The Bezos Letters
BY STEVE ANDERSON
Have you ever wondered how Amazon managed to grow from the first online bookstore to a global technology leader in just 20 years?
Risk and growth expert Steve Anderson along with author and director Karen Anderson identify specific Cycles of Growth and 14 “Growth Principles” based on patterns they observed within shareholder letters written by Jeff Bezos between 1997 and 2018.
Learn how these same growth principles can be applied to any business and help you get into the same mindset that made Amazon a trillion-dollar company.
TOP 20 INSIGHTS
Leaders should see business risk as an investment rather than something to be avoided. Bezos often takes risks based on what he observes to be future opportunities rather than a sure bet, such as emerging technologies.
Take advantage of existing infrastructures to facilitate growth. Amazon would not have been able to offer fast, two-day shipping if FedEx hadn't already led the way with an efficient delivery network decades before.
Utilize A/B testing and invent on behalf of the customer so that you alway drive your industry forward. This is a low-risk way to test new ideas. You may find that you know what customers want before they do.
Identify what your company is known for, then experiment with advances in that marketplace. For example, this is how Amazon attracted authors to its Amazon Publishing platform – the company paid royalties monthly, rather just twice a year (which was a common practice at the time).
Companies can repeat a series of growth cycles: Test (Experiment, learn from mistakes and maintain a culture of innovation), Build (Use long-term thinking and stay true to core principles), Accelerate (Streamline, make quick decisions, utilize technology and promote ownership within the company) and Scale (Do it right and do it consistently). This will help to not only achieve, but continue growth.
Encourage “successful failure” within the company. Most businesses view failure as a risk to be avoided. Bezos encourages employees to try new things and turn any failures into valuable lessons. Amazon lost $178 million on its failed Fire Phone, but used what it learned to launch the Kindle.
Bet on big ideas, but start small. Free shipping for orders over $25 encouraged Amazon customers to fill up their carts with multiple items. When that proved successful, Amazon Prime was launched on the back of lessons learned.
No one knows their job better than a person who does it every day. Inspire each level of the company to experiment with new, faster or easier ways to do the work, then reward success. If an experiment fails, have the employee evaluate what can be learned rather than punish them for failure.
Obsess over customers. This might sound obvious, but your customers are your fuel for growth; not competitors, overhead costs or how many locations you have. As Amazon says, “Leaders start with the customer and work backwards.”
Apply long-term thinking to every facet of your business. Even though Bezos originally came from the world of Wall Street, he made investment decisions for Amazon that were based on “long-term market leadership considerations” rather than short-term Wall Street reactions.
Elements of your business should work as cogs on a wheel – each adding momentum to your central goal or “Flywheel.” Amazon's flywheel has growth at the center of it and each element from customer experience to higher selection turns the wheel. With enough momentum, the wheel begins to turn itself.
Meaningful growth is stymied by poor decision-making. Amazon teaches its leaders to distinguish between major, business-changing decisions and more flexible ones so that time is not wasted on unnecessarily long research or debate. Major decisions at Amazon require an extensive, six-page memo so that informed decisions happen quickly. This memo can also be used as a debrief should the idea fail.
Make complexity simple – identify and eliminate pain points for the customer. One example of this is Amazon's “frustration-free” packaging, which offers incentives to manufacturers that eliminate complicated elements designed for in-store retail. Technology allows us to rethink many established methods that can be improved upon.
Be intentional when you use technology to grow your business. Stay on the cutting edge, adopt or invent new technologies. Amazon created Web Services to power its own business and then turned it into a revenue stream.
Encourage everyone in the company from the janitor to the CEO to think like an owner. It's much easier to think long-term and consider risks when you are invested. That's why Amazon gives stock to all its employees and calls its shareholders “shareowners.”
To maintain your culture, focus on personal leadership as well as constant and continuous growth. Reconnect with or reinforce that entrepreneurial spirit and encourage it in all levels of the business.
