several other potentially great ideas would have been denied the opportunity to bubble to the surface.

At Amazon, Bezos saw an idea, thought it was important, and said go. Six weeks later, it launched. Sure, that approach will no doubt result in mistakes. But mistakes are usually fixable. Failing to act, or stifling an idea before it even gets an audience, is not.

I don’t know where Amazon is going next, but I’ll be actively watching, and very happy to be a shareholder. At least as long as Jeff Bezos is around, they have everything required to reinvent themselves as often as it takes to continue to find new sources of growth.

And for those who aspire to be the next Bezos and create the next Amazon, remember this Prime story the next time you feel reluctant about pushing something out into the market before its been studied and tested to death. If Amazon can emulate the best of the Lean Startup, surely you can.

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