Amazon’s "secret sauce" was drawn on a napkin in 2001 when Jeff Bezos sketched a diagram of Amazon’s flywheel.
Bezos had two critical insights that enabled him to conceive Amazon’s flywheel.
- Amazon could know its customers at a depth unachievable by traditional retailers.
- Cash flow, not profit was the objective.
I suspect many brand leaders either don’t know their flywheel or are focused on the wrong one.
The internet gave Bezos one massive advantage over his competition. He could understand what his customers wanted better than anyone.
This customer understanding led to a conviction that three things would always remain true. Customers will always want:
- Low Prices
- Vast Selection
- Fast Delivery
Doing any or all of these three delivers a Great Customer Experience which in turn drives repeat buying and new customers i.e. More Customers.
More Customers obviously drives sales and cash. But it also attracts Sellers who in turn increase Selection.
More Customers also increase data and insights allowing deeper insights into more customers.
The Amazon flywheel is spinning. Bezos then found a hidden gear to his flywheel.
"Our ultimate financial measure, and the one we most want to drive over the long term, is free cash flow per share."
Instead of pocketing the margins from the increased sales, Amazon would focus on maximizing free cash flow in order to use that cash to build the infrastructure of fulfillment centers and tech to lower prices, increase selection and speed delivery.
“Your margin is my opportunity” should be understood in this light. He used his margin to spin his flywheel faster.
It sounds so simple when abstracted.
- The internet enables a data rich direct connection with customers
- That enables Amazon to understand what customers really want
- By focusing relentlessly on making customers happy, Amazon gets more customers and sales
- Instead of focusing on profits, Amazon focuses on free cash flow
- Free cash flow is invested in giving customers more of what they want
For the last decade, many DTC brands thought they were building a flywheel. In reality, they were just renting one.
Pay Meta for traffic -> Get sales -> Use revenue to buy more Meta traffic.
The problem is this flywheel is incredibly cash intensive to cycle. Worse, it suffers from reverse economies of scale: as you scale, you exhaust your core audiences, and your CAC goes up, not down.
The Amazon flywheel is highly stealable. The only thing you have to figure out are what you deliver to customers that they can’t get elsewhere. You aren’t going to beat Amazon on low prices, vast selection and fast delivery.
But remember, the promise of DTC was never arbitraging ad spend. It was about knowing your customer and possessing the ability to directly communicate with them. So, in addition to all the data analytics, talk to your customers! Come up with your one, two or three unique values.
The deeper your understanding of what your customers really want, the better your inventory planning, the better your product development and the better your marketing and advertising. You sell more product at full price, you sell products faster and you buy the right amounts of inventory and avoid tying up too much capital. All of which increases your free cash flow generation enabling you spin the flywheel faster. Most importantly, you build your customer base which is your most valuable asset and by doing that, you build a valuable brand.