Strategy Letter I: Ben and Jerry’s vs Amazon Nicolas McMahon

Introduction  Two models for building a company  Amazon model  Ben and Jerry’s model  Their strengths and weaknesses  Factors that determine which model to use

Two Models for Building a Company  Ben and Jerry’s – organic model  Build business slowly over time  Become profitable quickly  Amazon – the “Get Big Fast” or “Land Grab” model  Build a large business as quickly as possible  Spend large amounts of money to build a customer base as quickly as possible  May take years to become profitable

Competition  Industries often have established competitors  Ben and Jerry’s model allows one to displace these competitors overtime  Amazon model will struggle to create a customer base due to “lock-in”  Some industries have no established competitors  Amazon model gets tons of customers quickly  Ben and Jerry’s model will have trouble competing with businesses using the Amazon model

Network Effect  Where the more customers you have, the more customers you will get  eBay  AOL  Metcalfe’s Law: The value of a network is the number of users squared  Strong in the Amazon model  Not in the Ben and Jerry’s model.

Lock-in  Something about the business makes people reluctant to switch  provided by Internet Service Providers  Word processors  Stealth Lock-in – Services lock in customers without them realizing it  Often with brief periods of free service  PayMyBills.com  Strong in Amazon model  Weak in Ben and Jerry’s model

Case Study: AOL  Spent a lot of money to grow at a rate of a million customers every 5 weeks in 1998  Chat rooms and instant messaging as stealth lock-in  After finding a group of people to chat with, switching ISPs meant having to find a new group of people to chat with  “Like trying to get all new friends”  Massive amount of people to chat with lead to a strong network effect

Finances  Ben and Jerry’s model starts with a small amount of money  Ben and Jerry’s initial investment was only $11,000 or $12,000  Reinvest profits to slowly grow  Amazon model requires tremendous amount of money to start  Rushing to acquire customers before there is more competition  Substituting money for time  High salaries or starting bonuses to fill openings more quickly  Hiring consultants

Corporate Culture  Important in Ben and Jerry’s model  Mistakes become valuable lessons for new employees  Impossible in Amazon model  Company grows too fast to mentor new employees  Mistakes go unnoticed

Success  Ben and Jerry’s more likely to become successful  Lose less money if unsuccessful  Takes much longer to be successful  Earns less money  Amazon model unlikely to be successful  Lose a much larger sum of money if unsuccessful  Earns a much larger sum of money

Deciding AmazonBen and Jerry’s ExpensiveCheaper Profitability can take a long timeUsually profits quickly Big profitsSmaller profits More likely to failMore likely to succeed No corporate cultureStrong corporate culture Depends upon lock-ins and network effects Can succeed without lock-ins or use of the network effect Only appropriate for non-established markets Can displace competition and break into already established markets Big losses on failureLittle losses on failure

Deciding  Market has lock-ins, network effects and no established competition = Amazon model  If you don’t, someone else will.  Market is already established = Ben and Jerry’s model  Examine Risk/Rewards  Personal Values

The Worst Things  Not deciding at all  No model to follow  Deciding to be an Amazon company, but behaving like a Ben and Jerry’s company  Amazon model requires substituting time for money whenever possible  Being frugal hurts the business

Conclusion  Amazon model  Good for non-established markets with lock-ins and network effects  Less likely to succeed, but more profitable upon success  More losses upon failure  Aims to grow a business quickly  Ben and Jerry’s model  Good for breaking into established marketplaces  More likely to succeed, but less profitable upon success  Fewer losses upon failure  Aims to grow a business slowly.  The worst things to do are not decide or not stick with the decision