Swimming upstream: How Amazon pivoted to Prime through Digital Transformation

Written by
Etienne Gadient

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Swimming upstream: How Amazon pivoted to Prime through Digital Transformation

Written by
Etienne Gadient

Swimming upstream: How Amazon pivoted to Prime through Digital Transformation

Written by
Etienne Gadient

Over the last several months, I have worked with many organizations who were focused on cloud enablement and transformation.   Through that process, many of the decision makers are focused on what technologies and cloud native platforms. As an example, I am often asked what tools should be used, such as "Should I use Google BigTable or AWS Dynamo to store large quantities of data?" Or "How can I bolt Machine learning on to this dataset?"  And while each of these platforms has unique features, near limitless scalability and amazing room for innovation, the question misses key fundamental marks for true digital transformation. 

  • Are the tools key to enabling the digital transformation or is it a different mindset that unlocks the change? 
  • How are you improving the experience and the underlying process? 
  • How are you changing your relationship with the customer? 

And Digital Transformation is a foundation of today's disruptive business climate:

  • 88% of companies report they are undergoing digital transformation (source: Altimeter Group)
  • 85% of enterprise decision-makers say they have a time frame of two years to make significant inroads into digital transformation or they will suffer financially and fall behind their competitors (source: PWC)
  • 25% of companies have a clear understanding of new and underperforming digital touchpoints (source: Altimeter Group)

Digital Transformation does not have a single set of rules and looking at various experts, they each have differing takes on the fundamentals.  But they can be summed up in a few specific categories:

  • Customer Experience
  • Business Process Optimization
  • Driving and Delivering the Change
  • Measurement and Adaptation

The Amazon Prime Story 

In 2004, Amazon launched a new and controversial customer loyalty program designed to improve customer retention while addressing one of the biggest complaints about buying a product on Amazon, delayed gratification.  At the time, the thought was that Amazon would lose a significant amount of money by making 2 day shipping free.  Many pundits forecasted its failure, especially with customers having to pay $75 to sign up. According to Business Week, Prime members increase their purchases on the site by about 150 percent after they join and may be responsible for as much as 20 percent of Amazon’s overall sales in the U.S. The company’s executives acknowledge only that the program gets people to buy more—and more kinds of items—on the site. “In all my years here, I don’t remember anything that has been as successful at getting customers to shop in new product lines,” says Robbie Schwietzer, vice-president of Amazon Prime and an eight-year veteran of the company.

Customer Experience

Successful digital transformation starts with the experience you want to create for your customer and a chance to establish brand loyalty.    The initial idea for Prime came from a software engineer named Charlie Ward, by first suggesting the idea of a free shipping service via a suggestion box feature on Amazon’s internal Web site, according to Ward’s colleagues at the time.  Jeff Bezos devised the free two-day shipping offer, which exploited Amazon’s ability to accelerate the handling of individual items in its distribution centers.  .  Ironically, one of the hardest aspects to determine was how much to charge for the program.  They ultimately decided on $79 as it was a "prime number" (divisible only by 1 and 0).   In the end, the concept of prime was to stoke immediate gratification and get customers to go to amazon first.  And Prime succeeded beyond their wildest dreams. It took occasional customers and turned them into repeat customers who use Amazon for research, alternative shopping (wide selection) and then to get the immediate gratification of knowing it will show up in 2 days or less (now same day or within 1 day in most areas). 

Business Process Optimization

 Prime was designed to exploit Amazon’s ability to accelerate the handling of individual items in its distribution centers, backstopped by Amazon's volume with the major shipping carriers.   By rethinking how they were storing inventory and forecasting of demand of items, distribution centers became a key enabler for the transformation.  With some key adjustments to how inventory was managed and distributed, Prime drove an expansion in sales that was unparalleled in the industry.  During the period of 2008-2010, a recessionary period, Analysts describe Prime as one of the main factors driving Amazon's stock price—up 296 percent—and the main reason Amazon's sales grew 30 percent during the recession while other retailers flailed.   At the same time, Prime has proven exceedingly difficult for rivals to copy:It allows Amazon to exploit its wide selection, low prices, network of third-party merchants, and finely tuned distribution system, while also keying off that faintly irrational human need to maximize the benefits of a club you have already paid to join. (source: businessweek)

Driving and Delivering the Change

Digital Transformation is disruptive in nature.  According to several former employees who participated in the program’s creation, Bezos commissioned Prime in December 2004 at an unusual Saturday meeting in the boathouse behind his home in Medina, Wash. At the meeting, he told the small team of employees they could commandeer other company engineers and resources, and instructed them to ready Prime for a rollout in time for the company’s fourth-quarter earnings report in January, less than two months away. The program is a “big idea,” Bezos told the group that day in the boathouse, according to people who were there, and one that would help the company further capture the devotion of its best customers. (source: businessweek).  And delivery was not seamless.  Bezos thought it so critical to their story that he delayed the analyst meeting for the earnings report by 1 week to have it ready for launch.  The key here is that focus on the key goals of the change become the decision points for the supporting technology...not the other way round. 

Measuring the Results and Adapting

Prime has evolved over time.  Despite the fact that Prime was break even in 1/8th the time forecasted (3 months vs. 2 years), Prime continues to be expanded and evolved with other ideas including Prime Day (Black Friday in summer), same day delivery, Prime Video, and Prime Music to just name a few.  This relentless adaptation is key to a successful digital transformation.  

IT as an Enabler to Digital Transformation

Certainly Technology plays a key role in Digital, however, it must be viewed as a tool rather than the end itself.  Which is where I see some in IT getting stuck over and over, it is easy to let the myriad of different available services and technologies seem like the key point of decision.  Starting with the business benefits to be enabled and asking if a decision will make that benefit simpler to attain or enhance is the key to getting to results fast.   This means that IT has to be tied into the business requirements, the decision process and completely understand the differentiating drivers behind the transformation.  Going back to the Prime story, certainly the Amazon prime service is powered by AWS tools such as Dynamo (NoSQL Database), Lambda (code functions as a service), and RDS (SQL database) to drive transaction processing and fulfillment while also leveraging Glue (ETL), Redshift(EDW) and machine learning to forecast inventory distribution.  But the key innovations came from understanding the experience to be created and the key disruptor to the business process underlying those technologies. 

Those fundamental changes can always be expressed in simple terms, like 2 day free delivery.