The watchwords were discipline, efficiency, and eliminating waste.
Sinegal explained the Costco model to Bezos: it was all about customer loyalty. There are some four thousand products in the average Costco warehouse, including limited-quantity seasonal or trendy products called treasure-hunt items that are spread out around the building. Though the selection of products in individual categories is limited, there are copious quantities of everything there—and it is all dirt cheap. Costco buys in bulk and marks up everything at a standard,
across-the-board 14 percent, even when it could charge more. It doesn’t advertise at all, and earns most of its gross profit from the annual membership fees. “The membership fee is a onetime pain, but it’s reinforced every time customers walk in and see forty-seven-inch televisions that are two hundred dollars less than anyplace else,” Sinegal said. “It reinforces the value of the concept. Customers know they will find really cheap stuff at Costco.”
Costco’s low prices generated heavy sales volume, and the company then used its significant size to demand the best possible deals from suppliers and raise its per-unit gross profit dollars. Its vendors hadn’t been happy about being squeezed but they eventually came around. “You can fill Safeco Field with the people that don’t want to sell to us,” Sinegal said. “But over a period of time, we generate enough business and prove we are a good customer and pay our bills and keep our promises. Then they say, ‘Why the hell am I not doing business with these guys. I gotta be stupid. They are a great form of distribution.’
“My approach has always been that value trumps everything,” Sinegal continued. “The reason people are prepared to come to our strange places to shop is that we have value. We deliver on that value constantly. There are no annuities in this business.”
The Monday after the meeting with Sinegal, Bezos opened an S Team meeting by saying he was determined to make a change. The company’s pricing strategy, he said, according to several executives who were there, was incoherent. Amazon preached low prices but in some cases its prices were higher than competitors’. Like Walmart and Costco, Bezos said, Amazon should have “everyday low prices.” The company should look at other large retailers and match their lowest prices, all the time. If Amazon could stay competitive on price, it could win the day on unlimited selection and on the convenience.
That July, as a result of the Sinegal meeting, Amazon announced it was cutting prices of books, music, and videos by 20 to 30 percent. “There are two kinds of retailers: there are those folks who work to figure how to charge more, and there are companies that work to figure how to charge less, and we are going to be the second, full-stop,” he said in that month’s quarterly conference call with analysts, coining a new Jeffism to be repeated over and over ad nauseam for years.
Drawing on Collins’s concept of a flywheel, or self-reinforcing loop, Bezos and his lieutenants sketched their own virtuous cycle, which they believed powered their business. It went something like this: Lower prices led to more customer visits. More customers increased the volume of sales and attracted more commission-paying third-party sellers to the site. That allowed Amazon to get more out of fixed costs like the fulfillment centers and the servers needed to run the website. This greater efficiency then enabled it to lower prices further. Feed any part of this flywheel, they reasoned, and it should accelerate the loop. Amazon executives were elated; according to several members of the S Team at the time, they felt that, after five years, they finally understood their own business. But when Warren Jenson asked Bezos if he should put the flywheel in his presentations to analysts, Bezos asked him not to. For now, he considered it the secret sauce.
The Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone
Though metrics vary wildly, consider Internet marketing standards:
• Marketing response rates hover around 2%. As an example, for every 1 million impressions, approximately 20,000 visits are generated.
• Of the 20,000 visits, 11.5% opt-in to join a mailing list or receive a free product.
• In addition, 3.5% convert to paying customers within three months. Therefore, for every 20,000 visitors or 1 million impressions:
• 700 customers are secured.
• 2,300 potential clients are added to one’s database.
As indicated, assuming a median cost of $2.52/CPM, a typical expenditure will be $2,520 for one million impressions. Based on the above metrics, the lifetime value of a single customer must be $3.60 to break even ($2,520 per 700 customers). This is certainly a viable proposition if $24.95 books, $97 workshops, and other items are being sold with reasonable profit margins.
However, if the ultimate goal is to sell high-end coaching services (e.g. $300/hour with a 3 hour minimum) or multi-session workshops (e.g. $10,000 for six weeks of training) the metrics look pretty darn appealing.
That said, conversion is a byproduct of multiple tangible and intangible factors and there’s no guarantee things will happen as planned. Further, many Internet marketers simply cannot afford pay-for-placement/performance marketing and must pursue other options. If this is the case, low-cost or free traffic must be generated to sustain one’s operation if online sales are the primary component of revenue.
Providing free, high-value products and driving traffic through synergistic partnerships leads directly to the second step of the equation, bypassing the upfront investment required in step one.
Given no out-of-pocket expense, this equates to an immeasurable ROI as each opt-in costs nothing to secure. Even if less than 1% of the 11.5% of visitors who opt-in become paying customers, the metrics are phenomenal. Best of all, the customer views the relationship as a favorable exchange of value: “For providing my name and email address, I receive valuable content. That’s more than worth it.”
Internet Prophets: The World's Leading Experts Reveal How to Profit Online by Steve Olsher
Documenting repeatable processes for anything you will do more than once is essential to your sanity.
Process is King
Documenting repeatable processes for anything you will do more than once is essential to your sanity. It’s true; you can fly by the seat of your pants and get by, but it makes you a hostage to your work. If you’ve ever been a manager you probably like process and understand its benefits. If you’re a developer you probably dislike process or see it as a necessary evil. Startups, being lean and mean, seem like the perfect place to eliminate documents, have no systems, and no processes…but that’s far from the truth. Without process it’s impossible to delegate, difficult to bring on a business partner, and easy to make mistakes. With processes in place it’s much easier to sell your product if/when you want to make an exit. The fact is, creating processes will bring you freedom through the ability to easily automate and outsource tasks.
Start Small, Stay Small: A Developer's Guide to Launching a Startup by Rob Walling
When you start to build your business online, knowing what to measure helps to tell you how to build and what elements matter and what doesn't. Too often people don't create a feedback loop to let themselves see how they are doing. These loops are important as you want to improve fast, and knowing what doesn't work to improve your key measureables is critical to success.
The following list is pretty straight forward, and pretty comprehensive..
Site traffic/ Email list
To paraphrase Drucker, what gets measured, gets done.
Make sure you are going the direction you think you are, and the direction you want. Measure things.
“We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.
— Charles T. Munger”
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Some of the links in the post above are “affiliate links.” This means if you click on the link and purchase the item, I will receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”