The Amazon Flywheel or Amazon Virtuous Cycle is a strategy that leverages customer experience to drive traffic to the platform and third-party sellers. That improves the selection of goods, and Amazon further improves its cost structure so it can decrease prices which spins the flywheel.
The Amazon Flywheel is a strategic concept that outlines the virtuous cycle driving Amazon’s growth and success. It represents a self-reinforcing loop of activities and factors that, when spinning together, generate momentum and drive the company’s expansion.
Customer-Centric Focus
Customer-centricity is at the core of Amazon’s Flywheel. It starts with an unwavering commitment to customer satisfaction and providing the best customer experience possible, which drives customer loyalty and repeat business.
Selection and Pricing
Selection and competitive pricing are key elements of the Flywheel. Amazon’s vast product selection and competitive prices attract customers, encouraging them to shop on the platform. This leads to increased sales volume and market share.
Traffic and Customer Data
Amazon generates significant web traffic, and every visit provides valuable customer data. This data helps Amazon understand customer preferences, behavior, and buying patterns, enabling the company to refine its product offerings and tailor recommendations.
Seller Partnerships
Third-party seller partnerships are an essential component of Amazon’s Flywheel. By allowing independent sellers to leverage the Amazon platform, the company expands its product selection, attracting more customers and increasing sales. This, in turn, benefits sellers.
Fulfillment and Logistics
Amazon’s fulfillment and logistics network ensures fast and reliable delivery. This efficiency enhances the customer experience, as customers receive their orders quickly and reliably, further boosting customer satisfaction and loyalty.
Prime Membership
Amazon Prime, with its benefits like free and fast shipping, streaming, and exclusive deals, is a critical driver of customer loyalty. Prime members tend to spend more on Amazon, reinforcing the Flywheel effect.
Innovation and Investments
Amazon continually invests in innovation across various sectors, such as technology, e-commerce, and cloud services (AWS). This innovation drives differentiation, attracts customers, and supports the company’s long-term growth and expansion into new markets.
Competitive Advantage
The Flywheel concept creates a competitive advantage for Amazon. As the cycle gains momentum, the company can invest in areas that competitors may find challenging to replicate, solidifying Amazon’s market leadership.
Challenges and Criticisms
While the Amazon Flywheel has been highly successful, it has also faced criticisms, including concerns about market dominance, labor practices, and data privacy. Managing these challenges is crucial for sustaining the Flywheel’s positive effects.
Key Take
The Amazon Flywheel illustrates how a relentless focus on customer satisfaction, a wide selection of products, competitive pricing, and strategic investments can create a self-reinforcing cycle of growth and success. It serves as a powerful model for businesses looking to build sustainable momentum and customer loyalty.
Understanding Amazon’s flywheel model
This process is well known within Amazon and as explained by Jeff Wilke, CEO of Amazon Worldwide Consumer this idea was first sketched by Jeff Bezos back in 2001 and would become Amazon’s marketingstrategy for years to come.
More than a tool, this is a mindset, a way to seize opportunities within industries where inefficiencies are the rule.
At the same time, it helps speed up growth by investing as much as possible in customer experience.
The origin story of the flywheel
As the story goes, Jeff Bezos sketched Amazon’s flywheel, what he called the “virtuous cycle,” on a napkin.
It’s essential to understand the frame in which this framework developed. Indeed, we’re in the year 2001, right after the burst of the dot-com bubble.
Amazon was one of the companies most positioned for the Internet revolution, as Jeff Bezos was all-in already by 1994 when he had started Amazon.
Amazon had been growing at an explosive rate, going beyond books, and into other categories.
At the same time, to achieve, as quickly as possible, Bezos’ unbounded vision to transform Amazon into “the everything store” he placed some wild bets on other Internet players.
As the dot-com bubble burst, some of these bets turned into massive failures (companies like Pets.com and Kozmo went bankrupt).
Amazon was still a great company, yet many analysts thought the company would not survive the dot-com bubble.
In part, this was due to the fact that Amazon was an e-commerce company with very tight margins, and whether or not it would be able to scale was still an open question.
In this scenario, the paradigm shift happened. Amazon started its transition from e-commerce to the platform.
From a company primarily selling its own products to enabling its marketplace to host as many third-party stores as possible.
