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
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
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
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
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
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.
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.
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.
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.
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.
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