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The Meeting that Changed History
During the dot com bust in 2000, Amazon was struggling to make a profit. Jeff Bezos met with business legend and author of Good to Great, Jim Collins to seek advice and discuss strategy. This meeting would change the trajectory of Amazon forever. Collins introduced Bezos and his executive team to the concept of a business flywheel. Basically, figuring out how to push their business forward, gain momentum and create a sustainable model. Bezos and the team ate it up. “We’re going to make a flywheel of our own.” Like any great startup story, somehow these decisions seem to be made in restaurants without access to paper, so Bezos sketched out the first Amazon flywheel on a napkin. It looked something like this.
“Bezos and his lieutenants sketched their own virtuous cycle, which they believed powered their business. It went something like this: 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.” — Brad Stone, The Everything Store
That was just the start. Today, there is more than one flywheel — there’s an AWS flywheel, an AI Flywheel, a 3rd Party Seller Flywheel, and many more for each business unit. While preparing answers and stories around the Leadership Principles cover your culture fit with Amazon, answering questions around the flywheel cover your understanding of the overall growth drivers of the business. Understanding the flywheel is key to success in the interview process and your success in the company if you land the job. Let’s dive into how it operates and what kind of questions you will be asked.
The Amazon Flywheel – The Basics
From it’s early days, Bezos famously wanted the company to be the most customer-centric in the world. The flywheel reflects this and starts with this idea, where low prices and customer experience are key drivers. This customer-centricity is their business strategy and how they turn the flywheel, while the flywheel explains how to grow once the flywheel is turning.
In other words, the flywheel is not a business model or strategy, but describes how growth leads to more growth. It explains the mechanics behind growth, and the causal relationship between the different drivers. (Another example: Travel sites like Expedia and Booking.com have the same flywheel, but their business strategy is different).
Let’s define each part of the Amazon flywheel:
- Sellers - As with the selection, there are many third-party sellers on the e-commerce platform. Amazon directly buys and sells products with these third-party vendors as a part of their business, but anyone (including you or me) is permitted to sell products on the site.
- Selection - Consider the number of products and services available on Amazon.com - it is nearly infinite! This variety also applies to different categories, like the selection of Kindle content or number of movies made available on Prime Video.
- Customer Experience - Amazon uses the metric of “lifetime customer value” or “LCV” to measure the customer experience. LCV = (Average Value of a Sale) * (Number of Repeat Transactions) * (Average Retention Time in Months or Years for a Typical Customer)
- Lower Cost Structure - By selling products online, Amazon does not incur costs of running physical “brick and mortar” shops. Thus, the Company runs a more scalable and cheaper business model than most retail companies.
- Lower Prices - Jeff Bezos, founder and CEO of Amazon, believes that customers will always want lower prices. It is one of the few “timeless truths.”
- Traffic - This simply refers to the number of users driven to Amazon.com
Here’s a video of Jeff Wilke explaining it in simple terms: https://www.youtube.com/watch?v=5jcDlGn-tZA Every component of the flywheel is an accelerator. When effort is put into any one of these areas, it positively impacts all of the other components.
For example, as the Company attracts more sellers to the website, this will increase the selection of products. In turn, this will lead to a better customer experience and an increase in future traffic, which distributes more energy to the rest of the flywheel. All of this leads to growth and a faster spinning flywheel, represented by “growth” in the center. What you’ll also notice on the flywheel is that there is no circle for “take profits.” Indeed, Amazon is renowned for reinvesting its profits into new businesses, warehouses, drones, R&D, and fulfillment centers. While this might annoy some shareholders in the short term, it is a proven and extremely successful long-term strategy. If you want to dive deeper into Amazon’s financial model and growth strategy, take a look at Ben Evan’s analysis here.
How to Answer Hypothetical Interview Questions using Amazon’s Flywheel Model
“How would you increase the number of sellers in our department…?” These sorts of answers can all be answered with the Flywheel model.
Everything Amazon does at a micro and macro level is connected to the flywheel. When you go into an interview, you should be able to comfortably explain the flywheel model and understand how it shapes Amazon’s operations. When you receive an interview question about lowering prices or increasing website traffic, the questions may initially seem daunting and difficult to answer - they are not. Take a deep breath. Bring to mind the flywheel, and you will find your answer.
For example, if you are asked, “How would you increase traffic to the Baby Goods category?”, simply bring to mind the other parts of the flywheel. The answer is one of one of the following: increasing the number of sellers, increasing selection, lowering prices, improving the customer experience, and lowering the cost structure — or a mix of all of these.
