Amazon Prime Case Study
by Hutch Carpenter
As more organizations expand the innovation mandate throughout their workforce, creating and maintaining an ongoing employee innovation program is critical. Sustainable innovation requires a process, not a haphazard, random luck approach. To that end, a useful model to follow is:
The different activities address important aspects of innovation, from eliciting tacit ideas inside people’s heads to measuring the outcomes of innovations.
To give this model life, I came across a great case study for how Amazon sourced and pursued the idea for its Prime shipping service. Business Week published an article about Amazon.com, What’s in Amazon’s Box? Instant Gratification. The article examines the success of and emerging competition to Prime, Amazon’s all-you-can-ship program for an annual fee of $79. Included in that article is this great description of the innovation process behind Prime:
“Analysts say 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.
Prime came to life in late 2004, the result of a years-long search at Amazon for the right loyalty program. An Amazon software engineer named Charlie Ward first suggested 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. Bing Gordon, an Amazon board member and venture capitalist, says he came up with the “Prime” name, while other executives, including Chief Executive Jeffrey P. Bezos himself, devised the free two-day shipping offer, which exploited Amazon’s ability to accelerate the handling of individual items in its distribution centers.
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.”
Let’s break down the Amazon Prime story along the employee innovation processes…
Set Innovation Objective
Note the origin of Prime: “result of a years-long search at Amazon for the right loyalty program.” Amazon had a defined goal. Sure, they could have gone with one of the typical loyalty program types, such as points. But typical of Amazon, they were looking for something different.
They had a specific innovation objective: find an effective loyalty program. Goal-setting stimulates employee innovation, as covered previously.
Did the idea come from the marketing or customer service folks at Amazon? No. It came from software engineer Charlie Ward. A software engineer! Well why not? As previously discussed, the further away a problem is from someone’s realm of expertise, the more likely they will come up with a different, valuable solution.
Note the other thing. Ward didn’t email his boss on this. Imagine if he did? The software manager worried about loyalty program ideas? No, Ward posted the idea into a common place for all employees: “suggestion box feature on Amazon’s internal Web site.” While not as advanced as today’s social software for innovation, it was heaps better than relying on email:
Identify Highest Potential Ideas
Out of all the ideas suggested at Amazon, someone saw some potential in Ward’s free shipping concept. The Business Week article doesn’t go into detail on who identified its potential, or how that was done.
In a robust innovation environment, expect a lot of ideas. For instance, the employees of one major banking organization have generated several thousand of them. When you hear that, perhaps the first thought is, “how do they sift through them?”
Recommendation: a mix of crowdsourcing and expertise. Let the crowd do the heavy lifting in finding ideas with the best potential. As Daniel Koffler noted:
“Finding the needle in the haystack is much easier when the hay helps you look.”
But that’s not the end of the story. You need experts in there as well, on a distributed basis. They’re searching for the ideas the crowd overlooks, either because they’re too esoteric, incomplete or cutting edge.
Evaluate and Select Ideas
Not much is known for the evaluation process that Amazon conducted in evaluating Ward’s idea. One can presume that his idea wasn’t the first for a loyalty program.There was a process, formal or informal, for vetting these ideas.
Note that his original idea related to a “free shipping service”. Prime ended up being a variation on that, with a flat shipping fee for all-you-can-buy. Somewhere in its evaluation, the idea was refined. Which is a necessary and desirable outcome of advancing an idea through a complex corporate ecosystem.
Execute on Idea
This is where the integrity and utility of any employee innovation program rests. Are ideas taken up and executed on? In Amazon;s case, you can see the personal involvement of senior executives at the company. A board member came up with the name. CEO Jeff Bezos and other executives devise the actual implementation of the idea.
Key here is that there was follow-through on a good, albeit somewhat radical, idea. Want to show employees their ideas count? Demonstrate a commitment of executing on their ideas. Because without that, all you have is a lovely collection of creativity, held in what is essentially an online museum.
Well after the initial idea is proposed, surfaced, evaluated, refined and selected, it will be put in place. After some period of time, the results of the idea will be seen. They’ll vary, of course, with the nature of the idea. They might include:
- Increased sales
- Lower costs
- Lower employee turnover
- Increased website hits
- Higher throughput
In Amazon’s case, they clearly understand the impact of Prime. While they don’t talk publicly about results, analysts have good sense for what Prime has meant for their business: as much as 20% of overall sales in the U.S.
Understanding the downstream impact of your upstream innovation practices is valuable for ensuring you’re getting benefits from your employee innovation program.
Hutch Carpenter is the Vice President of Product at Spigit. Spigit integrates social collaboration tools into a SaaS enterprise idea management platform used by global Fortune 2000 firms to drive innovation.