Participants into Profits:
The Case of Amazon.com
This paper describes the core competencies and business strategies of Amazon.com, while focusing particular attention to the company’s utilization of a participatory network of “workers”. I will argue that these workers, acting as voluntary agents, contribute significantly to Amazon’s business strategies and strengthen the company’s core competencies, resulting in sustainable competitive advantage in the online retailing market.
After a short discussion on the methods employed in this research paper, I will provide an short outline of the formation and history of Amazon.com, including how the company established not only the Amazon brand but also its supporting participatory network. This section will also explain Amazon’s efforts to establish a solid reputation on the Internet as well as the importance of Amazon’s first-mover advantage as it relates to the online retailing market.
Next, I will discuss Amazon’s strategies and resultant core competencies while attempting to clearly establish a connection between the company’s strategic use of the participatory network and each of those competencies. Namely, I will consider Amazon’s strategies in terms of pricing, product selection, and providing a desirable online customer experience.
I will argue that the network advantages derived from Amazon’s community of online participants forms the foundation of its competitive advantage in the market of online retailing. Overall, I aim to focus on the aspects of each of Amazon’s core competencies which are dependent upon and/or derived from the company’s employment of online participatory networks.
Finally, I will discuss the selected elements of the Amazon.com participatory network in detail, providing examples of Amazon.com’s participatory strategies, including its Associates Program. Furthermore, throughout this paper, I will highlight the added value that customers derive from the participatory network, as well as how these added values contribute to the success of Amazon.com. Ultimately, I hope to establish a direct link between the company’s participatory network and it’s competitive advantage, suggesting a causal relationship between the two.
This paper aims to draw conclusions from Amazon.com’s employment of participatory consumer networks into its business strategy. As such, I will employ a single-case study methodology in order to establish a causal relationship, whereby certain conditions will be shown to lead to other conditions.1
In choosing this methodology, I considered the uniqueness of the Amazon.com business model, noting Amazon’s innovative use of the participatory network from the initial formation of the online service. Considering that Amazon was the first company to incorporate such online participation into its business strategy, I have denoted it as a unique case. Although Amazon’s strategies as they relate to leveraging participation have been subsequently imitated by competitors, the success of Amazon’s employment of this strategy stands out as a point for further exploration. As such, I base my methodology on the following description of the single-case study method:
“Single-case studies are appropriate in circumstances where, for example…the case is an extreme or unique case, or the case provides a revelatory case for exploring certain aspects of phenomena previously inaccessible to scientific investigation. Single-case design can also provide an applicable means to studies of explorative nature (Yin 1989 p. 49).”2
This will be an “instrumental” case study, conducted in order to learn more about other cases as well. Although there will be limitations on the ability to generalize this case study into broad areas of analysis, this research will provide a basis for further research into similar cases, particularly those which have an active community of participants and which are associated with online retailing markets. The case of Amazon.com will serve as an example of a group of other cases which could also have been selected for analysis, including Barnes & Nobel, eBay, and similar companies utilizing participatory networks in their business models while integrating those networks into their strategic actions.
Although a multiple-case study was considered for this research, the single-case study offers the potential for a more thorough analysis of the intended subject, Amazon.com. Furthermore, external conditions, such as the nature of the different business models in other cases, may adversely influence the research significantly, especially in conducting multiple-case studies these external variables may make replication and cross-analysis very difficult. Thus, the single-case method used in this research will allow for a better focus on the various aspects of the case in study while avoiding the confusion of external variables.2
The central case in this study will be the online retailer Amazon.com, which is considered the first of its kind, driven by a (then) unique business model emphasizing the online customer shopping experience as an integral aspect to its strategic actions in the market of online retailing. I will present this case largely from the point of view of business strategists and marketing specialists. Through this perspective, I hope to provide insight into the strategies employed by Amazon as they relate to participatory networks and the attainment of sustainable competitive advantage. While this case study will not include detailed financial analyses of the company (nor its long-term profitability), I do intend to suggest links between the growth of the Amazon’s participatory network and the value added to customers, and hence, the sustainable competitive advantage enjoyed by the company.
