(FORTUNE Magazine) – Back in 1994, when Jeff Bezos chucked his job at hedge fund D.E. Shaw in New York City and headed west to open the Web store that would become Amazon.com, he hadn't thought through all the details. He did know that the Internet was slow--people had taken to calling it the "World Wide Wait." So to sell anything online, Bezos decided, he was going to have to work to make the buying process appealing. "We figured this thing is such a pain to use, we're going to have to deliver some overwhelming value," he says. "The value would have to be way out of proportion to the wait."

The defining value Bezos ultimately hit on was customer care. In case you've been living in a cave for the past couple of years, Amazon.com is the leading consumer e-commerce Website, famous for its happy customers, its burgeoning sales ($610 million in 1998), and its sky-high market valuation. The site, which began as an online bookstore, has expanded to offer CDs, computer products, and auctions. Most important, it has 8.4 million registered customers. By comparison, online music store CDNow (which recently merged with rival N2K) has just two million customers.

Customers flock to Amazon.com for its wide product selections, its easy-to-navigate site, its excellent use of e-mail for marketing and customer service, and its skill at tailoring product recommendations to individuals. The site is built with visitor experience in mind. Yet that hardly accounts for Amazon's e-commerce dominance; after all, these offerings are easily copied. "Amazon sets the stage," says Nicole Vanderbilt, an analyst at Jupiter Communications in New York City. "But six to 12 months later, everyone else catches up."

What really sets Bezos' company apart is its ability to innovate--to come up with novel ways to deal with customers and thereby leapfrog its competition. How does it happen? "I know this sounds ridiculously simple," Bezos says, "but we ask customers what they want." That means encouraging e-mail feedback, sorting through purchase histories to learn customer preferences, conducting real, live focus groups, and even buying companies like PlanetAll.com (an online community site, chock full of good data). Amazon tries to collect its info in ways that don't impose on customers--a little bit here, a little bit there. "It's drip-irrigation dialogue," says Martha Rogers, co-author of The One to One Fieldbook, a guide to Web marketing.

Everyone knows that Amazon uses the data it gleans to make buying recommendations for its customers. What's less well understood is that the company also uses the info to, as Bezos puts it, "invent things we suspect people will want." Innovations have included one-click shopping, its popular bestseller list ranking sales on the site, and the associates program, through which sites that offer a link to Amazon get a cut of any sales they refer. Bezos' latest experiments are Amazon auctions (for which the company guarantees the delivery of items, a response to user concern about rip-offs) and Shop the Web, a service that directs users to other commerce sites that Amazon has partnered with.

All this helps explain why Amazon.com isn't losing customers to its competition. According to Bezos, more than 60% of Amazon's sales are repeat business. Amazon is so good that customers have little incentive to go through the trouble of signing up elsewhere. "I'm married, and I'm happily married, so it doesn't matter how cute the guys are I meet," says Martha Rogers, trying to explain how Amazon loyalty works. "It would be almost impossible for me to get someone else trained."

--Eryn Brown