Dancing with the Elephant

Will personalization and eCRM enable e-tailers to become profitable?

He is an engaging fellow, Jeff Bezos. Talk about landing in the lion’s den: There he was, giving a keynote at PC Expo (New York, June 28), just days after some of Wall Street’s leading analysts turned thumbs down on the burn rate of his Internet enterprise. Analysts have suggested that Amazon is going to run dry: In other words, gone are the days of easy money, stratospheric stock prices, and hordes of investors. Wall Street wants to see profits now, which so far Amazon does not have. Yet, despite the sounds of knives sharpening and share prices falling, Bezos couldn’t have been more unflappable.

Bezos was cracking jokes, playing with the crowd, and confidently demonstrating the inner workings of Amazon’s personalization kingdom. Wish lists, recommendations, affinity groups, and all the wonders of collaborative filtering make being a mere chunk of data look breezy and pleasurable — and the process of creating the data almost a form of psychoanalytic self-realization. Now, long-lost relatives can look up your wish list and send something that befits the real you, like a Weber Smokey Mountain Cooker Smoker. And with Amazon’s new Friends & Favorites, personalization takes the leap into actual people. Who needs Roger Ebert? You can be the critic: the missionary, leading your flock through the virtual marketplace. On stage with his familiar pop-out eyes and wide grin, Bezos was clearly enamored with his amazing merchandising wonder. Just as Apple is Steve Jobs and Oracle is Larry Ellison, Amazon is Jeff Bezos.

“Any questions?” Bezos asked as he finished his prepared talk. Immediately, the lines at the microphones were 20 deep. Journalists and financial analysts, deprived of an exclusive press conference, gave voice to the general bitterness and skepticism sweeping those employed to watch the e-tailing industry. “Is Amazon running out of cash?” Bezos replied that Amazon has more than $1 billion in cash. “If people think we’re in the midst of a capital crunch, they’re crazy.” On the contrary, Bezos indicated that everything is going according to plan. But is that plan going to lead to profits? Is Amazon a Ponzi scheme? Yes, Amazon will be profitable, he said. “But the scale of what we are trying to do is unprecedented. It is expensive to innovate on this scale. It’s hard to build this stuff anyway — but it’s extremely hard to do it in real time.” Bezos exclaimed, “We have 20 million customers. Our market size is unconstrained!”

Amazon is merely trying to build itself into an e-tailing colossus — maybe the e-tailing colossus, if its rivals burn out as some analysts predict. It is trying to do at Internet speed what it took companies like Sears, Roebuck and Co. generations to accomplish. But even in the new economy, it cannot repeal seasonal shopping cycles. Robert Spector, author of Amazon.com: Get Big Fast (HarperBusiness, 2000), defended the company recently in the Wall Street Journal (July 10): “If you strip away everything — cool Web site, ‘Earth’s Biggest Selection (of merchandise)’ hype — Amazon.com is just like any other retailer, which means it depends on the fourth quarter to make its year. This realization appears to be just dawning upon some analysts.”

Well, it is not quite just any other retailer: Amazon is an e-tailer, the poster child of the new economy. In the world of e, people expect things to happen right away — including profits — or they lose interest. Thanks to good timing, tons of word-of-mouth free publicity, and — let’s face it — a great business vision Amazon has enjoyed favorable momentum. It has built a massive customer base much faster than any of its rivals have. It is the hare, still ahead of the tortoises. But to survive the race, it must now create profitable relationships with those customers; it can’t continue to “lose money on every transaction,” as the analysts claim it is doing.

Profiting from Intelligence

“In 1999, every idea got funded,” Bezos said, describing how the investment climate has changed. “In 2000, a lot of irrational business plans proved irrational.” Right: How many people really want to buy kitty litter online? As the irrational e-tailing business models die off, what remains is a rather traditional fight for brand identity, market share, share of wallet, and operational excellence. “The best way to build brand is still with an incredible, unique service,” Bezos said, and he obviously believes Amazon now has this. Originally, the transaction itself was unique: you could buy books online, at a discount, and have them delivered to your door. Now, differentiation must come through value-added services and customer knowledge that lead directly to higher sales.

The e-tailer’s arsenal for value generation is software: for personalization, e-customer relationship management, autonomous agents, and e-business intelligence. All of it must drive off a foundation of large databases — very, very large databases, in Amazon’s case. “How long do you intend to keep data on customer purchases?” someone asked. “Forever,” Bezos replied. That’s a lot of data, which Amazon can use not only for operational forecasting and demand planning, but also to mine for collaborative filtering and affinity-group creation and analysis. Along with purchasing data, there’s also clickstream data, which is filling up storage devices at Amazon and other e-tailers. It’s no secret that all along, a good chunk of Amazon’s investment capital has gone toward the construction of an imposing intelligent computing infrastructure. “Previously, it would have been impossible for a retailer to keep track of all of this information,” he stated.

From this investment will come profits, Amazon hopes. As Bezos indicated in his talk, the company is hardly done investing in technology, not with streaming media, 3D collaborative interaction, and other virtual shopping innovations on the horizon. “This is the Kitty Hawk era of personalization,” Bezos said. Will techno-savvy be enough to keep Amazon ahead of click-and-mortar competitors, who can balance alternative sales and marketing channels, and who have more experience in managing inventory, operations, and suppliers? These are evidently areas that make Wall Street analysts jittery as inventory piles up in Amazon’s warehouses. However, at least the company is not faced with having to retrofit physical plants and older applications for e-business.

Privacy and the Elephant

If Amazon is counting on its personalization engine to generate profits, that means it is increasingly dependent upon none other than its customers for critical data. Right now, Amazon is about “implicit” personalization based on primarily purchase data, along with fine-tuning provided by customers. Bezos is concerned that this could lead to a “loss of serendipity” — meaning that the filters will naturally narrow the customer’s ability to discover new products and unexpected joys.

It seems reasonable to conclude that the company will devote increasing energy and investment in the realm of behavioral data, coming from clickstreams and external sources. According to Bezos, the virtual shopping experience should create “the perfect” store for each individual — including the opportunity for surprise.

But with customer behavior, could it be that the more you know, the more you don’t know? Is there adequate analysis software to enable business executives to draw meaningful conclusions? It could be like the proverbial dance with the elephant: that is, you don’t want to get stepped on, and you certainly don’t want to grope the elephant in, er, private places. Customers, like elephants, have long memories.

Bezos was asked numerous questions about privacy: a business-critical issue for e-tailers. The irony is that, with or without e-tailing, most businesses have long had access to a tremendous amount of very specific consumer data, drawn from their own databases or resources coming from external providers and partners. But now, customers can see the results of their data exchange right on their screens — and many find their virtual selves spooky and suspicious.

Customer data no longer exists by itself; it is the primary currency of a relationship based mutual affinity and trust. “We all have to be clearer with customers about what the value is in giving us information,” Bezos said, in response to a worried consumer. “Then people can evaluate whether to exchange data in a straightforward way.” A delicate balance must be struck. With profitability — and possibly survival — riding on customers’ compliance, Amazon and other e-tailers can’t afford to let customers freeze them out of the data stream.