Sunday, August 12, 2012

Why Amazon Started With Selling Books?

As I started working on “why Amazon could make it big?” I thought it would be most useful to understand their strategy right from the beginning. That brought me to some very basic questions about how Amazon began. Why did they start with selling books? What was the market size and potential that they saw? Was expansion to other categories planned or did it just happen?

I found some of the answers while going through their IPO prospectus and other articles and interviews. Let us begin by answering why Amazon started with selling books.

As it turns out, it was no coincidence. Selling books was a well thought out decision and Amazon had a lot of compelling reasons to start with selling books.

1. Amazon had figured out early that those products that were dependent primarily on information for making a purchase decision were easier to sell online. Come to think of it, all the bean bags and sofas in physical book stores are nothing but a means of letting the buyers discover that information in a comfortable environment by reading excerpts and sampling books.

Amazon provided synopses, excerpts, reviews, author interviews, and personalized recommendations – online. That is all you would need to make up your mind whether you want to purchase a book and this information is far more than what you will ever find in a physical bookstore.

2. Breadth of titles that an online retailer can offer is endless. In 1997, less than 2 years after website was launched, Amazon was offering 2.5 million titles, including most of the estimated 1.5 million English books that were in print and about 1 million that were out of print but in circulation.

Compare this with maximum of about 350,000 titles that a distributor would carry and 175,000 titles that largest bookstore could carry.

Amazon had a strong value proposition in offering wide range of books and making it possible for users to discover and find titles of their choice. It had opportunity to capture the long tail in the books industry.

3. Economic advantages of selling online – Amazon saved on real estate costs, personnel costs, and inventory costs. It had publisher tie ups and most of its orders were communicated to publishers who shipped the books directly.

4. Publishers liked Amazon because Amazon had significantly lower returns. Traditionally, publishers were generous in offering returns to their customers. This meant that if their customers erred in forecasting the demand, the inventory would end up at publisher’s door. This also encouraged over-ordering by bookstores.
Amazon on the other hand, would mostly ship books already sold and hence had much lower return rates. Combined with high volume, it helped them create solid supplier relationships.

5. Low procurement and operational costs enabled them to pass on economic benefit to the buyer which further strengthened their value proposition.

6. Convenience of shopping from home and having it delivered at your door step was additional advantage to the buyer that enhanced value proposition of selling books online.

7. Potential for direct marketing and personalized services – traditional bookstores did not have demographic information of their customers or an understanding of their individual needs. Amazon could easily collect and mine this data to create direct marketing offers and build personalized services both of which were of value to the buyer.

8. Market commonality between online users and book buyers. Those were the early days of internet and, as it seems intuitively correct and, as Amazon had figured out then, there was significant overlap in the population that was online and the population that bought books.

9. Global reach – Being an internet retailer gave Amazon access to customers around the world. In 1995, (the website debuted in 1995), international sales accounted for 39% of their sales. In less than 2 years they had customer accounts in over 100 countries. Amazon had started with an eye on international market.

10. Worldwide book industry was large, growing, and relatively fragmented.
U.S. book sales were estimated to be approximately $26 billion in 1996 and were expected to grow to approximately $30 billion in 2000, while worldwide book sales were estimated at approximately $82 billion in 1996 and were expected to grow to approximately $90 billion in 2000.

Seems like Amazon made a smart choice by starting with books. What do you think?