HOW AMAZON DRIVES FLYWHEEL MARKETING
Background
Amazon grew at an explosive pace, moving beyond books and other categories. And to achieve success as quickly as possible, Bezos turned Amazon into an “everything store” and bet on Internet users.
When the dot-com bubble burst, some of these bets failed miserably (companies like Pets.com and Kozmo went bankrupt). Amazon survived, but many analysts said the company would not have survived the dot-com bubble.
Jeff Bezos sketched out the Amazon Flywheel, or “Virtuous Cycle,” on a napkin. Amazon is one of the most well-positioned companies in the Internet revolution, because Jeff Bezos had it all when he founded Amazon in 1994.
Flywheel was born out of the fact that Amazon was an e-commerce company with lower-than-expected margins and whether it could scale was an unknown. In response, Amazon changed its model. Specifically, Amazon began to shift from e-commerce to platform.
From a company that primarily sold its own products, to gaining an advantage in the market by hosting as many third-party stores as possible, Flywheel transformed into a growth strategy where Amazon accelerated the process of providing a rich selection that took Amazon years to build.
The Flywheel Marketing strategy took about a decade to perfect, and by 2017-2018, most of the products sold on Amazon came from third-party stores.
The Virtuous Cycle has been a particular hallmark of Amazon’s growth, as Jeff Wilke, one of Amazon’s key executives, explains:
“You’re growing a company, and the side benefit of growing at Amazon over the last 10 years is that we’ve built a lower cost structure to build momentum. We’ve been able to leverage our purchases, leverage the operational and logistical infrastructure that we’ve built from leveraging the site, and lower our cost per unit. We had two options, we could keep that cash as a dividend or we could cut our prices. We ended up cutting our prices to complete another great customer experience cycle.”
The Goal
When it comes to the Amazon Flywheel business model, think of the low prices as what initially started the Flywheel. Once these low prices attract more consumers and create curiosity for third-party sellers to enter the market, more stakeholders will emerge and Amazon can gradually start to increase the market share difference between them and other online marketplace competitors.
Over time, the more powerful Amazon becomes, the lower its price structure becomes and the more conversions it generates. Amazon’s Virtuous Cycle continues to repeat itself until it creates momentum for the Flywheel, giving Amazon the opportunity to improve their structure, reduce costs, and reinvest money into other business ventures. Think of Amazon Prime and the Fulfilled by Amazon (FBA) program, both of which have been products of the Amazon Flywheel for years and allow them to reinvest in other ventures to outpace their competitors.
Insight
As mentioned earlier, Amazon’s Flywheel Marketing strategy is rooted in providing the best for the customer, and any action is guided by the central question: “What action is best for our customers?” Amazon enabled their Flywheel in the early days by keeping product prices low. Lower prices attracted more and more customers, and more customers came.
Amazon continued to help the Flywheel spin by allowing third-party sellers, who paid Amazon a commission on their sales, to enter the game and sell products through the Amazon marketplace. This group of third-party sellers allowed Amazon to finance the fixed costs and operating costs of the platform, and allowed them to invest in more high-quality servers to host the platform and set up sales centers in multiple locations around the world. This made the process more efficient, which in turn made Amazon more money. Instead of pocketing the profits, however, Amazon reinvests them into the platform, driving down the prices of the products it sells, then spins the Flywheel through the same but accelerated loops again.
At its core, Amazon’s Flywheel concept is centered around the concept of value. As prices become lower and more competitive, more third-party sellers sell on Amazon. More third-party sellers mean more product selection, which in turn draws consumers from other marketplaces and drives them to Amazon. This in turn allows Amazon to increase conversions while also developing and enriching the customer experience. Improving the customer experience by lowering product prices attracts more customers to Amazon.
Instead of distributing earnings as dividends, Amazon passes profits on to customers in the form of lower prices, while sustaining short-term operations through retained earnings. Additional funds are also invested in useful and popular initiatives like Amazon Prime.
All of these elements combine to feed each other and drive growth. Platform growth restarts the cycle by reducing prices and investing in Amazon innovations that reduce prices and improve the customer experience.
Creative Idea
The Amazon Flywheel Cycle with core growth but driven by a customer-first focus rather than profit. You can see the Amazon Flywheel chart below.
Jeff Bezos ultimately grew Amazon on the principle of customer satisfaction. By providing a great customer experience at a fair price, he reaches happy customers who are more likely to return, creating momentum for the cycle.
The Amazon Flywheel follows two consolidation cycles
The first cycle is the availability of third-party sellers, which leads to competition and a wider product selection. Competition and a wider product selection allow for lower prices, which leads to a positive customer experience. A positive customer experience leads to repeat purchases, which leads to more traffic, which leads to more sellers, and overall growth.