Data used in this research will include a combination of quantitative and qualitative data. Among the quantitative data, I will utilize financial statements, web traffic statistics, and sales figures. These data will provide support for parallel arguments of qualitative nature, which include direct observation, analysis of interviews with executive officers, press releases issued by the company, independent media articles, Amazon.com’s website, and affiliates’ websites. Media articles will also be considered from reputable business sources such as Business Week and Fortune. Finally, existing research on topics including participatory behavior, business advantages derived from participatory networks, analysis of online shopping experiences, online retailing business strategies, document repositories, weblogs, and virtual communities will be analyzed and integrated into this research.
In analyzing this case, I will first establish a background of the company, while emphasizing the importance of the first-mover advantage in establishment of the participatory network and the creation of brand reputation.
I also will focus on the identification of the strategic actions of Amazon.com as they pertain to establishing market dominance in the online retail landscape. Upon identifying these strategic actions, I will group them into three general categories, to include pricing, selection, and online customer experience. The data provided will establish the basis for determining which strategic categories provide Amazon.com with the foundations for its competitive advantage, as well as how each strategy employs participatory networks as a source for maintaining and/or establishing sustainable competitive advantage in the online retailing market.
During the summer of 1994, Jeffery Bezos, a computer science and electrical engineering graduate from Princeton University, left his job as the youngest senior vice-president in the history of D.E. Shaw, a Wall Street based investment bank, to investigate new business opportunities in the online space. Upon observing a statistic that the Internet was growing at 2300%, Bezos became convinced that this growth rate was the perfect opportunity for to begin a new venture in online retailing. After settling on books as the initial product, he chose open his business in a 400-square-foot office in Seattle, placing Amazon.com online in July of 1995 (Kotha, 1998).
After a series of moves into increasingly larger warehouses, Amazon.com had become one of the largest retailers on the Internet, with revenues reaching $15.6 million in 1996 (Kotha, 1998). On May 14, 1997, Bezos took Amazon.com public. Since then, the company has experienced phenomenal revenue growth, from $147 million in 1997 to nearly $3.1 billion in 2001, with an average revenue growth rate during this period of 141% (Taylor, 1996). Amazon’s most current financial statements indicate over $5.26 billion in revenue for the year ending December 31, 2003 (Amazon.com 2003 Annual Report), earning it a spot on the Fortune 500 list of largest companies.
In contrast to its beginnings solely as a bookseller, Amazon.com now offers new, used, refurbished and collectible items, in categories such as apparel, shoes and accessories, home, garden and outdoor living products, baby care products, jewelry and watches, books, kitchenware and housewares, camera and photography, magazine subscriptions, cellular telephones and service, music, computers and computer add-ons, office products, consumer electronics, software, DVDs (Digital Video Discs) and videos, sports and outdoors, gourmet food, tools and hardware, health and personal care and toys.3 The diverse set of products now offered by Amazon has transformed the retailer from a simple provider of books and music to an all-in-one online retail outlet.
Building Brand Reputation
Establishing reputation on the Internet is distinctly different from the physical marketplace. The absence of typical cues which the consumer relies upon in order to make purchasing decisions presents an added importance to reputation.
Pointing to cue-utilization theory, others have suggested that “consumers use both intrinsic cues (e.g., ingredients, taste, and texture) and extrinsic cues (e.g., price, packaging, and labeling) as surrogate indicators of product or service quality…in their absence, their transaction risk increases, and so does the importance of potential guarantees for product quality, such as a firm’s reputation” (Rindova and Kotha, 2001).
