How do you develop 7 points of margin while building a 70% cost advantage on your competitors?
Compounding.
Henry Ellenbogen (@henryellenbogen) from Durable Capital was an early investor in Amazon. He flew out to Seattle twice a year for lunch with Bezos. And on the recent @investlikebest podcast with @patrick_oshag, he made an incredible point about Amazon’s strategy. I was so shocked by the numbers I rewound the segment four times.
Amazon lowered its cost to deliver an order by 3-5% per year, for twenty years straight.
Henry also made the point that most of Amazon’s competitors delivery costs increased by 3-5% annually over that time period and at best, stayed flat. The above chart shows what that looks like.
Gemini said a reasonable estimate of Amazon’s fulfillment and shipping costs per order was $14. The green line is Amazon decreasing 3% annually. The red line is the next best competitor staying flat and the blue line is most competitors increasing 3% per year.
After 20 years, Amazon’s efforts resulted in a cost advantage of 70% against most of their competitors. Their investments in machine learning, tech, robotics and physical distribution capabilities created a massive advantage against the market. Henry made the additional point that by the time competitors realized what Amazon was doing, it was nearly too late. Only Wal-Mart and Costco had the scale and capability to start their own efforts while everyone else was left hopelessly behind.
Whether $14 per order is the right starting point and the actual annual reductions were 3% or 5% is besides the point. In a prior post I laid out that Amazon created a flywheel based on lower prices, vast selection and fast delivery. Henry’s anecdote brought to life how hugely impactful that relentless focus on reducing costs could be.
Amazon built 7 points of margin for themselves while creating a cost advantage in fulfillment and delivery to bludgeon competitors. Reduce costs, lower prices, win more customers. “Your margin is my opportunity.”
The lesson for all brand leaders is compounding advantages over time brings success. The opportunities are all around you.
Make your inventory buying 3% better every year.
Reduce OpEx as a percentage of Net Sales 3% per year.
Increase Contribution Profit per returning customer by 3% every year.
Decide on what makes your brand unique for customers, develop the metrics that measure that advantage, focus on improving those metrics just a few percentage points every year and ride that building wave of compounding to success and wealth!
Link to Invest Like the Best podcast with Henry Ellenbogen
Iya Man Versus Machine - Colossus