Amazon – how one controversial decision ignited massive growth
People often think that Amazon’s success is all about economies of scale, when actually it is the controversial customer review system that fueled Amazon’s massive growth.
When people often think about what is Amazon’s greatest competitive advantage they often think it’s their network. Their distribution network. However, long before Amazon was offering free 2 day shipping, Jeff Bezos made a controversial decision that will create such strong network effects that Amazon will become the everything store he dreamed about. He pioneered customer reviews.
Amazon knew it had one major advantage on neighborhood bookstores, it could carry a huge selection of books that no physical retailer could hold. On the other hand, many customers relied on bookstore employees to get unbiased recommendations for books. While Amazon could not replicate the dialog between a book shopper and their neighborhood bookstore, it could create the wisdom of the crowd. Crowdsourced customer reviews proved to be a genius way to scale the young platform. It is hard to imagine how many resources Amazon would need to invest in order to write every product review on its site.
Customer reviews create significant value for customers in ecommerce. If we are buying a product for the first time, it is quite difficult to assess the product’s performance and quality. When shopping in a brick and mortar store we might be able to see the product in action (for example when shopping for a TV) or feel it (for example kitchenware). We can also speak to the sales person and get an “expert” opinion. However, in the information age, customers have learned that sales agents have agendas and products on display might be misleading. I’ll tell you what’s not misleading- hundreds or even thousands of objective customers reviews. We can read the good and the bad and make our own decision based on herd mentality…
“When we pioneered customer reviews, it was incredibly controversial. I got letters from publishers saying, “You don’t understand your business. You make money when you sell things. Take down those negative customer reviews.” We’ve never done anything of real value that wasn’t at least a little bit controversial when we did it. But if you want to be a pioneer, you have to be comfortable being misunderstood.”- Jeff Bezos
20 years ago industry experts believed that letting customers rant on products is retail suicide, but in reality it created value for customers and companies alike. Suddenly, if you had a good product out there, the Amazon platform would ensure many customers discover your product and through Amazon’s sorting algorithms, products with plenty of positive reviews would be positioned atop the search results. Customer review’s also proved to be very valuable if you had a bad product out in the market. Through Amazon’s platform users were telling other users exactly what they don’t like about a product which by way gave the manufacturer honest and direct customer feedback.
Amazon’s customer reviews are so powerful they seriously threat Google’s business model. Because Amazon’s product selection and review system are so robust customers are starting and finishing the product discovery and purchasing within Amazon. Google is used to earning its revenue by having customers search for products on Google and then press on paid links. Since customers know they can find what their looking for in Amazon as well as all the product information and reviews, many customers are starting their product search on Amazon and not Google.
Great post Oded! Completely agree with your post, in the sense that Amazon is for many users (including myself) the first place to search for a product in the buying process. By looking at Amazon’s “#1 Best Seller” and customer’s reviews, you save a lot of time in researching for the perfect product. This is one of the most important features of Amazon. It’s nice to have 2 days shipping and stuff like that, but the real competitive advantage is that Amazon is the best place to search for whatever you need, and select it in little time.
Nice post! I agree that customer reviews have been a key driver in the success of Amazon as both a reseller, and now, platform business. However, I don’t think the reviews really help own the top of the funnel vis. your suggestion that customer reviews are a threat to google. Without expert opinions, the customer reviews are poorly formatted and only sometimes address salient points. They also aren’t weighted by the person’s expertise in the area. Without a better ability to programmatically determine what “the best books on business” are from customer reviews, Amazon will not be a place for search and discovery. People will useGoogle to find expert opinions and then only come to Amazon to execute the purchase. This hurts Amazon’s ability to cross-sell and learn about the user.
Rob, great comment! I agree with you that the customers reviews played an integral role in Amazon’s strategy. However, I don’t think Amazon can not be a place for search and discovery. Sometimes users not sure what they are looking for to buy, and with Amazon’s suggestions algorithm helps those users to find the right product. They still use Google for experts opinions, but I think some of the discovery happens on Amazon too.