Creative Coddling, Great Word Of Mouth

It's a sweet deal for Inc. Chief Executive Jeffrey P. Bezos and 500,000 of his closest friends. Those buddies--mostly Web sites too tiny to sell their own merchandise--send prospective buyers of books and CDs to Amazon's site. In return, Bezos pays them up to 15% of sales, and Amazon gets new customers for a pittance--keeping its overall cost to acquire them to $19 each, less than half the online average.

Since copied by hundreds of sites from CDNow to arch-rival, the program is just one example of how the e-commerce king is blazing new trails in electronic marketing. Bezos' essential insight: Building a brand and getting people to buy depends not on blaring Super Bowl ads, but squarely on creating a seamless buying experience that spurs people to tell others about it. On the Web, says market researcher Patricia Seybold, "it's the customer experience that creates the brand."

Amazon's all-out approach, which includes spending $300 million on warehouses, remains highly controversial. Investors weary of its continuing losses have knocked its stock down by more than 60% since last December. Amazon's successful marketing has provided one big edge, however: the best-known brand in e-commerce. So, despite a recent slowdown, Amazon's sales still grew by 84% in the second quarter, on pace to hit $2.8 billion this year.

Amazon uses its distribution and customer service as marketing weapons. In July, just hours after the new Harry Potter book came out, Amazon arranged Saturday delivery of 250,000 copies to eager readers at no extra cost. Besides netting new customers for less than $10 a head, Amazon forged a lot of consumer goodwill: Kids kept giving Federal Express Corp. drivers hugs. Says David Risher, senior vice-president for Amazon's U.S. retail group: "That can do the work of 10 Super Bowl ads."

After their first purchase, customers see another marketing innovation: product recommendations personalized to their tastes. Web-traffic tracker Nielsen/NetRatings says last year, 8% of visitors to bought something--double the rate of nonpersonalized sites. Essentially, Amazon creates a unique store for each returning customer.

Amazon had fallen short in providing a reason for people to keep coming back even without a purchase in mind. So it recently added new features to get visitors more involved, from customer reviews to discussion groups. "They make me feel part of a community," says Bonny Holder, a writer in Cedar Crest, N.M., who volunteers book and CD reviews and spends up to $50 a month at the site. To fulfill its promise, however, Amazon must keep creating more of that marketing magic.