What’s Amazon’s secret?
Even as a kid, Bezos was obsessed with innovation.
One time, when he was three years old, Bezos insisted on sleeping on a bed instead of a crib. Determined to do so, he disassembled his crib with a screwdriver, all on his own. Once again, Bezos was three! His quirks didn’t end there.
Teachers at his Montessori school report that Bezos would become so engrossed in whatever he was doing, that the teachers had to pick up his chair — with him still sitting on it — just to transport him to the next activity. His obsessive-attitude extended outside the classroom. He had dreams of becoming an inventor at a young age and admired Thomas Edison.
Bezos was gripped by the mechanical workings of the cables and pulleys at the local playground. His mother shuttled him back and forth, to and from Radio Shack to buy parts for his gadgets: homemade robots, hovercrafts, a solar-powered cooker, and devices to keep his siblings out of his room.
He had many of idiosyncratic qualities. Friends report that Bezos was ridiculously competitive. They say that when Jeff put his mind to something, he worked harder than anybody else.
Disciplined and precise, Bezos collected the “Best Science Student” award three years in a row, and the “Best Math Student” award for two. He won a statewide science fair with an entry focused on the effects of a zero-gravity environment on a housefly. The valedictorian of his high school, he crammed his schedule with honors classes to improve his ranking.
Even from a young age, Bezos refused to let anybody beat him at anything.
Physically, Bezos was a chicken; mentally, he was bold. He thought analytically about everything, including social situations. As Brad Stone, the author of The Everything Store writes:
“Single at the time, he started taking ballroom-dance classes, calculating that it would increase his exposure to what he called n+ women. He later famously admitted to thinking about how to increase his “women flow,” a Wall Street corollary to deal flow, the number of new opportunities a banker can access.”
Bezos’ quirks have, at least in part, led to Amazon’s success.
Amazon: The Early Days
Bezos first encountered the internet in an astrophysics class at Princeton in 1985. However, he didn’t consider it’s commercial potential until 1994, almost a decade later.
What changed?
Bezos observed that the number of “bytes” transmitted over the web had increased by a factor of 2,057 between January 1993 and January 1994. The number of packets — a single unit of data — sent over the internet jumped by 2,560 during the same span. Sensing the emerging opportunity, Bezos began to brainstorm businesses that made sense in the context of that growth.
Bezos came up with the idea for an “everything store.” The store would sell nearly every type of product, all over the world. It would be an intermediary between customers and manufacturers. True to his philosophy, he almost named the “everything store’s” first website Relentless.com, and registered the URL in September 1994. Even today, type Relentless.com into your web browser and it’ll take you to Amazon.com. Try it. It works!
Why did Bezos use Amazon.com instead?
Amazon was founded before the invention of search. At the time, internet users used website directories, many of which listed websites in alphabetical order. In October of 1994, Bezos was poring through the A section of the dictionary when he stumbled upon the word “Amazon.” It was Earth’s largest river and soon, it would become Earth’s largest bookstore.
When Amazon.com website launched, its homepage read: “One million titles, consistently low prices.” At first, Amazon held no inventory. There was little science behind Amazon’s earliest distribution methods. When a customer bought a book, Amazon ordered it, the book would arrive within a few days, and Amazon would store it in the basement and then ship it off to the customer. At the time, it took a week for Amazon to deliver most items to customers. Sometimes, it took more than a month.
Even in Amazon’s early days, Bezos was highly driven and articulate. He was technically fluent and spoke with conviction about the internet’s potential to build a more convenient shopping experience.
Bezos has always been a strict operator. He obsessed over the quality of employees and said that each hire should raise the bar for the next new hire. That way, talent pool would always improve. He sought to hire “athletes,” versatile managers who could move fast and get big things done.
Work, life balance wasn’t an option. The assumption was that no one would take even a weekend day off. If potential employees made the mistake of talking about wanting a harmonious balance between work and home life, Bezos rejected them.
One did not work with Jeff Bezos; one worked for him.
As he told his employees: “You can work long, you can work hard, you can work smart, but at Amazon you can’t choose two out of three.” He predicted the company’s ability to personalize a version of the website for each shopper, based on their previous purchases.
Last year, I interviewed Kara Godin, the CEO of Hint Water. Kara, who was working for AOL at the time, told a story about meeting with Jeff Bezos in Seattle when the company had only 100 employees:
“I went up to Seattle and then reached out to him that day and say hey I’ll see you at 4 o’clock. I’m building out my bookshelves and if you don’t mind me talking to you while I’m building my bookshelves and I’m like no, I’ll help you build my bookshelf too. Crazy!
