The significance of a "platform." - Peter

Excerpts from "The Everything Store: Jeff Bezos and the age of Amazon" by Brad Stone

Chapter 6 - Chaos Theory

Amazon’s ability to ship products efficiently and offer precise delivery times to customers gave the company a competitive edge over its rivals, particularly eBay, which avoided this part of the business altogether. Fulfillment was a lever that Bezos had invested in, and he started using it to guide strategy.

 

By 2002, the company was offering customers the option, for an extra fee, of overnight, two-day, or three-day shipping. Wilke’s team called these fast-track or fast-lane orders and built a separate process around them. On the floor of the FCs, those items were accelerated through the Crisplant sorters and were the first to be delivered to the packers and the trucks waiting in the yard. The company refined this ability gradually, pushing the cutoff time for next-day delivery to forty-five minutes before the last trucks left its fulfillment centers. Expedited shipping was almost prohibitively expensive, for customers and for Amazon, but the website’s having the capability was to pay huge strategic dividends.

In 2004, an Amazon engineer named Charlie Ward used an employee-suggestion program called the Idea Tool to make a proposal. Super Saver Shipping, he reasoned, catered to price-conscious customers whose needs were not time sensitive—they were like the airline travelers who paid a lower rate because they stayed at their destinations over a Saturday night. Their orders got placed on the trucks whenever there was room for them, reducing the overall shipping cost. Why not create a service for the opposite type of customer, Ward suggested, a speedy shipping club for consumers whose needs were time sensitive and who weren’t price conscious? He suggested that it could work like a music club, with a monthly charge.

That fall, employees showed enough enthusiasm for Ward’s proposal that it came to the attention of Bezos. Immediately enchanted by the idea, Bezos asked a group that included Vijay Ravindran, the director of Amazon’s ordering systems, to meet him on a Saturday in the boathouse behind his home in Medina. Bezos conveyed a sense of urgency as he began the meeting, saying that the shipping club was now top priority. “This is a big idea,” he told the gathered engineers. He asked Ravindran and Jeff Holden to put together a SWAT team of a dozen of their best people and told them he wanted the program ready by the next earnings announcement, in February—just weeks away.

 

Bezos met with the group, which included Charlie Ward and Dorothy Nicholls, who would later go on to become a longtime Kindle executive, weekly over the next two months. They devised the two-day shipping offer, exploiting the ability of Wilke’s group to accelerate the handling of individual items in its fulfillment centers. The team proposed several names for the new feature, including Super Saver Platinum, which Bezos rejected because he didn’t want people to see the service as a money-saving program. Bing Gordon, Amazon board member and partner at Kleiner Perkins, claims he came up with the name Prime, though some members of the team believe the name was chosen because fast-track pallets were in prime positions in fulfillment centers. Focus groups were brought into Amazon’s offices to test the Prime sign-up process. The volunteers found the process confusing, so Holden proposed using a large orange button with the words Create my Prime account right inside the button.

Selecting the fee for the service was a challenge; there were no clear financial models because no one knew how many customers would join or how joining would affect their purchasing habits. The group considered several prices, including $49 and $99. Bezos decided on $79 per year, saying it needed to be large enough to matter to consumers but small enough that they would be willing to try it out. “It was never about the seventy-nine dollars. It was really about changing people’s mentality so they wouldn’t shop anywhere else,” says Ravindran, who later became chief digital officer for the Washington Post.

Bezos was adamant about the February launch date. When the Prime team reported that they needed more time, Bezos delayed the earnings announcement by a week. The team members finished mapping out the details for the service at three o’clock in the morning on the day of the deadline. It was a complex undertaking, but it was achievable because so many of the elements of the program already existed. Wilke’s organization had created a system for the expedited picking, packing, and shipping of prioritized items within the FCs. The company’s European operation had built a subscription-membership tool for its nascent DVD-by-mail business (a Netflix clone) in Germany and the United Kingdom, and that service, though rudimentary, was quickly improved and pushed into production in the United States to support Prime. “It was almost like Prime was already there, and we were putting the finishing touches on it,” Holden says.

In many ways, the introduction of Amazon Prime was an act of faith. The company had little concrete idea how the program would affect orders or customers’ likelihood to shop in other categories beyond media. If each expedited shipment cost the company $8, and if a shipping-club member placed twenty orders a year, it would cost the company $160 in shipping, far above the $79 fee. The service was expensive to run, and there was no clear way to break even. “We made this decision even though every single financial analysis said we were completely crazy to give two-day shipping for free,” says Diego Piacentini.

But Bezos was going on gut and experience. He knew that Super Saver Shipping had changed customers’ behavior, motivating them to place bigger orders and shop in new categories. He also knew from 1-Click ordering that when friction was removed from online shopping, customers spent more. That accelerated the company’s fabled flywheel—the virtuous cycle. When customers spent more, Amazon’s volumes increased, so it could lower shipping costs and negotiate new deals with vendors. That saved the company money, which would help pay for Prime and lead back to lower prices.

Prime would eventually justify its existence. The service turned customers into Amazon addicts who gorged on the almost instant gratification of having purchases reliably appear two days after they ordered them. Signing up for Amazon Prime, Jason Kilar said at the time, “was like going from a dial-up to a broadband Internet connection.” The shipping club also keyed off a faintly irrational human impulse to maximize the benefits of a membership club one has already joined. With the punitive cost of expedited shipping, Amazon lost money on Prime membership, at first. But gradually Wilke’s organization got better at combining multiple items from a customer’s order into a single box, which saved money and helped drive down Amazon’s transportation costs by double-digit percentages each year.

Prime wouldn’t reveal itself to the world as a huge success for another few years, and originally it was unpopular inside Amazon. One technology executive griped to Vijay Ravindran that he feared Bezos would now believe that he could commandeer engineers and ram his favorite projects through the system. Other execs were wary because of Prime’s estimated losses. Almost alone, Bezos believed fervently in Prime, closely tracking sign-ups each day and intervening every time the retail group dropped promotions for the shipping club from the home page.

But even back in February of 2005, Bezos suspected he had a winner. At Amazon’s all-hands meeting that month at the usual location, the classic Moore Theater on Second Avenue, Vijay Ravindran presented Prime to the company, and afterward Bezos led everyone in a round of applause.

Prime opened up new doors, and the next year Amazon introduced a service called Fulfillment by Amazon, or FBA. The program allowed other merchants to have their products stored and shipped from Amazon’s fulfillment centers. As an added benefit, their products qualified for two-day shipping for Prime members, exposing the sellers to Amazon’s most active customers. For Wilke’s logistics group, it was a proud moment. “That is when it really hit home,” says Bert Wegner. “We had built such a good service that people were willing to pay us to use it.”