Amazon.com’s founder Jeff Bezos summarized the above conditions as follows:
If I am walking down the street and I spot a large bookstore, I don’t even need to know the name to have a pretty good idea of what the experience will be like. But online, all Web sites pretty much look the same. Is it a 40,000-square-foot Web site, or a 2,000-square-foot site? Without a clear sense of brand, I might never log on.”19
In light of the initial uncertainty experienced among buyers and sellers on the Internet, the importance of reputation serves as a mediator of the flow of resources among them (Rindova and Kotha, 2001).
In response to (or perhaps in anticipation of) these circumstances, Amazon.com has focused strongly on reputation building as a means of gaining new customers. Dubbing itself as “The Earth’s Biggest Bookstore”, the company has employed several strategies in order to gain a reputable name on the Internet, each of which Rindova and Kotha group into three distinct “action flows”, including symbolic, competitive, and relational action flows.
First, the company’s symbolic action flows consist of actions that form part of its communication strategies, including positioning, web site design, and advertising.
“The positioning of Amazon.com was created by its name and motto…Amazon.com explained its name and positioning in a press release as follows: ‘Amazon.com's name pays homage to the Amazon River. Just as the Amazon River is the Earth's biggest river -- Amazon.com is Earth's Biggest Bookstore’ (PR Newswire, June 10, 1997). The motto communicated the firm’s identity as book retailer, and its strategic intent for gaining a leading position in the industry” (Rindova and Kotha, 2001).
In addition, Amazon.com utilized extensive resources in promoting a reputable image through targeted advertising campaigns during its initial formation.
“Amazon.com hired an advertising agency in early 1996 with an explicit goal of developing integrated corporate identity, branding, website design, online and print advertising, and media planning and placement (PR Newswire, May 29, 1996). Its advertising – described by experts as ‘scientific’ (McCarthy, 1999) -- focused on defining the concept of virtual scale by using images of the largest buildings in the world -- The Pentagon, The Vatican, and Taj Mahal – to convey the necessary physical size to store its book selection” (Rindova and Kotha, 2001).
Next, Amazon’s competitive action flows focus establishing and defending the company’s competitive positions. Rindova and Kotha declare price and selection as the primary competitive action flows of Amazon.com, noting the company’s competencies in these areas while attributing Amazon’s online reputation to these factors.
Finally, relational action flows fall into three categories. First, service and personalization took front seat in promoting the goal of making Amazon.com the “most customer-centric organization in the world”4. Furthermore, the company was the first to extend customer relations into a community. It did so by creating a space on its site for users to post their own product reviews, enabling them to create editorial content on the firm’s website. Thus, Amazon.com is credited with creating one of the first Internet communities organized around a commercial entity (Hagel & Armstrong, 1997).
Moreover, in the design of its website, Amazon.com focused its relational actions on the simplicity of website navigation, as well as the creation of visible cues that parallel physical shopping experiences, such as the “shopping cart” and the “check-out”, in order to reinforce traditional aspects of shopping and cue utilization.
Overall, Amazon.com pioneered many new technologies in order to establish its brand reputation and create added value in the absence of traditional purchasing cues. Resultantly, the company has been extremely successful in building one of the most widely-known reputations on the Internet.
Amazon.com was the first company to develop the concept of selling books online, and has been innovating in the online retailing market ever since. By pioneering this business model, the company has achieved widespread success in the online retail market. With its focus on the customer, Amazon has devoted much research into ascertaining what the customer wants out of the online shopping experience. As a result, Amazon has been the first to develop many innovative services to customers, such as the previously-mentioned “one-click” shopping, as well as online product reviews and custom product recommendations.
By being the first to develop these and other technologies, Amazon.com has gained considerable advantage over its competitors while establishing brand recognition and online reputation. Furthermore, the first-mover advantage has played an extremely important role in the development of the supporting online community of participants which drive the business model. Through early recognition as the leading online book retailer, Amazon.com has been able to “recruit” more registered users (who contribute to customer usage statistics and often provide book reviews) that its online competitors. “According to Media Metrix ratings…Amazon.com consistently ranks as the Web's most visited retailer.”5
Thus, the first-mover advantage has allowed for not simply the creation of many new technologies in the online retailing market, but it has also established Amazon.com as the premier online location for participants to contribute their work, whether in the form on book reviews, recommendations, or links to the Amazon.com website. The premier establishment of the online community of participants has provided Amazon.com with one of the largest foundations of networked “workers”, which contribute immensely to the ability of the company to create added value to its customers and while providing the strategic basis for Amazon’s competitive advantage.