We go over there and so crazy… I still have his original business card… It was literally cardboard tables in his office. And I said ‘tell me more about Amazon. Why did you decide to sell books?’
And [Jeff] says: ‘it’s not about books at all. Think about this… The last time you were in Barnes & Noble or Borders, did you go up to the counter and ask the guy for a recommendation? Do you trust the recommendation that the person behind the counter is giving you? He doesn’t really understand the stuff what you’re reading. And he said: that’s what we’re doing. And I remember leaving that meeting thinking this guy is really smart, he’s somewhat crazy, he’s scrappy, he’s a founder sitting in the room with 50 people in the whole company but still building his own bookshelves. But the thing that I gained from that conversation is I feel like he was really solving a problem. He wasn’t looking to sell problems but help [customers] make better decisions.”
At the time, mass-personalization seemed like a radical future — a pipe dream.
Alan Kay’s famous quote drove Bezos: “the best way to predict the future is to invent it.” He set out to build the merchandiser’s dream — an everything store with infinite selection and called Amazon “the next Sears.”
Day 1
As Amazon grew, Bezos obsessed over building a culture of action and speed. Most companies move slower as they get bigger. Bezos did not want this to happen. Bezos used clever communications techniques to extend his mind and organize the company.
He encoded Amazon’s core principles in concise and memorable ways. Looking for a way to reinforce, Sam Walton’s bias for action and high-velocity decision making, Bezos created the “Just Do It” award. The award went to employees who did something notable and took initiative, typically outside their primary job responsibilities. Even if the action turned out to be an egregious mistake, an employee could still earn the prize as long as he or she had taken risks and shown resourcefulness in the process.
Eugene Wei, an early Amazon employee and North Star Podcast guest wrote:
I suspect that very early on in his career as CEO, Jeff noticed the Chinese whispers problem as the company scaled. Anyone who is lucky enough to lead a successful company very quickly senses the impossibility of scaling one’s own time to all corners of the organization, but Jeff was laser-focused on the more serious problem that presented, that of maintaining consistent strategy in all important decisions, many of which were made outside his purview each day. At scale, maintaining strategic alignment feels like an organizational design problem, but much of the impact of organizational design is centered around how it impacts information flow.
This problem is made more vexing by not just the telephone game issue but by the human inability to carry around a whole lot of directives in their minds. Jeff could spend a ton of time in All Hands meetings or with his direct reports and other groups inside Amazon, explaining his thinking in excruciating detail and hoping it sank in, but then he’d never have any time to do anything else.
Amazon is still driven by simple and memorable rhetoric. Jeff Bezos has compressed his entire philosophy, packed with ideas, into two simple words: “Day 1.”
“Near the elevators, there’s a black plaque with white lettering that informs visitors they have entered the realm of the philosopher-CEO. It reads: There is so much stuff that has yet to be invented. There’s so much new that’s going to happen. People don’t have any idea yet how impactful the Internet is going to be and that this is still Day 1 in such a big way.”
Everybody knows what Day 1 means. Bezos even named one of the buildings at Amazon “Day 1.”
Standing on the Shoulders of Giants
Hungry for knowledge, Bezos borrowed his competitors’ best ideas. By learning from his competitors, Amazon could stand on their shoulders of other major retailers. Bezos read the autobiography of Sam Walton, the founder of Walmart, and admired Walton’s “bias for action” and commitment to frugality. With Costco, it was all about customer loyalty and low prices. Costco’s low prices generated heavy sales volume, which the company leveraged to get the best possible deals from suppliers.
Stone writes:
“There are some four thousand products in the average Costco warehouse, including limited-quantity seasonal or trendy products called treasure-hunt items that are spread out around the building. Though the selection of products in individual categories is limited, there are copious quantities of everything there—and it is all dirt cheap. Costco buys in bulk and marks up everything at a standard, across-the-board 14 percent, even when it could charge more. It doesn’t advertise at all, and earns most of its gross profit from the annual membership fees. “The membership fee is a onetime pain, but it’s reinforced every time customers walk in and see forty-seven-inch televisions that are two hundred dollars less than anyplace else… “It reinforces the value of the concept. Customers know they will find really cheap stuff at Costco.”