No matter how large your company becomes, focus on high standards, raise the bar and don’t allow yourself to become complicit. Amazon rewards its employees and gives preferential treatment to third-party merchants who consistently strive for the best.
Measure what matters, question what's measured and trust your gut. Ensure that you gather data on the most useful information and upon review, trust your instincts. Concentrate your data gathering on information that drives your business' core values. In this case of Amazon, that is always customer experience.
Believe it's always day one of your business. As soon as you no longer push hard to be the best, your growth stops. To maintain the habits of an entrepreneur, stay up to date on trends, competition and consumer habits and take advantage of emerging technologies.
Adopt and maintain a risk and growth mindset. Sometimes it is riskier for a business not to take enough risks. Amazon took a risk when it allowed third-party merchants, meaning competitors to sell on its platform. As of 2018, third-party sales accounted for 58% of physical gross merchandise sold on Amazon.
Right out of the gate, Bezos identified growth as the most important focus for the company. Ever since, this decision has provided Amazon leaders with a compass that guides all strategy. Inside his annual letters to shareholders, Bezos left a trail of innovative mindsets, leadership techniques and company priorities that allowed Amazon to become the trillion-dollar behemoth it is today. Take advantage of these growth principles and help your business discover and implement new avenues of meaningful growth.
ENCOURAGE “SUCCESSFUL FAILURE”
Some of Amazon's biggest achievements were made possible by its most “successful” failures. While many business leaders shy away from risk, Bezos encourages it at all levels of his company with one stipulation: you must learn from failures.
Amazon Auctions, Bezos' answer to eBay, taught him that customers expected to pay a low, fixed price on Amazon but had a different mindset when bidding on eBay that didn't translate. The failed zShops proved too complicated for third-party sellers and customers but later evolved into the wildly successful Amazon Marketplace.
The Fire Phone was created to give AT&T customers exclusive mobile access to Amazon – something we now take for granted. The failed idea cost Amazon $178 million dollars in losses. But Amazon's teams took what they learned from Fire Phone and put it into Alexa, which continues to yield billions.
BET ON BIG IDEAS
When Bezos launched Amazon, no one knew what an online bookstore was and most consumers didn't have internet in their homes. The company, itself, was a bet on big ideas, but that tradition continues to this day.
In 2002, shipping costs prevented many customers from purchasing online. Super Saver Shipping was an experiment to see if free, albeit slow, shipping for orders over $25 would encourage more purchases. It was such a success that the idea evolved into Amazon Prime.
So bet on big ideas, but start slow. “Super saver” shipping was a way to test different features and get to the root of what customers wanted before asking them to pay upfront for free shipping. The same goes for infrastructure. Amazon Web Services began as an internal infrastructure for the company's own use, which could be privately tested before offering it as a service to the world.
PRACTICE DYNAMIC INVENTION AND INNOVATION
In a 2018 interview, Bezos relayed a story about packing boxes on his hands and knees. When he told his associate they needed knee pads, the man replied that they needed packing tables. And he was right.
Have you ever made a suggestion at work about how to make your job more efficient, only to have it shot down or worse, given an insincere pat on the head never to hear about it again? Bezos encourages experimentation at all levels of Amazon and in every department. In fact, invention is a part of each person's job description.
Everyone is expected to try new things, ask questions, and look at processes differently from their first day on the job. Invention and innovation are part of Amazon's core growth principles. It allows the company to identify its most inventive team members, empowers employees to make their own jobs better and keeps the company moving forward.
OBSESS OVER CUSTOMERS
Being customer-obsessed means to be proactive rather than reactive. Instead of saying, “the customer is always right,” which tells employees to defer to the customer whenever there is a problem, Amazon says to be “customer-obsessed,” which translates to solution-based planning. That's why customer service agents are given the authorization to solve many issues without supervisor approval.
Many businesses spend too much time thinking about how to improve existing features rather than market new ones. Think like a customer, then work your way backward.
Questions that Amazon always asks:
Who is the customer?
What is the customer problem or opportunity?