This strategy took about a decade to roll out fully. And by 2017-18, most of the products sold on Amazon came from third-party stores.
In this context, one of the main Amazon executives under Jeff Bezos, Jeff Wilke, explained:
I want to go back to the sort of core approach that our company has taken to take care of customers and grow the company and it’s this thing we call the virtuous cycle this it is true it was written on a napkin by Jeff probably eight or nine years ago – (back in 2001) – the napkin will eventually be in the Smithsonian Institution I imagine but we’ve taken the liberty of converting it into PowerPoint and the way you read this thing is you start with customer experience so we want to have in order to grow our company a fantastic customer experience
In short, it starts with customer experience, Jeff Wilke continued:
if we do we know we’ll get lots of traffic lots of consumers will be interested in that customer experience they’ll hear about it through word-of-mouth will have their own experiences and they’ll come to the website well now we have all this traffic what can you do with it we can certainly sell to our consumers but we can also allow other sellers to offer their items on our detail pages now when we first thought about this it seemed kind of crazy right why would you open up your detail pages your store to competitors to sell right next to you and the answer is twofold one it’s just a better customer experience but mostly it’s a better customer experience because the sellers bring selection.
Therefore, customer experience is fueled further via the presence of third-party sellers. While today it makes perfect sense, back then it didn’t much.
Indeed, those third-party sellers were Amazon’s competitors, and by giving them space, Amazon was giving visibility to its competitors. However, as Jeff Wilke further explained:
so Amazon through fast track in stock stuff that we have in stock in our warehouses that we buy and through FBA which is the seller selection is made much more valuable because sellers as you know sellers in many subcategories that were not in and even categories that we have an expansive retail selection make the experience much better by backfilling us when we’re out of stock and by adding extra aces that would take us a long time to get so selection.
In short, the flywheel converts into a growthstrategy, where Amazon can speed up the process of having a more extensive selection, which it would have taken years for Amazon to build.
Thus, by co-opting third-party sellers, Amazon speeded up the process:
really is about fast track that we buy ourselves and mostly FBA but really all selection that’s added by by third parties and I say mostly FBA because we really want to focus our attention on this particular piece of 3-p in the category leadership positions that you’re all in want to make sure that when third parties have a choice of selling to us through their own platforms their own fulfillment or putting their merchandise in our warehouses so that our customers can use Prime and Super Saver and have the same experience as if it was a retail offer that they choose the latter it makes our virtuous cycle complete and a better customer experience.
This virtuous cycle gave a particular imprint to Amazon’s growth, as explained more in detail by Jeff Wilke:
you’re growing the company a side benefit of our growth over the last 10 years has been that we build a lower cost structure so as we get bigger we get to leverage our buys we get to leverage the fulfillment infrastructure and logistics infrastructure we get to leverage the website and and that lowers the cost per unit of everything that we do and we have two choices we can keep that cash paid as dividend or lower our prices as you know over the years we’ve chosen to lower our prices which completes again another cycle of great customer experience.
The Amazon Flywheel, what they call a Virtuous Cycle, starts from the customer experience.
As explained by Jeff Wilke, customer experiences might focus on a few key elements:
Low prices.
Really big selection.
A great delivery experience.
Therefore, from customer experience, you get a lot of traffic.
Rather than monetizing that traffic just by selling Amazon products, the company focused on allowing third parties to sell their products on Amazon; this is the foundation of third-parties stores.
Instead of focusing on products Amazon already has, the company allows third parties to bring a selection that – at least initially – is hard for Amazon to have.
That selection makes the customer experience even richer.
Therefore, it allows the cycle to reinforce itself.
Rather than distribute the cash as dividends to its shareholders, Amazon passes it in the form of lower prices to customers.
Costco does something similar, while still generating enough money to sustain its short-term operations.
That cash generated is also used to fuel other initiatives, like Amazon Prime.
On the other hand, the army of dozens of thousands of sellers that as of 2018, sold on Amazon, are all small organizations that employ up to six people, which when combined, make up another large organization.
Yet, when those small companies send their inventories to Amazon so they can get fulfilled (managed and delivered) by Amazon.
The whole flywheel strengthens as those advantages are passed along to the same third-party sellers on the platform.
In something that looks like the image below:
To simplify even further this marketing strategy, we can start with two key elements:
A lower-cost structure, where cash is reinvested in the business, offers even lower prices, better selection, and more efficient inventory management.
