More than two decades ago, perhaps a few people had imagined an e-commerce site selling books would one day become a mighty empire, as it is today. The philosophy behind Amazon’s success is the flywheel effect.
Flywheel is a rotational mechanical device used to conserve rotational energy, helping the machine operate even when the power is discontinued. The flywheel effect is also referred to in the book by Jim Collins: “From Good to Great,” describing the process of a good company become a great one by relentlessly pushing the flywheel and accelerate the momentum. Each component in the flywheel feeds each other and contribute to growth.
Amazon applies this principle keeping in mind of long-term vision and customer focus. Jeff Bezos stated in annual shareholder meeting: “Our vision is to be earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online”. Jeff applied this effect to Amazon’s flywheel. He outlined it on a… napkin (Figure 1).
There are three important factors to Amazon in maintaining customer-centric focus: low prices, vast selections, and availability of products. The Flywheel Principle is itself a virtuous cycle: reducing costs will create many customer visits. More customers mean increasing sales, attracting more third parties.
Most importantly, when we feed any part of it, the flywheel will grow. Flywheel is fractal into three main areas of Amazon. (In addition to these three pillars, the fourth pillar is the Alexa virtual assistant, which is discussed in more detail in Part 2: Alexa- where tributaries of Amazon meet). 3 pillar we discuss in this paper are:
- E-commerce sites, especially the Marketplace on Amazon.com where third parties participate.
- Amazon Prime, which offers membership subscription on and other unique offers.
- Amazon Web Services, which provides cloud computing services.
|Fractal is a branch of mathematical study of structures in nature that tend to repeat itself but at a different scale. The structure of the galaxy is similar to the shell, the snail shell is shaped like a fern leaf, or putting the leaf before sunlight, we see the main leaf veins, smaller leaf veins. The Flywheel at Amazon is fractal down to the branch of business based on that philosophy.|
First of all, Marketplace (3rd party can participate in Amazon). Flywheel is fractal crystal clear in this business, starting with the customer experience:
- Increased customer experience leading to being more traffics.
- More traffic leads to more sales volume and more engagement from third parties sellers in Marketplace
- More and more sellers will have to generate more selections for their customers, leading to improved customer experience, creating momentum for Amazon.
When there is growth momentum:
- The growth momentum helps reduce the cost of infrastructure investments (fixed costs) on an Amazon customer (fixed costs of building an order processing center, server infrastructure, etc…)
- Lower costs will make price lower, and in turn, will improve customer experience.
- This leads to more traffics to the site (Amazon)
- More customers lead to increased volume of sales and attract third-party vendors, creating an economy of scale.
- Attracting more 3rd party Amazon vendors reduces fixed costs on a customer (eg, order processing center, server needed to run the website). By that pattern, the flywheel will spin faster and faster, creating momentum for Amazon.
The Amazon Web Service & Prime is also powered by a similar principle. Amazon Prime is a monthly or yearly subscription service that uses services such as 2-day shipping and other proprietary packages such as video streaming content, music, quality ebooks, etc… All are available in one package and users spend only $99 for per year (or $12.99 per month). Amazon Prime now has more than 100 million global subscribers (in the next 10 years it is forecasted to reach 275 million), generating huge sales potential for Amazon.
But what Prime made was a stickiness that dragged users into Amazon’s ecosystem, creating loyal customers, shopaholics on Amazon’s e-commerce platform. Business Insider shows that Prime users tend to buy twice as much as non-subscribers (about $1300 per year). They tend to take advantage of the Prime Package as much as possible. The list of items in Amazon’s 2-day shipping program is on the rise, prompting many sellers wanting their products labeled “Prime,” which makes Prime more attractive to customers, supporting greater experience. Prime also promotes new businesses (such as video, music, etc.). Third-party developers also dragged the fulfillment line of amazon growth. This little flywheel of Prime contributes greaely for the big flywheel of Amazon.
If Amazon.com, Prime focus on “C” – mass customers, the AWS array focuses more on the “B” – business consumer. Amazon is the market leader in cloud computing, providing services not only to Amazon but also to other major players, contributing more than $20 billion to the company. Services range from storage, analysis, tools for developers to machine learning services, such as EC2, S3, Aurora, DynamoDB, Kinesis, Redshift, Sagemaker. Recently, AI & IoT is growing quickly in the AWS service, creates a third-party environment based on Amazon’s cloud computing service, optimizing the platform, lowering the price, attracting more customers, creating more innovations and diversity in services, and the loop goes on. Alexa (which will be discussed in detail in part 2) is also an important contributor to the AWS flywheel. AWS is an important infrastructure for the Amazon flywheel. As more and more people use it, Amazon will take advantage of the scale, serving the core e-commerce business segment, contributing to the overall flywheel.
Marketplace, Prime, AWS, and more recently AI (with Alexa) are the different business line but they synergy. Each small flywheel contributes to Amazon’s overall flywheel growth. This is Amazon’s long-term strategy that becomes a platform that affects every day’s activities. Amazon wants to sell content, services, products, 24/7 to customers. This also explains why Amazon is presenting from retail to healthcare, finance, entertainment … and aspiring to be the leader in smart home platforms such as the Amazon logo, products, services from A to Z.
Amazon has become the second US corporation to have a valuation of more than $1 trillion, with a positive financial result in the second quarter and the potential to grow even stronger. As for Jeff Bezos, he spent $42 million making a 10,000-year watch, perhaps representing long-term thinking and built-to-last mindset, reflecting in the flywheel strategy he built at Amazon.
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