The second cycle goes like this:
Company growth opens the door to a lower cost structure
Lower cost structure allows for lower product prices
Lower prices again improve the customer experience
Execution
When using the Flywheel business model in your own strategy, it is essential to think of the Flywheel as a mindset and think in a way that is appropriate for your business, rather than a specific action plan or roadmap to follow. Each change you make to your strategy should ultimately be aimed at accelerating growth and moving you closer to your KPIs, although some improvements will naturally have a more noticeable effect than others.
Some key aspects of the Amazon Flywheel strategy that businesses can apply to their campaigns:
Customer Experience
Customer experience refers to any interaction or event that occurs throughout the relationship between a consumer and a brand. For the Flywheel model to work, it is necessary to closely monitor every aspect of the customer experience.
To do that, track all customer performance metrics on Amazon and other online marketplaces such as the number of support tickets, the number of support tickets outstanding, the average resolution time, the average response time, customer satisfaction score, etc.
As a seller, you should always be looking for new ways to improve the customer journey and optimize the user experience, from the first time a potential customer sees a product to the moments after they make a purchase.
There are some obvious ways to improve the customer experience, such as pricing, product selection, delivery times and experiences, and customer service management.
Be Dynamic
One thing that Amazon is famous for is its emphasis on being unique every time it launches new projects, whether it is Amazon Prime, Prime Video, Same-day Shipping, etc. Skip the Amazon book series and never let your promotional methods or strategies become stale.
To start the Flywheel model and continue to build momentum, sellers must always try new ways to attract attention, whether it is through better advertising campaigns or more attractive product offers.
Optimize SEO
All product listings on Amazon and other online marketplaces should be search engine optimized and ranked, otherwise you will put yourself at a disadvantage. This means you will not get visibility in SERPs.
Be sure to consider the target keywords for each product and incorporate them into the product title, description, and feature list. The more visibility you have when users search, the more sales you get, and as your sales increase, your rankings improve significantly. SEO is a prime example of the Flywheel Marketing model, and these small efforts have a long-term, ongoing effect on your overall sales strategy.
Product Analysis
Another important aspect of the Flywheel concept involves the products you have to offer. It is important to regularly analyze your product catalog and have a proactive approach to inventory management. Sellers should strive to understand their best-selling products, any underperforming or expired products, etc.
Product analysis is not enough to replenish inventory when it is running low. Instead, you should always be on the lookout for new opportunities to expand your product offering and don't be afraid to stop production if a product is not meeting your goals.
Monitor Your Reputation
Last but not least, prioritize your reputation. When it comes to third-party sales, or making any e-commerce sales for that matter, reputation is everything. We’ve all been guilty of reading product reviews or ratings of a brand before making a purchase, so we feel more confident in our purchasing decisions.
Online sellers should strive to provide as many trust signals as possible by ensuring that you have a legitimate website, social media platforms, an existing customer base, and a repository of unbiased product reviews. By making an effort to monitor, manage, and build your reputation, you’ll see
You might be wondering what makes the Amazon Flywheel model so ideal?
Being customer-first means I have to think less about profits and more about experiences.
Thinking about customer satisfaction has motivated me to create high-quality products.
I can improve my existing products based on customer feedback
My brands are now self-sufficient without investing heavily in a huge marketing campaign beyond PPC
If you haven’t done Flywheel Marketing yet, check out the following:
Follow the same philosophy of customers first, quality products, how to increase sales, reviews, then how to rank higher.
Find areas of strength and focus on them, identify and eliminate the root of any problems (and manage customer pain points)
Define what you want to communicate with your brand and create content around that vision. This makes it easier for you to attract customers.
Participate in Amazon A/B Testing to better understand customer preferences. Testing provides you with reliable data and saves you time and stress from trying multiple experiments without results.
Conduct surveys or case studies and provide the results for future reference. You can learn from them for product launches and new strategies.
Provide excellent customer service. Word of mouth is still one of the most powerful forms of advertising.
Understand the game through optimization research, investing in quality advertising and content.
Expand your product line when opportunities arise to build brand awareness.
Create a system based on the previous and next steps of the cycle to create momentum for the Flywheel (meaning everything is linked together)
Lessons
A Flywheel can be applied to any business. While we have seen the Amazon Flywheel built specifically for e-commerce, you can try to find the right Flywheel for yourself.
Keep these 5 factors in mind:
Initially, it takes a lot of force for the Flywheel to gain momentum.
As you increase energy, the Flywheel spins more efficiently.
The Flywheel also stores energy for growth.
As the Flywheel gains enough momentum to take on a role of its own, the Flywheel continues to release energy.
At that point, nothing can suddenly stop the Flywheel.
If you have never thought of your business, a business unit, or a project as a Flywheel, it is time to start building this mindset. The Amazon Flywheel is not just a repeating cycle, it grows stronger with each iteration. Jeff Bezos founded Amazon in his garage, and you have the potential to reach greater heights too.
In business, we always tend to think in numbers. Take a moment and put yourself in your customer’s shoes. Ask yourself what you want from the buying experience. From there, you can think about the next steps you need to take to become an expert in your field.
