amazon-flywheel

Amazon Flywheel: Amazon Virtuous Cycle In A Nutshell

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.

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 marketing strategy for years to come. That contributed to the Amazon business model success. 

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 on customer experience.

In a YouTube video 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 where Amazon 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 in a growth strategy, where Amazon can speed up the process of having a more extensive selection, where 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
I covered already the Amazon Cash Machine Strategy, which has been another key ingredient to Amazon massive growth.

Breaking down Amazon Virtuous Cycle

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. At the same time, Amazon is known for its cash machine strategy where the company can operate efficiently at very tight profit margins.

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 it can get fulfilled (managed and delivered) by Amazon, the whole flywheel strengthens as those advantages are passed along the same third-party sellers on the platform. In something that looks like the image below:

amazon-flywheel

To simplify even further this marketing strategy, we can start from two key elements:

  • A lower cost structure, where cash is reinvested in the business, to offer even lower prices, better selection, and more efficient inventory management
  • The customer experience improves as prices get lower and selection broadens up, which in turns 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, it also stores energy for later release
  • When the flywheel has build momentum, it keeps releasing energy
  • At that point, it becomes harder to stop!

If you never thought of your business, a business unit, or a project as a flywheel, now that is time to start implementing this mindset!

Key takeaway

Amazon has built its success of a marketing strategy called flywheel or virtuous cycle. 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 made it possible to Amazon to speed up its growth process to the point in which in a few years the company dominated several industries.

The flywheel isn’t just a marketing strategy, but a mindset. The difference is critical as a marketing strategy 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!

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which he brought to reach over half a million business students, professionals, and entrepreneurs in the last year | Gennaro is also Head of Business Development at a tech startup, he helped grow at double-digit rate and become profitable | Gennaro is an International MBA with emphasis on Corporate Finance | Subscribe to the FourWeekMBA Newsletter | Or Get in touch with Gennaro here

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