All businesses attempt to turn what they do well, or their core competencies, into sources of competitive advantage. In the case of Amazon.com, these competencies are derived from strategic actions discussed earlier. Namely, the company strives to offer the widest selection of products at the lowest price in an environment that promotes the best online customer experience. Bezos illustrates the success of the online store as such:
"Bill Gates laid it out in a magazine interview. He said, "I buy all my books at Amazon.com because I'm busy and it's convenient. They have a big selection, and they've been reliable." Those are three of our four core value propositions: convenience, selection, service. The only one he left out is price: we are the broadest discounters in the world in any product category. But maybe price isn't so important to Bill Gates"11
For the purposes of this paper, I will combine Bezos’ notions of convenience and service into one broad category: online customer experience. The reason for this generalization is twofold. First, most elements of Amazon.com’s customer service (email correspondence, associates programs, product recommendations, and product reviews) are also considered as aspects of customers’ convenience. Furthermore, many aspects of convenience (one-click check out) can also be considered to be integral aspects of customer service. Thus, the distinction among two separate value propositions is weakened by the overlapping of each into the other. Second, both of these value propositions are mediated by the Internet: service and convenience for an online retailer are inherently dependent on the customers’ online experiences. Thus, the distinction between these two competencies will be disregarded in favor of the online customer experience.
Although each of these competencies, (convenience, selection, online customer experience) have undoubtedly contributed to the current successes of Amazon.com as the leader in online book retailing, it is imperative to note that each of these competencies, or sources of competitive advantage, are supported and/or created by a network of participants. I will argue that each of these competencies are dependent upon and often derived from participatory networks. Furthermore, these competencies, in the absence of their supporting participatory network, could be relatively easily imitated by competitors. For example, Fortune reported in 1997:
“Anything Amazon.com can do on the Internet, so, too can Barnes & Noble. There was a mystique about how difficult it was to get started on the web, but it is quickly fading. Hiring hot designers from Silicon Valley, Barnes & Noble now offers a web shop front that’s just as inviting and useful as Amazon’s, with easy-to-use subject indexes, online author events every day, book forums, book reviews, and other features.” (Stross, 1997)
Given that Amazon’s core competencies are easily observable online and subject to thorough analysis by competitors, Fortune’s article suggests that many (if not all) of Amazon.com’s strategies can be imitated by competitors such as Barnes & Noble, which had extensive capital to contribute to the development of a website and supporting technologies to meet or exceed the standards created by the online market leader, Amazon. Although Fortune and others6 have argued that these core competencies of online retailing are imitable, Amazon’s competitors have had an extremely hard time doing so. In fact, Barnes & Noble, after launching its online store shortly after Amazon.com, shows online sales of a mere $425 million in 20037 relative to Amazon.com’s $5.26 billion for the same period4.
I will argue that the reason for this inability to imitate Amazon’s core competencies lies in the fact that Amazon has utilized the participatory network in order to create strong barriers to entry in the market. In the areas of price, selection and online customer experience, Amazon has leveraged the contributions of a participatory community in order to decrease prices, increase selection, and effectively enhance the online customer experience of its shoppers.
I will now discuss each of Amazon.com’s core competencies, while describing the factors pertaining to the importance of each as a source of Amazon.com’s sustainable competitive advantage, as well as how those competencies are derived and supported by participatory networks.
