Don’t look now, but by 2005 many of you reading this will look back at 1999 and slap your forehead: Why didn’t I buy Amazon.com stock when it was hovering around $60 per share, give or take the occasional wild fluctuation.
That’s our prediction and we have absolutely no personal or professional stake in the company, except for maybe a few shares in our IRAs.
There is no doubt that investors today are valuing Internet and e-commerce companies in ways that defy traditional norms. Whether the next market correction is small or large, sooner or later, it is clear that something different is going on with respect to how rational investors apply their rationales to valuing `Net stocks.
Just over three years ago, Michael Dell turned his firm into one of the first PC makers to sell computers directly to consumers online via the Internet. Today, the company’s “run rate” is $14 million in PC equipment sold daily on the Web, and by the end of the year Dell aims to conduct 50% of its sales electronically. Its stock has soared 3,500% since the Web site opened, and by now the company’s success has become a cliche.
Still, there’s no doubt that the market for Internet stocks is overheated. And for every profitable Dell or Cisco Systems there are two dozen unprofitable Internet start-ups with supercharged market caps.
So let us pose our question directly: Are investors crazy?
In a word: no. They are perfectly rational. Even more rational, we suggest, than many traditional stock market analysts, who overlook the inherent long-term value of building customer relationships, as opposed to selling products in this quarter.
But this is an easy thing to overlook. Blinded by the fact that the Web makes product prices and specifications instantly available to anyone, many analysts see the Web only in terms of its capacity for “commoditizing” a wide range of products and facilitating low-margin, friction-free commerce. Buy a new car on the Web for just a few dollars over dealer invoice, or trade a thousand shares of the car company’s stock for a $7.95 commission, they argue, and pretty soon the Web will push companies into very low-margin, unattractive situations.
However, for those online operators and electronic merchants who use the Web to set up interactive feedback loops with their customers individually, the long-term potential is enormous. The Web is interactive. It’s not a cathode-ray billboard. For the first time in history, technology allows companies to build friction-free, low-cost, automated relationships with millions of customers, one to one.
By tracking a single customer’s interactions at a particular site, an operator can improve continuously how that customer is treated, making it easier and easier, faster and faster, for that customer to get what he or she wants. If the customer finds value in the transactions, then over time he will remain loyal to the site even if other sites offer the same basic services. After all, to get an equivalent level of service somewhere else, the customer would first have to re-teach the new site what the current site has learned about him.
About 80% of Dell’s sales are to enterprise customers. A significant business customer gets a partitioned section of the Dell Web site to themselves, where any authorized employee can see the contract prices that apply to various Dell products, and then order these products configured in the way that’s already been approved for the company. The more products any single firm buys from Dell, the easier it is for that company to continue doing business there.
With every visit to Amazon.com, it’s easier for you to get what you want than it was the last time, because of the site’s relationship-building features, such as one-click ordering and book recommendation services. The result is that Amazon.com has a 64% repurchase rate, more than double the repurchase rate at a traditional brick-and-mortar bookstore. Calculating the effect of this repurchase rate over a lifetime of book buying (not to mention other product categories) reveals that at any given level of annual sales Amazon’s customer base is worth three to five times more than the customer base at a physical bookstore. And as of this writing, Amazon.com has more than 10 million customers.
Would it surprise you to know that barnesandnoble.com has the same relationship-building features, including one-click ordering and book recommendations? They may also have the same repurchase rate as Amazon. But this just proves our point. Build a Web business, use the Web to automate your relationships with individual customers, and then it doesn’t matter what your competitor does – your customers will remain loyal to you, one customer at a time.
Investors, we submit, are not irrational. They are simply predicting that today’s leading e-commerce players are building tomorrow’s loyal customer relationships. They recognize that an e-commerce company must maximize its base of loyal customers and then begin to “monetize” that base by selling increasingly relevant products and services to each customer.
And the fact is, monetization doesn’t necessarily have to be confined to a single product category. It’s an interesting question whether Amazon will, in fact, succeed in its effort to sell more to its customers than just ink-on-paper books. After all, the company now offers music and entertainment CDs, videos, retail drugs, groceries, toys, games, consumer electronics, greeting cards and auction services.
>From what we’ve seen so far, we’re predicting success. Wait five years or so and we’ll all know for sure.
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