Inspired by Costco and Walmart, Bezos continues to stress the importance of low margins and “everyday low prices.” If Amazon could stay competitive on price, Bezos said, Amazon could win with an unlimited selection and customer convenience.
Bezos continued:
“There are two kinds of retailers: there are those folks who work to figure how to charge more, and there are companies that work to figure how to charge less, and we are going to be the second, full-stop.”
Bezos outlined six core values: customer obsession, frugality, bias for action, ownership, and high bar for talent, and innovation. Customer obsession stands out as the most discussed theme.
Why?
Bezos wrote:
“There are many ways to center a business. You can be competitor focused, you can be product focused, you can be technology focused, you can be business model focused, and there are more. But in my view, obsessive customer focus is by far the most protective of Day 1 vitality.
Why? There are many advantages to a customer-centric approach, but here’s the big one: customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf. No customer ever asked Amazon to create the Prime membership program, but it sure turns out they wanted it, and I could give you many such examples.”
Bezos has an obnoxious desire to reinforce Amazon’s message of customer centricity. During negotiations with other companies, Bezos would make a big show about keeping one chair open at the conference table: “for the customer,” he’d explain.
Bezos’ idiosyncrasies also influence product development. Instead of starting with the product and working towards the customer, Bezos begins with the customer and works towards the product.
Stone writes:
“For each new product, they craft their documents in the style of a press release. The goal is to frame a proposed initiative in the way a customer might hear about it for the first time.
Every time a new feature or product was proposed, [Bezos] decreed that the narrative should take the shape of a mock press release. The goal was to get employees to distill a pitch into its purest essence, to start from something the customer might see—the public announcement—and work backward. Bezos didn’t believe anyone could make a good decision about a feature or a product without knowing precisely how it would be communicated to the world—and what the hallowed customer would make of it.
Bezos’ obsession with the customer experience continued, even when it was expensive to do so:
“Bezos placed an expensive bet, hitching Amazon’s Quidditch broom to the rising fantasy series Harry Potter. In July, author J. K. Rowling published the fourth book in the series, Harry Potter and the Goblet of Fire. Amazon offered a 40 percent discount on the book and express delivery so customers would get it on Saturday, July 8—the day the book was released—for the cost of regular delivery. Amazon lost a few dollars on each of about 255,000 orders, just the kind of money-losing gambit that frustrated Wall Street.”
Wall Street’s opinion didn’t matter to Bezos:
“Bezos refused to see it as anything other than a move to build customer loyalty. “That either-or mentality, that if you are doing something good for customers it must be bad for shareholders, is very amateurish,” he said in our interview that summer.
The Harry Potter promotion unsettled even the executives working on it. “I was thinking, Holy shit, this is a lot of money,” says Lyn Blake, the Amazon executive in charge of books at the time. She was later inclined to admit that Bezos was right. “We were able to assess all the good press and heard all these stories from people who were meeting their deliverymen at their front doors. And we got these testimonials back from drivers. It was the best day of their lives.” Amazon was mentioned in some seven hundred stories about the new Harry Potter novel in June and July that year.”
Even today, with $11 billion in costs and only $6.5 billion in fees collected. Amazon reportedly loses money on shipping. Scale, though is on Amazon’s side. Profit margin comes from elsewhere.
The Harry Potter promotion illustrates Bezos’ relentless focus on long-term growth. As Bezos said:
If you want to get to the truth about what makes us different, it’s this: We are genuinely customer-centric, we are genuinely long-term oriented and we genuinely like to invent. Most companies are not those things. They are focused on the competitor, rather than the customer. They want to work on things that will pay dividends in two or three years, and if they don’t work in two or three years they will move on to something else. And they prefer to be close-followers rather than inventors, because it’s safer. So if you want to capture the truth about Amazon, that is why we are different. Very few companies have all of those three elements.
This is long-term thinking at its finest.
The Amazon Flywheel
What’s Amazon’s advantage?
The flywheel.
A voracious reader, Bezos discovered the concept of a flywheel, or a self-reinforcing loop while reading Good to Great. Since then, Amazon has been driven by its virtuous flywheel: the bigger the company gets, the lower the prices it can exact.
Here’s how Bezos described the flywheel:
“Lower prices led to more customer visits. More customers increased the volume of sales and attracted more commission-paying third-party sellers to the site. That allowed Amazon to get more out of fixed costs like the fulfillment centers and the servers needed to run the website. This greater efficiency then enabled it to lower prices further. Feed any part of this flywheel, they reasoned, and it should accelerate the loop.”