It is well known that Amazon.com has focused on price leadership as a means of obtaining new customers and securing repeat buyers. The low-price strategy of Amazon.com works in light of the incredible volume of merchandise offered and the relatively low transaction costs relative to physical booksellers. Furthermore, Amazon.com reduces overhead costs by stocking only a fraction of its “inventory”, relying instead on an efficient distribution channel to deliver orders for its un-stocked products. Streamlining the distribution process while eliminating many of the traditional costs through web-based transactions, Amazon.com is able to pass savings onto customers much in the same way Wal-Mart does in the traditional retailing space.
However, in addition to traditional means of cost cutting, Amazon.com derives additional benefits from the abundance of third-party sellers on the website, yet another facet of its participatory network. Amazon.com’s Seller Marketplace allows external merchants to offer their products for sale through the Amazon.com website while the company charges commissions on the sales. Anyone can sell their products on the Amazon Seller Marketplace, from individuals to small and medium-sized businesses. Furthermore, Amazon provides a guarantee that insures the buyer in the event of non-delivery or the supply of a defective product. Through this system, sellers are provided with an inexpensive outlet in which to sell their products to an established customer base that invests its trust in Amazon.com. On the surface, the strategy employed by Amazon seems counterintuitive. Why would a company provide the means for competitors to undercut its own sales?
In fact, this strategy enables Amazon to further promote its reputation of having the widest selection at the lowest prices. By creating a competitive environment among sellers within the same collective store, Amazon encourages pricing competition among independent participatory merchants who end up serving the interests of Amazon.com. Interestingly, although the products are sold by third-party sellers, the primary beneficiary of these transactions is the arbitrator, Amazon.com, which (assuming a successful transaction) gains reputational stock in light of the lower prices offered by its sellers. Furthermore, the additional revenue gained on the commissions comes very cheaply, considering that, in most cases, Amazon.com is not directly involved in packaging, shipping, and other transaction costs that would normally be associated with a traditional website sale.
For Bezos, one of the chief advantages to offering books as the main product for Amazon.com was selection. He states:
are incredibly unusual in one respect, and that is that there are more items in
the book category than there are items in any other category by far. There are
more than 3 million different titles available and active in print worldwide.
When you have this huge number of titles, a couple of things start to happen.
First of all, you can use computers to sort, search and organize. Second, you
can create a super-valuable customer proposition that can only be done online,
and that is selection.”
(originally quoted in Krishnamurthy, 2002)
Amazon.com offers a selection of more than 5 million books8, electronics, house wares, etc. on its website, offering one of the widest selections of products available in any one “place”. However, many of the products offered on the website are not actually stocked in Amazon.com’s warehouses. In fact, the company relies not only on an efficient distribution channel in order to give the impression of having the widest selection of products available, but also on an extensive array of relationships with independent sellers (as discussed above) who offer their own products on the Amazon.com website. By opening up its market to external parties, Amazon inherits a sales presence in products that it would not otherwise offer to customers. Furthermore, the Seller Marketplace increases Amazon’s effective inventory without adding to inventory costs.
Although others have argued that product selection, as well as website usability, do not create a competitive advantage because such attributes are easily observable and therefore susceptible to imitation by competitors6, I posit that the participatory network, in this case taking the form of the Amazon.com Seller Marketplace, actually creates, by proxy, competitive advantage in the area of product selection.
An integral aspect to Amazon.com’s product selection is that it is not solely determined by Amazon.com itself. Amazon Marketplace sellers, third-party businesses who offer their products through the Amazon.com interface, also contribute to the overall product selection of Amazon.com. By integrating third-party sellers into its business model, Amazon.com effectively increases its inventory of products while taking a commission of the sales revenues of it’s marketplace “employees”.
In addition, the third-party seller system creates new, potentially high-margin revenue streams in the form of a monthly fee paid to Amazon for listing items on its site, and in the form of a transaction fee paid to Amazon whenever a listed item is sold (Krishnamurthy, 2002). This network of (participatory) sellers serves Amazon with an additional source of suppliers who offer their own products to Amazon’s customers.