The customer experience improves as prices get lower and selection broadens up, which in turn spins the flywheel with more momentum!
Find your flywheel
A flywheel can be built in any business.
While we’ve seen Amazon flywheel is built specifically on an e-commerce platform, you can try to find your flywheel.
Remembers these five elements:
Initially, it takes a lot of force to allow the flywheel to spin around.
As you build up momentum, the flywheel rotates more efficiently.
As it turns out, it also stores energy for later release.
When the flywheel has built momentum, it keeps releasing energy.
At that point, it becomes harder to stop!
If you have never thought of your business, a business unit, or a project as a flywheel, now is the time to start implementing this mindset!
That consists of a reinforcement process that starts with the customer experience and ends with it.
When this cycle gains momentum, it also powers up economies of scale and makes it possible for Amazon to speed up its growth process to the point in which, in a few years, the company dominates several industries.
The flywheel isn’t just a marketingstrategy but a mindset. The difference is critical as a marketingstrategy makes it applicable only to certain areas of a business.
A mindset makes you think in terms of flywheels in any part of your business. If you can incorporate that mindset within your organization, you might be able to unlock the great potential for your business!
From Amazon onward, the flywheel has become the predominant mental model that drives digital businesses.
Indeed, in a digital world, where competition and barriers are much more blurred, digital players have to build moats through network effects.
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.
And from a linear growth model to a non-linear and exponential model!
In this model, it’s critical to build momentum and then use that momentum to enable to speed things up quickly, as other players entering the same market might quickly gain traction.
This requires fast execution, iteration, and the ability to deploy capital efficiently to gain the so-called first-scaler advantage!
In this context, digital players know that to achieve speed, a flywheel model, over time, is way more effective, as it shifts the focus from short-term unscalable endeavors to long-term scalable initiatives.
Thus, in the short-term, “doing things that do not scale” is critical to start gathering valuable feedback and therefore kicking off iterative feedback loops.
On the other hand, as those short-term initiatives start to work, the digital player scales them up via iteration, execution, automation, and fast experimentation!
Amazon has a diversified business model. In 2023, Amazon generated nearly $575 billion in revenues while it posted a net profit of over $30 billion. Online stores contributed over 40% of Amazon revenues. Third-party Seller Services and Physical Stores generated the remaining. Amazon AWS, Subscription Services, and Advertising revenues play a significant role within Amazon as fast-growing segments.
Amazon’s mission statement is to “serve consumers through online and physical stores and focus on selection, price, and convenience.” Amazon’s vision statement is “to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices.”
In the Amazon Shareholders’ Letter for 2018, Jeff Bezos analyzed the Amazon business model, and it also focused on a few key lessons that Amazon as a company has learned over the years. These lessons are fundamental for any entrepreneur, of small or large organization to understand the pitfalls to avoid to run a successful company!
With 64,588,418 shares, Jeff Bezos is the primary individual investor. Owning 12.7% of the company. Other top individual investors include Amazon’s CEO Andy Jessy, who has 94,729 shares. Top institutional investors include mutual funds like The Vanguard Group (6.6% ownership) and BlackRock (5.7% ownership).
Amazon generated over half a trillion dollars in revenue in 2023, of which $231.87B from online stores, over $140.05B from third-party seller services, $90.76B from AWS, $46.9B from advertising, $40.21B from subscription services, $20.03B billion in physical stores, and $4.96B from other sources.
Amazon was profitable in 2023. On nearly $575 billion in revenue for 2023, Amazon generated a net profit of over $30 billion. Since 2014, Amazon hasn’t recorded a net loss, but it did record a net loss of over $2.7 billion in 2022, while it recouped that in 2023. Indeed, in 2014, Amazon reported a net loss of $241 million, and it would be profitable until 2021. In 2022, Amazon turned unprofitable again and highly profitable again in 2023.
Amazon AWS follows a platform business model that gains traction by tapping into network effects. Born as an infrastructure built on top of Amazon’s infrastructure, AWS has become a company offering cloud services to thousands of clients from the enterprise level, to startups. And its marketplace enables companies to connect to other service providers to build integrated solutions for their organizations.
