To: Gordon A. Langston who wrote (23795 ) 10/30/1998 11:44:00 AM From: Rob S. Respond to
Covey said (from memory, not notes) that Amazon has seen about 63% of sales come from repeat customers and that increases in expenditures are due primarily to expansion in Europe and domestic facilities and personnel. The story is that these increases will eventually flatten out while sales growth continues. IF margins remain near current levels or improve, then the company should eventually make money. If sales grow near the same pace and turn marginally profitable, then the earnings will be substantial. If margins come under significant pressure, then the "story" of the business plan is blasted. What analysts found particularly encouraging in the lst qtr and cc was the success Amazon had with music. That supports the theory that Amazon is building "brand" loyalty that can be easily transferred to additional product areas. The growth in sales due to existing customers is also supportive of the idea that they are building brand loyalty. The proposition is that while it is expensive to acquire new customers, as the existing base of customers becomes a larger part of overall sales and as the company continues to achieve a "critical mass" of reach, then the costs of doing business will drop dramatically. It now costs something like $35 to gain a new customer and it takes several months for that initial investment to pay off. What clouds the issue is that the company does not give out details on customer retention or granularity in what customers are buying relative to how long they have been a customer. Are new book (and now music) customers loading up on books during their initial months as an on-line buyer? Do sales then drop off? Or are customers buying at a sustained pace? What percentage of customers are returning month after month rather than leaving after some period of time? An analysis of these issues would provide a more thorough understanding of the the probability for long-term success of the "grand plan". Bezos and Covey argue that this would provide too much detail of their business to competitors so that they could devise strategies to target Amazon's customers or new customers more effectively. That's a reasonable concern.