Online Customer Experience
Online customer experience is a complex term involving many facets of online shopping, including website design, usability, and personalization, webpage load times, customer support, payment acceptance, order fulfillment, etc. As mentioned previously, I have combined two elements that Bezos describes as value propositions (customer service and convenience) into the generalized concept of online customer experience.
Others have extended the online customer experience to include operational (website usability, order fulfillment capabilities, site personalization), social (confidence and trust in the company’s reputation, community base, relationship building), and economic (pricing) aspects (Kotha, Rajgopal, and Venkatachalam, 2001). Furthermore, the authors go on to cite others in asserting that “actions directed at creating relationships with online surfers such as implementing mechanisms that ensure a sense of belonging online via virtual communities, and enable customers to personalize the firm’s website”.
Although I will refrain from using economic aspects as part of the customer experience (as I have treated this as a separate strategy of Amazon.com) I will consider both operational and social aspects as integral to the online customer experience. In addition, I will consider strategies of relationship building and site personalization as part of the social and operational aspects, respectively.
Specifically, I would like to focus attention on the aspects of Amazon.com’s online customer experience which are derived from or enhanced by the participatory network. Primarily, the participatory network serves as a foundation for many of the social aspects of the online customer experience.
Amazon’s online product reviews serve as the primary social aspect of the online customer experience. Subramani has classified these product reviews in their aggregate form as document repositories. “Document repositories, often termed knowledge repositories or knowledge bases are tools employed to capture, organize and store codifiable knowledge and are important components of knowledge management initiatives in organizations” (Subramani, 2003).
By featuring editorial book reviews by leading magazines and encouraging customers to contribute reviews on books, music, videos, and other products in its increasingly large inventory, Amazon.com has leveraged the voluntary work of over 1 million reviewers and created a vast document repository containing reviews on nearly 1.5 million books alone (Subramani, 2003).
Visited by over 14 million users every month (Subramani, 2003), the Amazon.com repository provides reviews which are one click away from the main product listing. After clicking on “more information” for a specific product, the user can view product reviews from a vast diversity of reviewers, thereby providing added value to the online customer experience.
In addition, Amazon.com allows any individual to register with the site and contribute their own reviews of both products sold on the site and merchants who sell products through the Amazon.com Marketplace. Upon reading the reviews, customers will note a rating which is placed against each review so that customers can decide whether to read it. Moreover, registered users can also provide additional rankings to the reviews depending on how useful s/he finds the particular review to be. In this sense, Amazon.com offers consumers an opportunity to participate in the reviewing process and contribute to the collective work of its online community. Although reviewers, for the most part, receive no explicit value from contributing reviews, the participatory nature of the reviewing process enhances the online customer experience by providing the consumer with additional value in the sense of community belonging. In fact, Subramani argues that there is “evidence that social capital in the form of obligations, trust and dentification with the community appear to play an important role in motivating contributions” (Subramani, 2003).
“In writing a book or music review and posting it on the Amazon.com site, reviewers share their opinion on these products with other users of the repository – information that they believe may be useful in helping the users decide if the book or CD is worth reading or listening to. The reviews are moderated – Amazon.com employs a small group of editors who delete inappropriate or offending content from reviews” (Subramani, 2003). In addition to central moderation, consumers also vote reviews as being helpful or not, thereby providing a community-based moderation area in which helpful reviews are more likely to be displayed most prominently under their respective products.
On the operational aspect, Amazon has also utilized the participatory space in order to enhance its online customer experience. Amazon.com employs a vast database containing statistics on customer navigation habits, product interest, and other preferences. By tracking the interests of it users (also participants in the business model), Amazon is able to create custom recommendations to other consumers who express interests in similar reading material, musical genre, or video titles. When previewing a particular product, customers are presented with additional recommendations, often in the form of a simple statement declaring that “customers who bought x also bought y”. Clearly,
effective recommendations encourage customers to browse additional material and buy more than what they had originally intended (Krishnamurthy, 2002).