What is the most important customer benefit (singular)?
How do you know what the customer needs?
What does the customer experience look like?
APPLY LONG-TERM THINKING
Long-term thinking allows businesses to create a legacy for their future employees. Anderson calls this “being a good ancestor to your business' future owners and employees.”
Bezos is always thinking about the future. He defies the quarterly earnings reports and instead focuses on long-term value propositions. This mindset helped Amazon to be one of the few companies that survived the dot-com bust and set the example for how Apple presents its earnings.
From the very first shareholder letter, Bezos emphasized that long-term growth would remain at the core of Amazon's culture. If you could go back to 1997 and tell your past self what commerce was like, it would sound like science fiction. Imagine where your business will be in five, 10, even 100 years. Then make plans now so that you are on the cutting edge.
UNDERSTAND YOUR “FLYWHEEL”
A flywheel is a heavy wheel that requires a large amount of effort to push. Once that wheel gains momentum, however, it begins to turn itself. This analogy for business was coined by Good to Great author Jim Collins. Shortly before the book was published in 2001, he helped Bezos understand Amazon's flywheel.
Your company's primary goal is identified as the center of the flywheel. In Amazon's case, that is growth. Activities on the outside of the flywheel are designed to turn it. It doesn't matter where you apply pressure to the flywheel or where you start; you just have to identify those activities and improve them.
The “cogs” on Amazon's flywheel add momentum to one another, allowing the company to grow. For example, Prime offers lower prices, which attracts more traffic, which attracts merchants to sell on the site, which increases the product selection, which improves the customer experience, which allows Amazon to grow and maintain a lower cost structure. And the wheel keeps turning.
GENERATE HIGH-VELOCITY DECISIONS
No business can stay on the cutting edge or achieve meaningful growth if leaders spend all their time debating and procrastinating choices.
Anderson identifies two types of decisions: H3
Type 1: decisions that hold major consequences and there's no turning back, meaning acquisition or selling the company (What you are doing).
Type 2: decisions that can be changed or reversed, meaning new procedures or pricing structures (How you are doing it).
Amazon can grow as fast as it does because all 60,000 employees are given the ability to make swift Type 2 decisions that will not make or break the company. Employees at Amazon are encouraged to take risks, come up with new ideas and accept small failures.
Bezos advises that you make decisions when you have about 70% of the information you wish you had. Otherwise, your decision-making can be slowed down. Quickly recognize and correct bad decisions. If there is no consensus on an idea, you can ask the other parties to “disagree and commit” or make the choice to do so yourself.
MAKE COMPLEXITY SIMPLE
Books have not changed much since their inception. There is nothing inherently wrong with the traditional book design, but Bezos knew that the internet could make finding and reading them easier than ever. With the introduction of Amazon Kindle, book lovers were given access to more than 110,000 books, blogs, magazines and newspapers at the press of a button. That number is now in the millions.
Traditional packaging, for example, was designed for brick-and-mortar retail. They advertise the product on a shelf and protect it during shipping. The result, however, is a mess of thick plastic and twist ties. In 2008, Amazon worked with product manufacturers to simplify packaging. Now, customers have a choice of packaging that is traditional or “Frustration-Free.”
Take a look at your industry and observe which elements continue to be used simply because “that's the way it's always been done.” Chances are, technology has advanced in a way that can disrupt your industry and you could be the first to do it.
ACCELERATE TIME WITH TECHNOLOGY
Intentional growth allows companies to take control and scale without the pressure of being left behind. The best way to do this is to identify exponential technologies (new but rapidly growing) that will help your business grow in the long term. Bezos and his team identified cloud computing as a technology that could help Amazon scale and manage its data in a secure environment. The company's fulfillment centers use technology that can tell an employee where a product is anywhere in the storage area. This allows Amazon to store 25% more inventory in the same space as traditional warehouses.
Ownership is a mindset. In a 2003 letter to shareholders, Bezos related a story in which his friends rented their house to tenants who nailed a Christmas tree directly to the hardwood floor. “No owner would be so short-sighted,” he added.
