amazon-flywheel

Amazon Flywheel: Amazon Virtuous Cycle In A Nutshell

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.

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 marketing strategy for years to come.

That contributed to Amazon’s business model’s 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 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 growth strategy, 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
I covered already the Amazon Cash Machine Strategy, which has been another key ingredient to Amazon’s 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 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:

amazon-flywheel

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!

Key takeaway

Amazon has built its success on 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 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 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!

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.

Those network effects imply a shift in mindset.

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!

That is the essence of the flywheel model.

Connected to Amazon Business Model

Amazon Business Model

amazon-business-model
Amazon has a diversified business model. In 2021 Amazon posted over $469 billion in revenues and over $33 billion in net profits. Online stores contributed to over 47% of Amazon revenues, Third-party Seller Services,  Amazon AWS, Subscription Services, Advertising revenues, and Physical Stores.

Amazon Mission Statement

amazon-vision-statement-mission-statement (1)
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.” 

Customer Obsession

customer-obsession
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!

Amazon Revenues

amazon-revenue-model
Amazon has a business model with many moving parts. With the e-commerce platform which generated over $222 billion in 2021, followed by third-party stores services which generated over $103 billion, Amazon AWS, which generated over $62 billion, Amazon advertising which generated over $31 billion and Amazon Prime which also generated over $31 billion, and physical stores which generated over $17 billion.

Amazon Cash Conversion

cash-conversion-cycle-amazon

Working Backwards

working-backwards
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.”

Amazon Flywheel

amazon-flywheel
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.

Jeff Bezos Day One

jeff-bezos-day-1
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.”

Amazon Organizational Structure

amazon-organizational-structure
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.

Connected Flywheel Examples

Etsy Flywheel

etsy-flywheel

WordPress Flywheel

wordpress-flywheel

Epic Games Flywheel

epic-games-flywheel

Uber Flywheel

liquidity-network-effects

Ethereum’s Flywheel

blockchain-flywheel
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

virtuous-cycle
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.

Read Next: Business Model Innovation, Business Models.

Related Innovation Frameworks

Business Engineering

business-engineering-manifesto

Business Model Innovation

business-model-innovation
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.

Innovation Theory

innovation-theory
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.

Types of Innovation

types-of-innovation
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).

Continuous Innovation

continuous-innovation
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

disruptive-innovation
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.

Business Competition

business-competition
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

technological-modeling
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.

Diffusion of Innovation

diffusion-of-innovation
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.

Frugal Innovation

frugal-innovation
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.

Constructive Disruption

constructive-disruption
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.

Growth Matrix

growth-strategies
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).

Innovation Funnel

innovation-funnel
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.

Idea Generation

idea-generation

Design Thinking

design-thinking
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.

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