Hi everyone, good morning!
The newsletter has now entered its fourth issue, and everything seems to be getting on track. Though we'll have to wait until the fiftieth issue to say it's officially on track. The newsletter's theme discusses Decision & Positioning, and we plan to analyze various types of decisions and all kinds of positioning to help us make good decisions and find our own good positioning.
This issue discusses Amazon's decision and positioning to become a company committed to charging customers the least amount possible.
Background: Early Amazon = Money-Losing Amazon
Amazon is a multinational e-commerce company headquartered in Seattle, USA, one of the world's largest online retailers and currently ranking in the top five US companies by market value. Amazon, which now achieves nearly ten billion dollars in operating profit almost every quarter, failed to achieve profitability from its 1997 IPO until 2002, remaining in a loss-making state. It was during these years of consecutive losses that Bezos had a cup of coffee that forever changed Amazon's future.
The Decision After One Cup of Coffee
In 2001, Amazon was going through a particularly miserable phase. The dot-com bubble had burst, market funding had shrunk, there was overstaffing and over-expansion, growth was declining, stock prices were experiencing a wave of decline, Amazon still couldn't turn a profit, and the company was under enormous pressure. Bezos and the company were preparing to plan raising prices on Amazon's products to enable the company to become profitable.
However, after finishing a cup of coffee, Bezos immediately changed his mind.
One Saturday morning in 2001, Bezos met with Costco founder James Sinegal at Starbucks for a chat. The Costco founder explained Costco's underlying philosophy to Jeff Bezos. After that cup of coffee, Bezos returned to Amazon's office and made an announcement:
"There are 2 types companies in the world. Companies that work hard to charge you more and companies that work hard to charge you less. Henceforth, as of today, Amazon is the company that works hard to charge its customer less."
— Jeff Bezos
From that point forward, Amazon committed to providing customers with maximum value while charging the least amount, ensuring customers truly felt that every dollar they spent created maximum value.
This decision appeared to be empty rhetoric, a grandiose statement, but it actually had profound implications for Amazon's strategy. Right after the breakfast meeting with Costco's founder, when Amazon was still losing money with no hope of profitability in sight, they decided to immediately reduce prices on books, CDs, and other items by more than 20%. Simultaneously, Amazon opened its platform to third-party sellers—inviting other companies to sell their products on Amazon's platform. This meant Amazon's website would have both Amazon's own products and external companies' products, allowing external companies to compete with them on their own turf. In 2002, Amazon opened "Self-Service Order Fulfillment," allowing third-party sellers to ship their goods to Amazon's warehouses, letting Amazon handle storage and shipping to customers. These third-party companies remained the owners of the inventory and could set their own prices while competing with Amazon's own products.
However, Amazon had pressure to clear inventory, but simultaneously opened up to third-party sellers selling the same products as Amazon. Moreover, they opened their warehousing and logistics systems to third-party sellers, allowing third-party sellers to reduce transportation and storage costs and lower prices on Amazon's platform, forcing Amazon to face even greater inventory clearance pressure and compelling Amazon to reduce prices to manage inventory pressure.
The Amazon Flywheel
Amazon's approach of opening warehousing to third-party sellers seemed like a mess, but from the perspective of working hard to sell cheaply to customers, this became quite logical. Because when Amazon competed with other third-party sellers, it would force Amazon itself to reduce prices. When all third-party vendors were reducing prices, this indeed achieved the result of working hard to sell cheaply.
The question was: how could Amazon make money and survive by working hard to sell cheaply? The key lies in the following Amazon flywheel effect:
- Amazon's low prices increase more sales
- → More sales encourage more third-party sellers to list more products
- → Amazon collects more commissions from third-party sellers
- → More revenue and more commissions allow Amazon to further reduce prices and invest in logistics
- → Lower prices and Prime membership loyalty increase more sales
- → Continuous cycle...
As long as this flywheel keeps turning, Amazon can continue to grow and obtain greater profits. So if you look at Amazon's profit growth (including Amazon's other investments calculated together), you can see the benefits when Amazon's flywheel starts turning.
Reflection
When Amazon chose to "work hard to charge customers less," it seemed quite counterintuitive, but only by thinking about working hard to sell cheaply could they create a new business model. In the early 2000s, Bezos hadn't seriously considered how Amazon should grow or how to build a business model and profit method, but simply participated in retail warfare with traditional thinking—raising product prices.
If Bezos hadn't had breakfast with Costco's founder at that time, Amazon might not have achieved its current success. But it was precisely when Amazon positioned itself to "charge customers the least amount" and made decisions from this perspective that Amazon changed significantly. Amazon Prime membership ($14.99 per month or $139 per year) not only provides fast delivery services but also offers online video streaming, music services, games, and monthly free e-book reading. For customers, they can spend the least money to get the most services and maximum value. Who would have thought an online shopping platform could provide its members with video streaming, e-books, music, games, and more? If customers separately subscribed to different service providers for video, music, etc., the total cost would obviously be much higher than Amazon's membership. This is also a case of working hard to charge customers less while providing more value.
Amazon has always been a relatively frugal company compared to Silicon Valley or other tech companies. Frugal might be a gentler way to put it—a more direct description would be a sweatshop, with news occasionally emerging about how Amazon uses technology to exploit warehouse workers. Amazon becoming a sweatshop is also because they desperately want to reduce costs to achieve the Amazon flywheel. Whether this is a good decision, or whether it's necessary to exploit employees to achieve the Amazon flywheel, are all worth further in-depth discussion. However, Amazon at least presented a new business model through its positioning and created a certain kind of success.
Reflection: Can my company or my career apply the Amazon flywheel? Or can I have a different flywheel?
In addition to Amazon's commitment to selling products cheaply, there's also an approach of committing to providing value and making customers willingly pay high prices. Migoo ultra-rich golden cheese strings are known as the Hermès of cheese strings. This product has been affirmed by gourmets I know. Those who want to taste Hermès-level flavor can try their cheese strings.