In 2001, Amazon founder and CEO Jeff Bezos scribbled a diagram onto the back of a napkin that would ultimately define the company’s business model. He called it the “virtuous cycle” – a core approach to building Amazon by starting with the customer and working backwards, rather than focusing on a product or service.
“Our mission is to be Earth’s most customer-centric company,” Bezos told PBS anchor Charlie Rose in 2010. He went on to explain that what distinguishes Amazon from other successful retailers – such as Walmart – is the company’s strict and long-term focus on the customer. “We see our customers as invited guests to a party, and we are the hosts,” said Bezos. “It’s our job every day to make every important aspect of the customer experience a little bit better.”
Bezos’ original sketch of the “virtuous cycle” (pictured above) depicts a flywheel. By definition, a flywheel is a heavy, rotating disc or wheel that is specifically designed to use its own kinetic energy to keep moving. Flywheels are often used to provide continuous momentum in heavy machines that require tremendous power such as locomotives and tractors. Due to the weight of a flywheel, it typically requires great effort to move from a standstill. As it begins to rotate, however, its design helps store and redistribute its own energy to build momentum. Once a flywheel is in motion, it is difficult to stop.
The Amazon flywheel propels itself on the same principle. Centered around customer satisfaction, each part of the business model feeds momentum into another part, which in turn improves the efficiencies of other parts. This enables the business to grow, expand, and improve with its own inertia.
The core functionality of the Amazon flywheel revolves around three primary components of customer satisfaction:
- Low prices – Amazon has built its marketplace with a priority on keeping prices low. One example of this is the Match Low Price feature, which helps sellers quickly and easily match the current lowest prices on Amazon for the products they offer.
- Wide selection – Amazon has become the first website customers visit when researching and learning about new products. Many shoppers prefer Amazon simply because they know they will be able to find virtually anything.
- Fast, convenient delivery – Thanks to Amazon, one-day and two-day delivery are now factored into the customer’s purchasing decision. Over time, the company has increased its focus on fast delivery and is currently expanding its logistics network to transition to same-day delivery.
Under this concept, a business will be in a constant state of growth so long as the prices continue to drop, the selection continues to expand, and the delivery experience continues to improve. This is precisely what Amazon has achieved over the past 20 years – but not without taking risks and making calculated decisions.
In the early 2000s, as Amazon started to attract more customers to its website, the company chose to open its marketplace to 3rd party sellers rather than monetize this traffic with its own product line. As Jeff Wilke, CEO of Amazon’s Worldwide Consumer Business has explained, this decision was designed to expand the selection of available products. It was based on the company’s mission to improve the customer experience. As more sellers joined the marketplace and more products became available, Amazon’s customer base continued to grow. With more customers came more revenue and instead of turning a profit and paying dividends, the company reinvested into itself to lower prices and add new services – all based around the principle of improving the customer experience.
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Today, Amazon is the largest and most powerful retailer in the world. What began as an online bookstore has transformed into an e-commerce behemoth that has revolutionized – or at least reshaped – multiple industries and counting. In 2020, Amazon generated a record $386 billion in revenue, a 38% increase from 2019. Perhaps even more insightful, Amazon’s net profit climbed 84% YoY to reach more than $100 billion, according to a recent report by Forbes. This growth is not just revenue, but also profit and can be directly attributed to the Amazon flywheel business model. Over time, Amazon has been able to introduce new products and services while at the same time lowering prices and costs, which translates to an increase in profit. Amazon shows no signs of slowing down, either. In fact, the nature of the flywheel is self-propelling, meaning Amazon will continue to not just expand, but expand faster. This, along with the acceleration of e-commerce due to COVID-19, provides the perfect combination of business model and business climate that will allow unlimited growth – which is exactly what Jeff Bezos envisioned when he scribbled a little diagram onto what is now likely the most influential napkin of the 21st century.
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