Amazon’s secret sauce: the flywheel model

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Amazon’s flywheel of growth. From Andreessen Horowitz’s blog post http://a16z.com/2014/09/05/why-amazon-has-no-profits-and-why-it-works/[/caption]

After finishing The Everything Store recently, I wanted to share an interesting framework that Bezos used when founding Amazon. The book, by the way, is a phenomenal read and gives great insight into Bezos’s character and how he has led an innovative Amazon. Ambition, persistence, spontaneity, and being neurotic/obsessive are some of the most common traits of the successful people I’ve read about so far, and he certainly embodies all of them.

Bezos thought about Amazon’s business model as a “flywheel” in the early days, and claimed that this was their secret sauce. Without going into what an actual flywheel is, this was another way of saying that the business model possessed a positive reinforcement loop that grew stronger if you fed any part of it. To quote the book:

… Bezos and his lieutenants sketched their own virtuous cycle, which they believed powered their business. It went something like this: lower prices led to more customer visits. More customers increased the volume of sales and attracted more commission-paying third-party sellers to the site. That allowed Amazon to get more out of fixed costs like the fulfillment centers and the servers needed to run the website. This greater efficiency then enabled it to lower prices further. Feed any part of this flywheel, they reasoned, and it should accelerate the loop.

Starting up the flywheel can be difficult, but once results accumulate, momentum builds and business accelerates. In the flywheel model, all incentives are aligned in the same direction. Some strategic and managerial conclusions:

  1. Design for success: the flywheel model is just another example of how leaders can design for the successful operation of their company before any real rubber hits the road. All planning and no action is bad, but having some sort of goal and a plan before doing any serious execution, in principle, works a lot more efficiently than trying things haphazardly and seeing what works.
  2. Design for alignment: a business model is least impeded when the result of anyone’s actions promote everyone’s desires and best interests, especially when that cycle is self-reinforcing.
  3. Do everything to start, protect, and build that initial momentum

Fun fact: during the 1999 holiday season, a lost box of stuffed Jigglypuffs wreaked havoc on a few Amazon distribution centers (they weren’t called fulfillment centers back then). Bezos ordered staff to pull all-nighters looking for the bundle of Pokemon — customers always came first.