As Lessig states in his praise of the company’s ability to advertise to him:
“I doubt any of your friends knows your tastes in music and books as well as Amazon knows mine. After a three-year relationship, dutifully remembered by Amazon’s data-mining engine, Amazon can recommend to me things that I ought to buy. It advertises to me, but its advertisements – unlike 99 percent of the ads I see in real space – actually speak to me. They actually say something that I want to hear. And because they speak to me, I listen…Preference-matching engines are constantly gathering data about what I buy and what others buy; Amazon adds to that data preferences that I express” (Lessig, 2001).
Lessig goes on to argue that, beyond improving the online customer experience, the identification of customer preferences derived from participatory networks has created a boom in demand that could not be built in real space. Noting that the complexity of our preferences contributes to the difficulty of others in speaking to them, Lessig describes Amazon’s ability to more accurately and efficiently identify those preferences, thereby increasing the demand for a diverse selection of content that would otherwise be undiscovered (Lessig, 2001).
Bezos drives this point home by stating:
the online world, businesses have the opportunity to develop very deep relationships
with customers, both through accepting preferences of customers and then
observing their purchase behavior over time, so that you can get that
individualized knowledge of the customer and use that individualized knowledge
of the customer to accelerate their discovery process. If we can do that, then
the customers are going to feel a deep loyalty to us, because we know them so
(Quoted in Krishnamurthy, 2002).
In addition to personalized recommendations, Amazon offers another operational aspect of the online customer experience by allowing users to create individual “Wish Lists”, to which users can add Amazon products that they would like to acquire. Available to the world on the Internet, the Wish List provides a convenient way to promote the purchase of Amazon’s products on the behalf of friends, family, or donations.
Overall, the social aspects of the online customer experience show how “Amazon.com does whatever possible to enrich its relational space through member pages, wish lists, purchase circles and discussion boards; essentially encouraging online communities to coalesce around topics of interest, such as books, movies and music” (Dafermos, 2003).
In addition to traditional advertising through media such as radio, television, and Internet banner ads, Amazon has employed unique marketing strategies which utilize the participatory network for incredible online promotional advantage.
Amazon’s Associates Program, founded in 1996, provides another example in which Amazon.com has leveraged the participatory network to its own advantage. The Associates Program allows smaller sites to act as traffic generators for Amazon.com. Each registrant with the program posts content on its site with a link to one or multiple Amazon.com products. Subsequently, when a visitor to the associate’s website clicks the link and purchases the product, Amazon.com pays a commission of up to 15% of the purchase value. By creating monetary incentives for users to create links on their own website under specific topics of interest to products on the Amazon.com site, the company benefits from increased traffic generation and the resultant additional sales.
The relevance of this new form of advertising also results in distinctly targeted messages to website viewers. For example, an associate who operates a politically-oriented website might offer links to books on Amazon.com that are specifically related to the political content of the website. Through this system, Amazon relies on its network of participants in order to create advertising targeted directly at consumers with interest in a specific content area. Upon the completion of a successful purchase, Amazon pays only for the successful referral after the purchase is completed, as opposed to traditional advertising in which companies pay ahead of time without the foreknowledge of a secured purchase. In this sense, the benefit of the Associates program can be seen as a bottom-up form of marketing, in which Amazon only pays in the case of a successful sale initiated by associates, in contrast with the top-down form of advertising employed by other traditional retailers. This strategy, developed by Amazon and later imitated by other online retailers, has resulted in a much more efficient form of advertising which is completely dependent upon the participatory network of associates.
Furthermore, the benefit derived from the Associates program extends beyond increased sales. More links scattered across the Internet to relevant products on the Amazon.com site certainly benefits the promotional and sales aspects of Amazon’s business. However, the Associates Program also increases the branding of Amazon across the Internet. With the large numbers of sites displaying Amazon logos and advertisements to Amazon products, it has become fairly common to see other sites promoting everything from books to electronics on their own sites. In fact, the company reported that it had signed up at least 800,000 associates by September 2002 (Krishnamurthy, 2002). The result for Amazon is increased visibility – not simply for individual products, but for the company as a whole.