It is useful to spend some time thinking about the overall business and exploring their website and apps. Even if you are a frequent Amazon user, you might have not thought about how they monetize yet manage to maintain such low prices. One of the company’s mantras is to focus on long-term growth rather than short-term profit. This is why Amazon keeps reinvesting their revenues and starting new businesses. They have managed to build a huge business without actually being profitable.
As an exercise, I encourage you to check out Amazon’s home page and browse through their categories. Look at the selection of their products, promotions they are running, and new products.
Then put yourself in the shoes of an Amazon employee. Ask yourself the following questions: “How are they driving traffic? How could I improve the selection? How do we maintain low prices for this product or category? How does this product fit into the larger ecosystem of services? What do we need in order to scale this part of the business?”
So Many Flywheels
Every new innovation that Amazon has started causes the flywheel to turn faster. Everything from Prime, the Kindle, Fire TV, Echo, Alexa, and AWS – these all were designed to make customers happy, attract more 3rd party sellers, boost sales and push the flywheel forward to more growth. The ones that don’t push the flywheel, like the Fire Phone, ultimately fail and are shut down. And of course, some of these innovations create their own ecosystems and spawn new flywheels, like the growth of AWS as both a new business strategy and flywheel for Amazon.
In an interview, you’ll need to consider what role/department you are interviewing for and how the flywheel applies. For Kindle, it’s providing a greater selection of publishers, and giving customers access to better and cheaper books. For Alexa and Echo, it’s the number of 3rd party developers building apps and connected devices that improve the customer experience. For brick and mortar retail, it’s expanding Prime customers and keeping prices low both in physical and online shops. Let’s take a quick look at a few more examples.
Amazon Prime
When customers spend more, Amazon’s volumes increase, so it can lower shipping costs and negotiate new deals with vendors. That saves the company money, which would help pay for Prime and lead back to lower prices. Prime was a big bet, but it eventually justified its existence.
”...Prime, the two-day shipping service, was an engine spinning the company’s flywheel ever faster. Amazon customers who joined Prime doubled, on average, their spending on the site, according to a person familiar with the company’s internal finances at the time. A Prime member was like a shopper who walked into a Costco warehouse for a case of beer and walked out with the beer plus an armful of DVDs, a nine-pound smoked ham, and a flat-screen television.” — Bezonomics
The Retail Flywheel
Amazon launched its first brick and mortar store, Amazon Go, in 2016. Since then it’s expanded to 30 stores and acquired Wholefoods – a massive retail play. Not only does Amazon have growing revenues and cash flows allowing the company to reinvest, they also have a huge opportunity to build their retail in-store presence.
Jon Allion describes the potential for brick and mortar retail:
- Consumers try out Amazon.
- Consumers love Amazon, get hooked and purchase an Amazon Prime account.
- As a result, these consumers stop going back to brick and mortar stores and no longer shop there.
- With no sales, these retail stores shut down.
- Consumers who have yet to try out Amazon now do so as the stores they would previously shop at are no longer around. In addition, Amazon buys this prime real estate for pennies on the dollar to set up its own stores, further adding to the Prime benefits, while getting more new customers to try Amazon in-store.
The AI Flywheel
In a 2016 letter to shareholders, Bezos explains the power of machine learning and AI: “Machine learning drives our algorithms for demand forecasting, product search ranking, deals recommendations, merchandising placements, fraud detection, translations and much more.” Using artificial intelligence takes a lot of energy to get started. But once the wheel begins turning, it’s easier to keep it going. In the case of the AI flywheel, that energy is big data.
By now, Amazon has hired tens of thousands of data scientists and engineers to put this data to use and keep the AI flywheel turning. They collect data on 300 million + customers every second, and each piece of data can drive decision making on what items to purchase, how much to charge, how much inventory to stock, and much more.
The AWS Flywheel
AWS took the same flywheel page from its parent Amazon.com, and applied it to their cloud computing business. As of 2021, AWS represented only 12% of Amazon's revenues in 2020, but accounted for nearly 60% of the company's operating profits. As more enterprises and start-ups adopted a cloud first mentality adopt AWS cloud services, AWS cloud computing became the gold standard for consumption-based IT-as-a-service.
“This made the storage piece of AWS even bigger, even with its competitors side by side. They reduced the cost of their storage offering, which meant more storage capacity consumption, created more innovative ways to improve the overall storage delivery experience, made AWS storage absolutely vital to the customers, and customers come back for more.” And so the flywheel turns.
And more…
Bezos plans to apply and turbocharge this flywheel not just to retail or AWS, but across multiple industries, from healthcare to finance and media and more. Check out the resources below to dive deeper into some of these models!
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