Amazon.com 2002 Annual Report Download - page 2

To our shareholders:
In many ways, Amazon.com is not a normal store. We have deep selection that is unconstrained by
shelf space. We turn our inventory 19 times in a year. We personalize the store for each and every
customer. We trade real estate for technology (which gets cheaper and more capable every year). We
display customer reviews critical of our products. You can make a purchase with a few seconds and one
click. We put used products next to new ones so you can choose. We share our prime real estateÌour
product detail pagesÌwith third parties, and, if they can oÅer better value, we let them.
One of our most exciting peculiarities is poorly understood. People see that we're determined to oÅer
both world-leading customer experience and the lowest possible prices, but to some this dual goal seems
paradoxical if not downright quixotic. Traditional stores face a time-tested tradeoÅ between oÅering high-
touch customer experience on the one hand and the lowest possible prices on the other. How can
Amazon.com be trying to do both?
The answer is that we transform much of customer experienceÌsuch as unmatched selection,
extensive product information, personalized recommendations, and other new software featuresÌinto
largely a Ñxed expense. With customer experience costs largely Ñxed (more like a publishing model than a
retailing model), our costs as a percentage of sales can shrink rapidly as we grow our business. Moreover,
customer experience costs that remain variableÌsuch as the variable portion of fulÑllment costsÌimprove
in our model as we reduce defects. Eliminating defects improves costs and leads to better customer
experience.
We believe our ability to lower prices and simultaneously drive customer experience is a big deal, and
this past year oÅers evidence that the strategy is working.
First, we do continue to drive customer experience. The holiday season this year is one example.
While delivering a record number of units to customers, we also delivered our best-ever experience. Cycle
time, the amount of time taken by our fulÑllment centers to process an order, improved 17% compared
with last year. And our most sensitive measure of customer satisfaction, contacts per order, saw a 13%
improvement.
Inside existing product categories, we've worked hard to increase selection. Electronics selection is up
over 40% in the U.S. alone over the prior year, and we now oÅer 10 times the selection of a typical big
box electronics store. Even in U.S. books, where we've been working for 8 years, we increased selection by
15%, mostly in harder-to-Ñnd and out-of-print titles. And, of course, we've added new categories. Our
Apparel and Accessories store has more than 500 top clothing brands, and in its Ñrst 60 days, customers
bought 153,000 shirts, 106,000 pairs of pants, and 31,000 pairs of underwear.
In this year's American Customer Satisfaction Index, the most authoritative study of customer
satisfaction, Amazon.com scored an 88, the highest score ever recordedÌnot just online, not just in
retailingÌbut the highest score ever recorded in any service industry. In ACSI's words:
""Amazon.com continues to show remarkably high levels of customer satisfaction. With a score of 88
(up 5%), it is generating satisfaction at a level unheard of in the service industry.... Can customer
satisfaction for Amazon climb more? The latest ACSI data suggest that it is indeed possible. Both
service and the value proposition oÅered by Amazon have increased at a steep rate.''
Second, while focused on customer experience, we've also been lowering price substantially. We've
been doing so broadly across product categories, from books to electronics, and we've eliminated shipping
fees with our 365 day-per-year Free Super Saver Shipping on orders over $25. We've been taking similar
actions in every country in which we do business.