Amazon’s moat expands when it feeds this flywheel. As Amazon builds fulfillment centers, lowers its shipping costs and increases its shipping speed, this flywheel spins faster. That’s why Amazon’s built more than 100 million feet of distribution center space in the U.S. To accelerate this flywheel, Amazon is also investing in its own transportation fleet that includes more than thirty Boeing 767 airplanes and thousands of 53-foot trailers, and a dedicated air hub in Wilmington, Ohio. Improvements to the feedback loop are like a shot of adrenaline.
The Amazon Flywheel
Communication
As Amazon grew, its base of stakeholders grew exponentially. To keep everybody on the same page, Bezos turned his attention to organizational design and communication.
Bezos believes that communication is a sign of dysfunction. It means that people aren’t working together in a close, organic way. Teams should strive to communicate with each other less, not more.
Bezos resents meetings. In Bezos’ experience, meetings tend to be filled with trivial updates and political discussions, not problem solving and brainstorming. Meetings are fake work and wasted time. Even today, Bezos rarely meets alone with an individual colleague.
Amazon is guided by simple maxims — methods of reinforcing Bezos’ values within the company.
Every year, Bezos ends his letter to shareholders with the same message: “As always, I attach a copy of our original 1997 letter. It remains Day 1.” Bezos’ principles are so effective, so enduring, and so universal that they haven’t changed in more than two decades.
Powerful.
To spread the spirit of frugality, Bezos created the “Door-Desk award,” given to an employee who came up with “a well-built idea that helps us to deliver lower prices to customers” — the prize was a door-desk ornament.
Bezos vowed to run Amazon with an emphasis on decentralization and independent decision-making. In the fast-paced internet environment, hierarchies aren’t responsive enough to change. But by operating in a decentralized fashion, employees can make independent decisions, unburdened by the weight of bureaucracy. People closest to the problem — not executives — are in the best position to solve problems.
Service Oriented Architecture
Amazon is designed with a service-oriented architecture.
Under this system, would become a series of independent, but interconnected parts. Every piece of the company operates as an independent division or a separate platform. Bezos wanted to easily update or replace pieces of the company without breaking the whole. Amazon would become a collection of businesses sharing resources and consist of hundreds of small, autonomous teams and each would control its own destiny.
Stone writes:
“The entire company, he said, would restructure itself around what he called “two-pizza teams.” Employees would be organized into autonomous groups of fewer than ten people—small enough that, when working late, the team members could be fed with two pizza pies. These teams would be independently set loose on Amazon’s biggest problems. They would likely compete with one another for resources and sometimes duplicate their efforts, replicating the Darwinian realities of surviving in nature.
Freed from the constraints of intracompany communication, Bezos hoped, these loosely coupled teams could move faster and get features to customers quicker. There were some head-scratching aspects to Bezos’s two-pizza-team concept. Each group was required to propose its own “fitness function”—a linear equation that it could use to measure its own impact without ambiguity.”
Over time, each piece of the company is opened to outside competition. Without free market competition, Bezos believes that products and divisions will get fat and inefficient.
As Zach Kanter observed:
“Bezos wanted independent teams to be entrepreneurial. To achieve this, Bezos broke Amazon down to its most basic parts in the hopes that surprising results would emerge. They would act as autonomous working units with minimal oversight.”
Market competition future-proofs the company against technological stagnation. Amazon generates cash when their internal services work and quickly identifies problems when they don’t.
Here’s Kanter:
“A recent example is AWS’s Amazon Connect — a self-service, cloud-based contact center platform that is based on the same technology used in Amazon’s own call centers. Again, the “extra revenue” here is great — but the real value is in honing Amazon’s internal tools… If Amazon Connect is a complete commercial failure, Amazon’s management will have a quantifiable indicator (revenue, or lack thereof) that suggests their internal tools are significantly lagging behind the competition.”
Amazon tries to expose every service to outside competition, even ones that don’t make money. Bezos is systematically productizing all of Amazon. Informed by markets and the wisdom of crowds, Amazon doubles down on what works, fixes what doesn’t, and kills everything else.