Bezos compared the tenant mentality to many investors who turn their portfolios so quickly that they are “just renting the stocks that they temporarily own.” Amazon's leader wants everyone involved in the company from drivers to investors to think like owners. Employee compensation at Amazon has traditionally been tied into stock in the company and beginning in 2002, Bezos began referring to shareholders as “shareowners.”
Amazon promotes ownership by encouraging invention and decision-making so that everyone in the company becomes personally invested in the outcome. In addition, the company offers employees money to quit every year, ranging from $2,000-$5,000 depending on length of employment. First implemented at Zappos, Amazon adopted the practice to encourage employees to stop and think about what they really want. That way, the company only keeps those who want to be there, and employees have the opportunity to make a change for the better, if that's the case.
MAINTAIN YOUR CULTURE
Bezos admits that maintaining a company culture becomes more difficult as it grows. Bureaucracy stifles creativity and causes employees to lose sight of what's important. The solution, he said, during a 2018 Forum on Leadership, is to teach everyone how to be a leader and make swift decisions.
Amazon's 14 Leadership Principles are:
Invent and Simplify
Are Right, a Lot (Leaders should have strong judgment and good instincts)
Learn and Be Curious
Hire and Develop the Best
Insist on the Highest Standards
Bias for Action
Have Backbone, Disagree, and Commit (Respectfully challenge decisions when you agree. Do not compromise for the sake of social cohesion. If you still disagree, commit wholly nonetheless.)
FOCUS ON HIGH STANDARDS
Amazon purposely makes it difficult to work there. Bezos says, “You can work long, hard, or smart, but you can't choose two out of three.” Employees are encouraged to only hire those they would admire. This keeps the bar high for performance and expectations.
Third-party merchants and delivery partners must also adhere to strict standards. In 2018, Amazon invited people to start their own businesses. The company maintains strict guidelines for eligibility, however, each one echoing Amazon's own internal principles.
If your customer service is inconsistent, you will never be able to scale. Begin by evaluating the customer experience you want to achieve, then explore ways to improve it. That could be through better quality materials, different manufacturers, new procedures or technology.
MEASURE WHAT MATTERS, QUESTION WHAT'S MEASURED AND TRUST YOUR GUT
Data drives everything at Amazon. The company is constantly testing different ways to improve the customer experience: from allowing customers to answer questions about a product to suggest other things to buy.
Use this A/B testing technique to divide test subjects into two groups, give one option to one group, and another option to the second. Then, measure which option performs better. Amazon has its own internal experimentation platform, called “Weblab” which it uses to evaluate improvements. The company rewards those who view this data and identify new ways to improve the customer experience.
When you question what has been measured, you make sure that the appropriate data is being looked at. For example, Bezos measures free cash flow per share instead of earnings to illustrate the company's financial health.
Amazon took a huge financial hit when the internet bubble burst. The company's stock fell from $113 to $6. But unlike other companies that folded during that time, Amazon had already generated the income it needed to carry on, so additional funding wasn't needed. The data would say that Amazon was not a healthy company, but the truth was far different.
At the end of the day, leaders need to trust their gut. Anderson says that there will always be tension between data and gut instincts, but you always have to have both.
BELIEVE IT'S ALWAYS “DAY 1”
Every year, Bezos refers back to his original 1997 letter to shareholders. In this way, he maintains “Day 1” as a concept, not a date. When a business first opens, few things are more important than being the best and satisfying the customer. As soon as you lose that mindset, Bezos warns, the company dies.
As Bezos wrote in his 2016 letter: “Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. That is why it is always Day 1.”
The idea of it always being “Day One” of your business is that leaders should not take anything for granted. “Day One” business owners are aware of the latest trends, what their competitors are doing, and consistently look for ways to provide the best customer service or product. You don't need a million dollars to disrupt your industry. All you need is a risk and growth mindset. And never stop thinking like a start-up.