Have you ever truly considered what it is that makes Amazon such an unmitigated success story? After all, their roots were simply as an online bookstore, and yet within a span of two decades, Amazon has grown into an e-commerce juggernaut that has not only amplified its business’s success, it continues to increase it at an accelerated pace.
The core of Amazon’s success was based on a very particular strategy known as the ‘Amazon flywheel’ and referred to by Amazon itself as the ‘virtuous cycle.’ At the center of this strategy has since the company’s inception and to this day has been the customer. With the unalterable core of customer-centricity, Amazon has been able to turn the flywheel spawned in the mind of company head Jeff Bezos all those years ago to produce and accelerate their sales growth.
What Exactly Is A Flywheel Strategy?
By definition, a flywheel is a revolving wheel used in machines used to generate and increase the machine’s momentum. The flywheel is heavy and is therefore notoriously challenging for initiating its rotation, but once it begins to spin, its own momentum propels it to spin quicker. The faster spin lends increase stability to the machine within which the flywheel is operating. This means that once the flywheel is pushed to move, its momentum takes on a life of itself, as it generates even more speed as it spins.
Aside from perpetually picking up momentum, the flywheel also stores off excess energy for a later release, and when the momentum has been achieved the energy is released. Once the rate of the spinning flywheel reaches a particular level of motion, it becomes nearly impossible to stop.
How Amazon Leveraged The Flywheel Model
As mentioned earlier, Amazon’s application of the flywheel strategy is rooted in delivering what is best for the customers, and letting any actions they took be guided by the central question of “how is this action best for our customers?” Amazon triggered the spin of their flywheel in its early days by keeping the prices of their products’ prices low. Lower prices appealed to more and more customers began showing up.
Amazon further helped the flywheel spin by allowing third-party sellers, who paid Amazon commission on their sales, to enter the game and sell products through the Amazon marketplace. This influx of third-party sellers afforded Amazon the ability to finance the fixed costs and overhead of running the platform, and allowed them to invest in more and higher quality servers on which to host their platform and establish fulfillment centers in more and more locations around the world. This brought the process a greater level of efficiency, which in turn made Amazon more money. Instead of pocketing it, however, Amazon reinvested the profits into the platform, which drove the prices of the products they sold even further down, which then spun the flywheel again through repeating but more accelerated turns.
In essence, Amazon’s flywheel idea became centered around the concept of price value. As prices got lower and more competitive, more third-party sellers were attracted to sell on Amazon. More third-party sellers meant a greater product selection, which drew consumers’ attention away from other marketplaces and drove them to Amazon, increasing the conversion, all while growing and enriching the customer experience. Among the beneficial traits of customer experience was the re-lowering of product prices, which drew more customers to Amazon.
Instead of distributing the earnings as dividends, Amazon passed the gains on to the customers in the form of even lower prices, while sustaining short-term operations through the money retained. The extra funds were also invested in helpful and popular initiatives like Amazon Prime.
All of these factors combine to feed one another and drive growth. The growth of the platform begins the cycle again by lowering prices and investing in Amazon’s improvements, which drives down prices and enhances the customer experience.
Key Role Of Third-Party Sellers
By initially bringing third-party sellers onto the platform, Amazon was able to offer products through their marketplace that it did not already possess, but there was a demand for. This enriched the vastness of offerings on the Amazon platform, making it more appealing to shoppers to check out what products Amazon had to offer.
The increased selection of choices increases supply, creating not just competition but variety. This allows brands to sell similar products to distinguish themselves on the platform and provide a greater variety to customers.
Challenges of Amazon’s Flywheel Strategy For Sellers
It has been established that the customer is the core of Amazon’s flywheel strategy, but where does that leave the sellers? As it turns out, the flywheel model, while highly effective for Amazon and its consumers, presents some interesting challenges to the sellers.
First, because most merchants who sell on Amazon sell their products in other places (other marketplaces, their own websites, etc.) the perpetual lowering prices to stay ahead of competition begin to undercut the prices that merchants can sell a product for. If the price something is sold for is $50, but with so many options potentially selling the same product for $40, the merchant would have to lower their prices to at least $40 to stay competitive on Amazon. They would feel consumer backlash for selling for $40 through one medium, and for $50 through others, forcing them to lower their prices to $40 across the board. This essentially undercuts their profits, and while it could increase sales, it still takes any mark-up prices and chops them down.
Secondly, a brand would not be the only one selling their product. Other sellers could end up selling their product on Amazon as well, and do so without authorization. In that sense, they are taking money away from the merchant and siphoning potential sales.
Lastly, customers purchasing through Amazon could be under the impression that they are making purchases from a reputable and authorized source but may receive a product that is ruined, deficient, or incapable of performing up to expected standards. Not knowing the difference in the purchase, the consumer’s wrath would be turned to the brand name, and end up hurting the company that puts their name behind this product.
The Marketplace Flywheel
The above pitfalls for sellers might be hard to overcome or to control with the Amazon Flywheel, but there is actually a way to overcome having your brand devalued and that is by utilizing the ‘Marketplace Flywheel.’ This is a ‘flywheel’ method similar to the Amazon one in its core premise but equipped with more market-wide seller protections.
There are three core pillars to the Marketplace Flywheel method that set it apart and they include channel governance, branding optimization, and growth based advertising. These will allow you to gain a greater scope of control over your brand while boosting your sales figures.
This is an important step by which a brand secures legal protections around its trademarks and develops policies and procedures to manage the distribution of its products on every medium through which the brand’s products are sold, including Amazon. It is also important to realign sales goals, incentives, and responsibilities to not focus primarily on maximizing sales but protecting the longevity of the brand across all sales channels. Not only does this set of actions ensure that the brand is the ‘seller of record’, but it also leads to consistent pricing of the products across all sales channels.
It is very important to have the presentations of your products to be reflective of how you wish to be viewed as a brand. Resellers will not care nearly as much about your message as you will, so when marketing your product on Amazon, and across all of your sales channels, it is vital to align your product messaging and display the most accurate information, clearest images, exact titles, accurately associated videos, and text to show your belief and commitment to the brand. Doing so will not only make you consistent throughout your e-commerce spaces but will also increase your chances of showing at the top of product search results. In turn, that increases the chances that the customer makes the product purchase from you.
Growth Based Advertising
The growth-based advertising strategy refers to drawing the maximum possible attention from Amazon customers towards your brand. This entails extensive preparatory research and discovery testing of optimal keywords that drive traffic to you more than to your competitors. On Amazon, once you achieve being the Buy Box winner (the box that appears in the primary purchasing slot on the Amazon product window, customers seeking out that product will primarily purchase from you. This is not an easy feat by any means, but as you apply more growth based advertising strategies to your products, you will ascend there.
From here, you become more attractive to resellers as well, and they will try to capitalize on your success by reselling your brand. At this point, the marketplace flywheel has turned, and you begin the process from the beginning, but now you are in a more dominant position than when you started.