Kanter writes:
“The perfect example of this is Amazon’s Marketplace Web Service (MWS) API — this is the set of services that Amazon Marketplace sellers can use to programmatically exchange data with Amazon. Amazon built out a service that they call the “Subscriptions API,” which gives the seller instant notification of any price change by any competitor — including Amazon itself!”
This service-oriented architecture allows Amazon to innovate faster and respond to change, even as it grows.
Primitives
Amazon Web Services (AWS) is Amazon’s spine.
AWS sells IT infrastructure to companies, so they don’t have to buy servers or set up data centers. Through AWS, companies can access “cloud” computing. AWS includes a wide array of features, from simple storage to sophisticated artificial intelligence. AWS can be set up on-demand. Companies pay as they go, which makes the service highly scalable, both upward, when business is good, and downwards, when business is slow.
“Primitives” are the basic building blocks of Amazon Web Services.
Primitives were inspired by a book Bezos read called Creation. The book was written by Steve Grand, the developer of a 1990s video game called Creatures. The game allowed players to guide and nurture a seemingly intelligent organism on their computer screens.
Grand’s idea would lead to primitives:
“Grand wrote that his approach to creating intelligent life was to focus on designing simple computational building blocks, called primitives, and then sit back and watch surprising behaviors emerge. Just as electronics are built from basic components like resistors and capacitors, and as living beings spring from genetic building blocks, Grand wrote that sophisticated AI can emerge from cybernetic primitives, and then it’s up to the “ratchet of evolution to change the design.”
Stone continues:
“The book, though dense and challenging, was widely discussed in the book clubs of Amazon executives at the time and it helped to crystallize the debate over the problems with the company’s own infrastructure. If Amazon wanted to stimulate creativity among its developers, it shouldn’t try to guess what kind of services they might want; such guesses would be based on patterns of the past. Instead, it should be creating primitives—the building blocks of computing—and then getting out of the way. In other words, it needed to break its infrastructure down into the smallest, simplest atomic components and allow developers to freely access them with as much flexibility as possible.”
AWS would enable developers and companies to use Web services to build sophisticated and scalable applications. Amazon would use primitives to create web services, from storage to computing to database, payments, and messaging.
Bezos wanted to level the playing field for startups and small companies. Through AWS, students in a dorm room would have the same infrastructure as the largest companies in the world.
“Part of AWS’s immediate attraction to startups was its business model. Bezos viewed Web services as similar to an electric utility that allowed customers to pay for only what they used and to increase or decrease their consumption at any time. “The best analogy that I know is the electric grid,” Bezos said. “You go back in time a hundred years, if you wanted to have electricity, you had to build your own little electric power plant, and a lot of factories did this. As soon as the electric power grid came online, they dumped their electric power generator, and they started buying power off the grid. It just makes more sense. And that’s what is starting to happen with infrastructure computing.”
Bezos wanted AWS to be a utility with discount rates, even if that meant losing money in the short term.
Amazon Web Services worked because of “primitives.”
Stone writes:
“Just like Creation author Steve Grand had predicted, the creatures were evolving in ways that Bezos could not have imagined. It was the combination of EC2 and S3—storage and compute, two primitives linked together—that transformed both AWS and the technology world. Startups no longer needed to spend their venture capital on buying servers and hiring specialized engineers to run them. Infrastructure costs were variable instead of fixed, and they could grow in direct proportion to revenues. It freed companies to experiment, to change their business models with a minimum of pain.”
AWS is Amazon’s profitability backbone. Like other parts of Amazon, AWS is differentiated by the marriage of software and capital-intensive infrastructure (data centers).
AWS reached $12 billion of annual revenue, just 10 years after its official launch (*). AWS is operating at a $13B revenue run-rate. It’s growing 55% YoY with operating margins that hover around 30% — an excellent business. According to Alex Clayton, AWS could represent roughly half or more of Amazon’s entire fully-diluted enterprise value at the current share price.
Today, Amazon Web Services is the most under-rated part of Amazon.
Racing Past Retail
From the beginning, Bezos understood that Amazon would not be bound by the traditional rules of retail.
In a world where consumers had limited choice, retailers needed to control distribution and compete for locations. But the internet economy is governed by a different set of rules. On the internet, consumers have unlimited choice; companies compete for attention.
Guided by this insight, Amazon Marketplace is a massive success. Today, more than 100,000 businesses make $100,000 or more per year on Amazon. Commissions from Marketplace fulfillment services totaled $6.4 billion in Q1 2017, accounting for approximately 25% of Amazon’s total revenue. The company receives more than 40 cents of every dollar U.S. consumers spend online.
