Before it became the $2 trillion business it is today, the future of Amazon was likely decided by some helpful advice from Jim Sinegal, the founder of Costco.
Amazon’s Future Was Once in Jeopardy
In 2001, the bursting of the dot-com bubble resulted in financial ruin for numerous online companies, with Amazon itself experiencing a stock dip of 90%. The notion that the company could never recover from such a loss was being tossed around, and founder Jeff Bezos had to start looking for direction anywhere he could go.
A Fateful Meeting With Costco’s Founder
According to Brad Stone’s 2013 book “The Everything Store,” Bezos met with Sinegal at a Starbucks in Barnes & Noble near Amazon’s Bellevue, Washington offices. He was looking for insight into Costco’s business strategies as a wholesale supplier, but the meeting focused on pricing strategies.
As Sinegal explained, Costco has a “value trumps everything” model. Customers who feel they are getting enough value from a membership fee will keep coming to Costco. The requirements for such a business model are eliminating unnecessary costs and building supplier relationships to secure deals on bulk goods.
“The membership fee is a one-time pain,” Sinegal reportedly told Bezos, “but it’s reinforced every time customers walk in and see forty-seven-inch televisions that are two hundred dollars less than anyplace else. It reinforces the value of the concept. Customers know they will find really cheap stuff at Costco.”
Possible Inspiration for Amazon’s Recovery
Stone wrote that, following this interaction with Sinegal, Bezos met with his team at Amazon to discuss pricing strategy. He suggested that the company always had to have lower prices than the competition, strikingly in line with the Costco model.
It should be noted, however, that Bezos has never attributed the later changes to Amazon’s pricing strategies to the meeting.
The Impact of a New Strategy
Amazon cut prices for books, music, and videos, which were the business’s focal points. By the end of the year, sales returned to their levels before the dot-com bubble burst, and the company turned a profit for the first time.
“We had a great Q4. We’re incredibly proud of it. And what really drove it was lower prices for customers,” Bezos told Fox News the following year. “We’ve always had low prices, but pushing that a little further really had a big impact on our results.”
Membership Models and Forward Momentum
In 2005, Amazon took another page out of Costco’s book with the launch of the Amazon Prime membership program. The company would provide discounted prices and free shipping on orders for members who pay the fee, enticing consumers with value-based propositions, much like Sinegal suggested during their supposed meeting.
Eleven years later, Bezos wrote a 2016 letter to Amazon’s shareholders with the following statement: “We want Prime to be such a good value, you’d be irresponsible not to be a member.”
The Comparison Between Costco and Amazon
While Bezos may not directly attribute the recovery and remarkable success of the Amazon business to his meeting with Sinegal in 2001, his language and pricing strategies are consistent with the advice given. Whether Amazon followed Costo’s model or Sinegal’s direct advice may never be known, but the comparison remains. Their new membership model, reoriented pursuit of value, and slashed costs follow in the footsteps of Costco while focusing on an online retail platform.
“There are two kinds of companies,” Bezos told the New York Times in 2002, “those that work to raise prices and those that work to lower them.” Of course, he said that Amazon was in the latter category.
