Four Tests by Jeff Bezos Before Amazon Can Launch First Physical Store

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We still don’t clearly know what made Amazon want open its first physical bookstore last year, but an old shareholder letter by its CEO Jeff Bezos gives some hints.

In Amazon’s shareholder letter written in 2007 , Bezos explains that he never officially accept new business idea, like opening a physical store, unless it passes the following 4 tests:

1. We should convince ourselves that the new opportunity can cause the returns on capital our investors expected when they invested in Amazon.

2. We must convince ourselves that new business can grow to a point where it can be important in the context of our overall company.

3. Furthermore, we must believe that the opportunity is currently underserved.

4. Lastly, we have the capabilities needed to bring
Strong customer-facing differentiation to the marketplace.

“I always get asked, ‘When are you going to open physical stores?’ That’s a big opportunity we’ve resisted,” Bezos wrote at the time. “When you do see us enter new businesses, it’s because we believe the above tests have been passed.”

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Bezos notes that the idea for physical stores fails all but one of the tests he mentioned above, which is scalability.
“We don’t know how to do it with low capital and high returns; physical-world retailing is a cagey and ancient business that’s already well served; and we don’t have any ideas for how to build a physical world store experience that’s meaningfully differentiated for customers,” Bezos wrote.

But given that Bezos backtracked and opened Amazon’s first physical store, planning to launch more, seems like the company had found a way to satisfy all four tests.

In fact, Amazon’s first physical bookstore is already proving to offer a completely differentiated shopping experience. Prices are not shown next to the items, because it fluctuates based on the price online. A user review and ratings from the website comes with each book, and the store recommends books based on what you like. Amazon is even working on an app that lets you pay without having to go through a checkout counter, according to Re/code.

Their bookstore shows the traditional retail experience can be changed. If Amazon has also figured out a way to produce returns from physical stores, it won’t be long before we see more stores open under Amazon’s name.

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