Amazon Marketplace has three core advantages: vast product assortment, low prices, and fast delivery.
Stone writes:
“Amazon had limitless shelf space and personalized itself for every customer. It allowed negative reviews in addition to positive ones, and it placed used products directly next to new ones so that customers could make informed choices. In Bezos’s eyes, Amazon offered both everyday low prices and great customer service. It was Walmart and Nordstrom’s. Being an unstore also meant that Amazon had to concern itself only with what was best for the customer. The conventions of the jewelry business allowed routine 100 or 200 percent markups, but, well, that just didn’t apply to Amazon.”
Before entering new markets, Bezos would hire veteran retailers with deep industry expertise. Then, he’d train them to think differently and remind them that they weren’t bound bound by the traditional ways of thinking about retail.
As an online retailer, Amazon has proprietary access to valuable data, which gives them an edge over traditional retailers. On Amazon, customers exchange privacy for personalized service. This, from Adventur.es:
“Amazon knows when its Amazon Marketplace sellers are struggling to fulfill demand or, by contrast, selling at scale with great margins. If you were them, what would such data suggest? Opportunity.
This creates a highly customized shopping experience for consumers. Amazon can anticipate needs, wants, trends, fascinations, and frustrations. Where others ask, Amazon knows. Where others guess, Amazon has data. Where others survey their users, Amazon checks their shopping carts. In a world where people lie, this info is priceless.”
Amazon uses this same strategy to enter market after market.
Amazon Fulfillment Center
Amazon Prime
Bezos sees opportunity where others see profit margin.
Speaking from personal experience, Amazon commands the vast majority of my spending dollars. I know that Amazon always has the lowest prices, and even when they don’t, the convenience of one-click shopping and two-day shipping more than makes up for it. Amazon Prime makes this possible.
The idea behind Amazon Prime was proposed by an Amazon engineer named Charlie Ward.
Stone writes:
“[Ward] reasoned, catered to price-conscious customers whose needs were not time sensitive—they were like the airline travelers who paid a lower rate because they stayed at their destinations over a Saturday night. Their orders got placed on the trucks whenever there was room for them, reducing the overall shipping cost. Why not create a service for the opposite type of customer, Ward suggested, a speedy shipping club for consumers whose needs were time sensitive and who weren’t price conscious? He suggested that it could work like a music club, with a monthly charge.”
“Super Saver Shipping” was the original name for the service. Bezos loved the idea but rejected the name. Bezos didn’t want people to see the service as a money-saving program.
Bezos wanted the service to be expensive enough to matter to consumers but cheap enough that they would be willing to try it out. From the beginning, the service was about changing people’s mentality so they wouldn’t shop anywhere else.
Spoiler alert: it worked.
At the time of Prime’s inception, the vast majority of consumers started their shopping trips on Google — not Amazon. Bezos didn’t like this because Google controlled these customer relationships. As the complexity of Amazon’s catalog increased, Google could search Amazon’s website better than Amazon itself.
Since the fundamental elements of Prime already existed, Amazon was uniquely suited to create the service.
Stone writes:
“Amazon had created a system for the expedited picking, packing, and shipping of prioritized items within the [Fulfillment Centers]. The company’s European operation had built a subscription-membership tool for its nascent DVD-by-mail business (a Netflix clone) in Germany and the United Kingdom, and that service, though rudimentary, was quickly improved and pushed into production in the United States to support Prime. “It was almost like Prime was already there, and we were putting the finishing touches on it,” Holden says. In many ways, the introduction of Amazon Prime was an act of faith.”
Stone continues:
“The company had little concrete idea how the program would affect orders or customers’ likelihood to shop in other categories beyond media. If each expedited shipment cost the company $8, and if a shipping-club member placed twenty orders a year, it would cost the company $160 in shipping, far above the $79 fee. The service was expensive to run, and there was no clear way to break even. “We made this decision even though every single financial analysis said we were completely crazy to give two-day shipping for free,” says Diego Piacentini.
But Bezos was going on gut and experience. He knew that Super Saver Shipping had changed customers’ behavior, motivating them to place bigger orders and shop in new categories. He also knew from 1-Click ordering that when friction was removed from online shopping, customers spent more. That accelerated the company’s fabled flywheel—the virtuous cycle. When customers spent more, Amazon’s volumes increased, so it could lower shipping costs and negotiate new deals with vendors. That saved the company money, which would help pay for Prime and lead back to lower prices.”