It is important to note that this increased visibility is not merely the result of website visitors who view Amazon-branded advertisements individual websites, but this visibility also relates to the incredible search engine rankings enjoyed by Amazon. Since the majority of search engine algorithms base their site popularity rankings on the number of other sites linking to the site in question, Amazon, with nearly one million associates providing incoming links to its site, enjoys some of the most prominent rankings on major search engines such as Yahoo!, Google, MSN, and others. Oftentimes, merely typing in the title of a specific book will lead not to the website of the author, but rather directly to the book’s listing on Amazon.com. This exposure clearly gives Amazon a leading advantage in the online retailing space, an advantage created by a network of participants who voluntarily link to the company’s website in hopes of earning a small commission on potential sales.
Throughout this paper, I have argued that Amazon.com's utilization of its online participatory network has been instrumental in the development of strategies used to create sustainable competitive advantage in the online retailing market.
Additionally, I have suggested that the benefits derived from the participatory network create barriers to entry among Amazon.com’s competitors, emphasizing the first-mover advantage in the establishment of the company’s online community. These barriers effectively diminish the opportunity for competitors to imitate Amazon’s competencies, while maintaining Amazon’s premier reputation as an online retailer as well as its strong sales figures.
I have outlined Amazon's core competencies as they related to pricing, selection, and online customer experience, as well as its participant-based marketing strategies, while suggesting a causal relationship between the company’s utilization of its participatory network and its resultant competitive advantage.
Dafermos, George N. (2003), “Blogging the Market: How Weblogs are Turning Corporate Machines into Real Conversations”, September 15, 2003, See: http://opensource.mit.edu/papers/dafermos3.pdf
Hagel, J. & Armstrong, A. G. (1997) Net Gain: Expanding Markets through Virtual Communities. Harvard Business School Press, MA.
Kotha, Suresh, Rajgopal, Shivaram, and Venkatachalam, Mohan, (2001) “From Surfing to Buying: The Role of Online Customer Experience in Acquiring and Converting Web Traffic”, See: http://www.gsb.stanford.edu/CEBC/pdfs/surfing.pdf
Kotha, Suresh (1998) “AMAZON.COM Expanding Beyond Books" University of Washington Business School Case, October 1998. See: http://us.badm.washington.edu/kotha/internet/handouts/Amazon_rev.pdf
Krishnamurthy, Sandeep (2002) Amazon.com – A Business History, September 27, 2002, See:http://www.swcollege.com/marketing/krishnamurthy/first_edition/case_updates/amazon_final.pdf
Lessig, L. (2001) Innovation from the Internet In: Lessig, L. (2001) The Future of Ideas: The Fate of the Commons in a Connected World (New York: Random House)
Rindova, Violina P. and Kotha, Surech (2001) “Accumulating Reputation Through Strategic Action Flows: Lessons from Amazon.com and its Competitors In Internet Retailing”, November 2001. UW Business School Working Paper. See: http://us.badm.washington.edu/kotha/Papers/repstock-1001.pdf
Stross, Randall E. (1997) "Why Barnes & Noble May Crush Amazon", FORTUNE, September 29, 1997
Subramani, Mani R. (2003) “Contributing to Document Repositories - An Examination of Prosocial Behavior” working paper, November 2003, See: http://ids.csom.umn.edu/Faculty/Mani/Homepage/Papers/Repository%20Contributions_Subramani%20Peddibhotla.pdf
Taylor, William (1996), Who’s Writing the Book on Web Business?, October 1996, See: http://www.fastcompany.com/magazine/05/starwave2.html
Mike Spainhower is a web developer living in Denver, Colorado.