After 30 years in business, Amazon is a $2 trillion behemoth and one of the world’s largest retailers.
But back in 2001, its very survival was in doubt after the dot-com bubble burst and Amazon’s stock dipped by 90 percent. Some critics believed Amazon was doomed to never recover, but founder Jeff Bezos turned things around — with some helpful advice from Jim Sinegal, founder of rival retailer Costco.
That year, Bezos met Sinegal for coffee at a Starbucks inside a Barnes & Noble near Amazon’s offices in Bellevue, Washington, according to the 2013 book “The Everything Store,” by journalist Brad Stone. Bezos wanted to talk about using Costco as a wholesale supplier for some products, but the meeting’s key takeaway ended up involving pricing strategies.
Sinegal explained how Costco could sell so many products for “dirt cheap” by eliminating unnecessary costs and maintaining strong relationships with suppliers to secure the best deals on bulk goods, Stone wrote. Those low prices were key to getting customers to pay for Costco’s annual membership, comprising most of the company’s gross profits.
“The membership fee is a one-time pain, but it’s reinforced every time customers walk in and see forty-seven-inch televisions that are two hundred dollars less than anyplace else,” Sinegal told Bezos, according to Stone. “It reinforces the value of the concept. Customers know they will find really cheap stuff at Costco.”
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Costco’s approach was that “value trumps everything,” and it would always work hard to ensure it delivered enough value to keep customers happy, Sinegal emphasized. Speaking to Stone for the book, Sinegal noted that he believed “Jeff looked at [that approach] and thought that was something that would apply to his business as well.”
Bezos has never publicly credited the meeting with Sinegal for inspiring any of Amazon’s pricing strategies, but Stone wrote that Bezos called a meeting at Amazon just a few days after sitting down with Sinegal. The topic: Amazon’s “incoherent” pricing strategy and the need to deliver on the company’s promise to always have lower prices than its competitors, according to Stone, who interviewed Amazon executives who were present.
That summer, Amazon slashed prices for some of its flagship products — books, music and videos — discounting them by up to 30%, in some cases. “There are two kinds of companies: Those that work to raise prices and those that work to lower them,” Bezos said at the time, according to The New York Times. Amazon, Bezos added, would always aim to be the second type of company.
Sales bounced back by the end of 2001, when Amazon posted its first ever profitable quarter. Bezos credited the rebound to lower prices and promised to eliminate unnecessary costs in order to make more discounts possible, the Times reported — a similar strategy to Costco’s.
“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 in January 2002. “We’ve always had low prices, but pushing that a little further really had a big impact on our results.”
A few years later, in 2005, Amazon rolled out its own membership program, Amazon Prime, offering discounted prices and free shipping on orders for members who pay an upfront fee. In a 2016 letter to Amazon’s shareholders, Bezos described the idea behind Prime using language reminiscent of Sinegal and Costco: “We want Prime to be such a good value, you’d be irresponsible not to be a member.”
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