When the service launched, Amazon offered free expedited shipping for Prime subscribers. It was a money-losing operation at the time, but Bezos believed the potential long-term payoffs would justify the risk.
Prime has benefited from viral, word-of-mouth growth. Prime subscriptions grew by 38% from the spring of 2016 and 2017.
Customers love Prime and double as marketers for the service. According to one estimate, 73% of 30-day trial subscribers convert for the first year of membership. 91% of them renew for a second year, and 96% renew for a third year.
Amazon.Love
As Prime became a success, Bezos outlined his vision for how Amazon would conduct itself and be perceived by the world. The memo, titled Amazon.love reflected Bezos’ values, determination, and even, his blind spots.
“Some big companies develop ardent fan bases, are widely loved by their customers, and are even perceived as cool,” he wrote. “For different reasons, in different ways and to different degrees, companies like Apple, Nike, Disney, Google, Whole Foods, Costco and even UPS strike me as examples of large companies that are well-liked by their customers.” On the other end of spectrum, he added, companies like Walmart, Microsoft, Goldman Sachs, and ExxonMobil tended to be feared.”
To Bezos, it wasn’t enough to be inventive. Amazon required a pioneering spirit and customers needed to know about it.
Bezos wrote:
“Rudeness is not cool. Defeating tiny guys is not cool. Close-following is not cool. Young is cool. Risk taking is cool. Winning is cool. Polite is cool. Defeating bigger, unsympathetic guys is cool. Inventing is cool. Explorers are cool. Conquerors are not cool. Obsessing over competitors is not cool. Empowering others is cool. Capturing all the value only for the company is not cool. Leadership is cool. Conviction is cool. Straightforwardness is cool. Pandering to the crowd is not cool. Hypocrisy is not cool. Authenticity is cool. Thinking big is cool. The unexpected is cool. Missionaries are cool. Mercenaries are not cool.”
Customer perception will gain importance as antitrust debates heat up.
Secrets
So, what is the secret to Amazon’s success? What can we learn from Jeff Bezos?
Amazon is a scaffolding build around Bezos’ brain — a machine to amplify his thinking.
Bezos’ closest colleagues are slavish in their devotion, their loyalty, and their effectiveness. Stone calls them Jeff Bots:
Jeff Bots draw fuel from their CEO’s ample idea tank and then go out into the world and dutifully execute the best notions. They have completely absorbed Bezos’s business philosophy and molded their own worldviews around it, and they recite rote Jeffisms—how they start from the customer and work backward, et cetera—as if these were their prime directives.
Amazon’s success comes down to three things: efficient communication, a spirit of action, and a commitment to long-term thinking — all of which have allowed Amazon to defy precedent and move faster as it’s gotten bigger.
Bezos is not tethered to conventional thinking. In the words of his former colleague: “Bezos is bound only by the laws of physics. He can’t change those things. Everything else he views as open to discussion.”
Amazon is either a super corporate startup or a corporation that’s still trying to be a startup. Either way, Amazon is unique.
The company is notorious for its confrontational culture. Bezos believes that truth springs forward when ideas and perspectives are banged against each other, sometimes violently.
“Bezos says the company attracts a certain kind of person who likes to pioneer and invent, but former employees frequently complain that Amazon has the bureaucracy of a big company with the infrastructure and pace of a startup, with lots of duplicate efforts and poor communication that makes it difficult to get things done. The people who do well at Amazon are often those who thrive in an adversarial atmosphere with almost constant friction. Bezos abhors what he calls “social cohesion,” the natural impulse to seek consensus. He’d rather his minions battled it out in arguments backed by numbers and passion.”
Bezos strives to approach the world with childlike curiosity. Bezos says that inventors are experts with beginners minds. Beginners, though, fail often. In Bezos’ mind, failure and invention are inseparable twins: “To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment.”
Bezos may be the world’s wealthiest person, but his ambitious transcends his success. As Amazon grows, he will attempt to move faster, push his employees harder, make bolder bets, and pursue both big inventions and small ones — all in the hopes to achieve his grand vision for Amazon.
Today, it’s an Everything Store.
Tomorrow, Amazon may be an everything company.
Cover Photo: Seattle City Council from Seattle, CC BY 2.0, via Wikimedia Commons
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