How should a textbook rental company respond when it discovers that Amazon has just introduced offerings that will make the giant retailer its newest and biggest competitor?
If it’s 2013 and the company is Chegg, Inc., management found a conference room and locked itself inside not for hours but for days and weeks, according to Dave Bernhardt, who sat alongside the company’s CFO and other operations leaders as they together considered some of the grim realities of having Amazon as a competitor.
“When Amazon entered the market, pricing on textbooks fell about 40%, so the profit in the business disappeared immediately,” explains Bernhardt, who first joined Chegg as a corporate controller and soon advanced into the vice president of finance role as Chegg tapped into more of Bernhardt’s FP&A acumen.
“We needed to find a way to make our business ‘capital light,’ and the question became: ‘How do we get out of where we are and take our money and put it back into something that will basically give it back to us?,’” recalls Bernhardt, who notes that Chegg’s management quickly zeroed in on partners and competitors facing a similar Amazon threat.
“We partnered with the logistics company Ingram, which did fulfillment for us. Later, we partnered with the publishers themselves when we moved to a consignment model. This meant that we weren’t buying any of these books and thus had that cash available to us,” remarks Bernhardt.
Nevertheless, Chegg’s profits from book rentals were being put on life support.
“We essentially gave to our partners whatever profits existed in the rental business. We had to tell Wall Street, “Hey, ignore this side of the business because all we’re viewing it as now is as a low-cost customer acquisition vehicle,” remembers Bernhardt, who adds that the company then began to aggressively upsell customers to Chegg services consisting of more high-margin products.
“I want to say that at the time Chegg services might have been 5% to 10% of the business, and now it’s probably 95%,” reports Bernhardt, who estimates that the education company’s profit margins today run higher than 80%, on average.
Reflecting on Chegg’s response, Bernhardt doesn’t hesitate to characterize fear as being an effective catalyst: “I don’t know that Chegg would be where it is today if Amazon hadn’t entered the market—or at least its transformation never would have happened as quickly or as successfully.” –Jack Sweeney
