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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? \xa0

If it\u2019s 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\u2019s CFO and other operations leaders as they together considered some of the grim realities of having Amazon as a competitor.

\u201cWhen Amazon entered the market, pricing on textbooks fell about 40%, so the profit in the business disappeared immediately,\u201d 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\u2019s FP&A acumen.

\u201cWe needed to find a way to make our business \u2018capital light,\u2019 and the question became: \u2018How 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?,\u2019\u201d recalls Bernhardt, who notes that Chegg\u2019s management quickly zeroed in on partners and competitors facing a similar Amazon threat.

\u201cWe 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\u2019t buying any of these books and thus had that cash available to us,\u201d remarks Bernhardt.

Nevertheless, Chegg\u2019s profits from book rentals were being put on life support.

\u201cWe essentially gave to our partners whatever profits existed in the rental business. We had to tell Wall Street, \u201cHey, ignore this side of the business because all we\u2019re viewing it as now is as a low-cost customer acquisition vehicle,\u201d remembers Bernhardt, who adds that the company then began to aggressively upsell customers to Chegg services consisting of more high-margin products.

\u201cI want to say that at the time Chegg services might have been 5% to 10% of the business, and now it\u2019s probably 95%,\u201d reports Bernhardt, who estimates that the education company\u2019s profit margins today run higher than 80%, on average.

Reflecting on Chegg\u2019s response, Bernhardt doesn\u2019t hesitate to characterize fear as being an effective catalyst: \u201cI don\u2019t know that Chegg would be where it is today if Amazon hadn\u2019t entered the market\u2014or at least its transformation never would have happened as quickly or as successfully.\u201d \u2013Jack Sweeney