Amazon subscription revenue in 2023 was over $40 billion, compared to over $35 billion in 2022 and nearly $32 billion in 2021. Amazon Prime grew from a $4.5 billion revenue segment in 2015 to an over $40 billion segment in 2023.
The Amazon Working Backwards Method is a product development methodology that advocates building a product based on customer needs. The Amazon Working Backwards Method gained traction after notable Amazon employee Ian McAllister shared the company’s product development approach on Quora. McAllister noted that the method seeks “to work backwards from the customer, rather than starting with an idea for a product and trying to bolt customers onto it.”
The Amazon Flywheel or Amazon Virtuous Cycle is a strategy that leverages on customer experience to drive traffic to the platform and third-party sellers. That improves the selections of goods, and Amazon further improves its cost structure so it can decrease prices which spins the flywheel.
In the letter to shareholders in 2016, Jeff Bezos addressed a topic he had been thinking quite profoundly in the last decades as he led Amazon: Day 1. As Jeff Bezos put it “Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.”
A regret minimization framework is a business heuristic that enables you to make a decision, by projecting yourself in the future, at an old age, and visualize whether the regrets of missing an opportunity would hunt you down, vs. having taken the opportunity and failed. In short, if taking action and failing feels much better than regretting it, in the long run, that is when you’re ready to go!
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model’s success.
Jeff Bezos was best known for founding eCommerce giant Amazon in 1994. However, the entrepreneur owns companies in several industries, including health care, retail, robotics, real estate, and media. Many of these companies have been acquired by Amazon over the years, but some have been the result of direct investment from Bezos himself (through his investment arm is called Bezos Expeditions).
Amazon is a consumer e-commerce platform with a diversified business model spanning across e-commerce, cloud, advertising, streaming, and more. Over the years Amazon acquired several companies. Among its 12 subsidiaries, Amazon has AbeBooks.com, Audible, CamiXology, Fabric.com, IMDb, PillPack, Shopbop, Souq.com, Twitch, Whole Foods Market, Woot! and Zappos.
The Amazon organizational structure is predominantly hierarchical with elements of function-based structure and geographic divisions. While Amazon started as a lean, flat organization in its early years, it transitioned into a hierarchical organization with its jobs and functions clearly defined as it scaled.
An imaginary flywheel of the development of a crypto ecosystem, and more, in particular, the Ethereum ecosystem. As developers join in, and the community strengthens, more use cases are built which attract more and more users. As users grow exponentially, businesses become also interested in the underlying ecosystem, thus investing more in it. Part of these resources is invested back in the protocol to make it more scalable, thus reducing gas fees for developers and users, and therefore facilitating, even more, the adoption of the whole business platform.
All Flywheel Models
The virtuous cycle is a positive loop or a set of positive loops that trigger a non-linear growth. Indeed, in the context of digital platforms, virtuous cycles – also defined as flywheel models – help companies capture more market shares by accelerating growth. The classic example is Amazon’s lower prices driving more consumers, driving more sellers, thus improving variety and convenience, thus accelerating growth.
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
The innovation loop is a methodology/framework derived from the Bell Labs, which produced innovation at scale throughout the 20th century. They learned how to leverage a hybrid innovation management model based on science, invention, engineering, and manufacturing at scale. By leveraging individual genius, creativity, and small/large groups.
According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).
That is a process that requires a continuous feedback loop to develop a valuable product and build a viable business model. Continuous innovation is a mindset where products and services are designed and delivered to tune them around the customers’ problem and not the technical solution of its founders.
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
Sociologist E.M Rogers developed the Diffusion of Innovation Theory in 1962 with the premise that with enough time, tech products are adopted by wider society as a whole. People adopting those technologies are divided according to their psychologic profiles in five groups: innovators, early adopters, early majority, late majority, and laggards.
In the TED talk entitled “creative problem-solving in the face of extreme limits” Navi Radjou defined frugal innovation as “the ability to create more economic and social value using fewer resources. Frugal innovation is not about making do; it’s about making things better.” Indian people call it Jugaad, a Hindi word that means finding inexpensive solutions based on existing scarce resources to solve problems smartly.
A consumer brand company like Procter & Gamble (P&G) defines “Constructive Disruption” as: a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future. According to P&G, it moves around four pillars: lean innovation, brand building, supply chain, and digitalization & data analytics.
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).
An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
