The Bezos Letters: 14 Principles to Grow Your Business Like Amazon by Steve Anderson
Amazon is the fastest company ever to reach $100 billion in sales and they didn’t reach that landmark by staying in their comfort zone. Risk taking is the key that unlocked the door to growth at Amazon, but those risks were (and are) intentional, calculated, and strategic. Thomas Edison believed, “I have not failed. I’ve just found 10,000 ways that won’t work.” and Amazon’s founder, Jeff Bezos, has always linked experimentation and failure with growth and success.
But “risk taking” can be costly (even disastrous) if you don’t know how to use it to your advantage. Fortunately, Bezos has provided every business owner a “hidden in plain sight” roadmap for how he grew Amazon through his Letter to Shareholders (or as he named them, shareowners) that he has written annually for the past 20 years.
For the first time, Technology and Risk expert Steve Anderson has analyzed and distilled these letters to reveal the key 14 Growth Principles that unlock the lessons, mindset, and steps Bezos has used to make Amazon the massive success it is today.
Now, business owners, leaders, CEOs, employees, and managers can apply these same principles to grow their business to be more efficient, productive, and successful–fast!
Way back in 1990s when the Internet was dubbed as the World Wide Wait by founder of Amazon himself, Bezos quit his day job and bootstrapped Amazon with $300,000 loan from his parents. Today Amazon dominates the global e-commerce and constantly leapfrogging in artificial intelligence with internet connected devices like Echo and Alexa. Amazon is also taking leads in dynamic invention and innovation forcing Microsoft and even Apple to catch up.
In The Bezos Letters, Steve Anderson explains 14 principles rooted in the exponential growth of Amazon over the decade. Whether you are in business for 10 minutes or 10 years, you can learn how Bezos grew his small online bookstore to the multi-billion business.
Bezos started Amazon with a glimmer of hope.
When Amazon was starting out, no one knew what the online bookstore was. In 1997, most people didn’t have Internet access at home. If they did, it was dial-up. 1997 was the year Bezos himself referred to the Internet as the World-Wide Wait. There was no such thing as cloud computing. Netscape was the browser of choice, and DVDs were just coming of age because live streaming was still 20 years in the future. Bezos said:
“The company was conceived in the spring of 1994. I came across a startling fact in the spring of 1994 that web usage was growing at 2300% a year. I have to keep in mind that human beings aren’t good at understanding exponential growth. It’s just not something we see in our everyday life. But things don’t grow this fast outside of petri dishes; it just doesn’t happen.
And when I saw this I said okay, what’s a business plan that might make sense in the context of that growth? I made a list of 20 different products that you might be able to sell online. I was looking for the first best product.
And I chose books for lots of different reasons. But one primary reason, and that is there are more items in the book space than there’re items in any other category, by far. There’re over 30 million different books worldwide in all languages. The number two product category in that regard is music, with about 300,000 active music CDs.
And when you have this huge catalogue of products, you can build something online that you just can’t build any other way. The largest physical bookstores, the largest superstores can only carry about 175,000 titles. There are only a few that large…”
Bezos moved from NY to Seattle for likely two main reasons.
That’s where Microsoft was headquartered, so there was a pool of exceptional programming talent. There were also two large book distribution centers nearby: Ingram and Baker & Taylor.
Bezos set safety nets to embrace failures.
Too many companies only stay afloat when everything goes well. If something goes wrong, cashflow slows down, money gets tight, and sacrifices must be made. To the point where if some business experiences a ‘hiccup’, they can be out of business almost just that fast.
Amazon builds failure into its budgets to give it the flexibility to allocate resources to many things they know will fail.
Bezos took risks with intentionality even if its counterintuitive.
Amazon Marketplace: The idea of putting a competitor’s product on Amazon’s unrivalled platform seemed outrageous to many.
Amazon Prime: Shipping was notoriously expensive without inflating the price enormously. Bezos offered free shipping with low prices.
Kindle: People thought eBooks wouldn’t sell well at least more than physical counterparts. Bezos took the risk with enticing features like movable highlights and cross-platform syncing.
AWS: AWS was originally designed to be internal OS for just Amazon. Bezos decided to open the platform to tether developers. No one else back then was providing SaaS and didn’t expect this of Amazon.
Bezos knew a few successes will more than make up for a thousand failures.
Amazon learns from and builds upon its failures to make the future attempts more likely to succeed. Amazon failed spectacularly with its Fire phone, but they took the lessons from their failure and used the insights when building Amazon Echo.
Creating a speech recognition system that could match Google or Apple was a complicated task – especially considering the huge head start those companies had with their smartphone ecosystem. But Amazon has now risen to the top of voice control with Echo and Alexa. One of the engineering marvels of Echo devices is the quality of far field voice recognition. Far field means you can literally stand ten to fifteen feet from the device, say the trigger word, and wake up the device to respond.
The two most successful Amazon’s failures
Dubbed Amazon Auctions, it was launched essentially to rival eBay’s platform. Despite several improvements, it just couldn’t compete with the industry incumbents. Sure, it did attract many sellers and buyers but Bezos himself said “didn’t work out very well.”
Many factors contributed to its failure, but one thing many agree on is consumers were uncomfortable bidding prices on Amazon. They expected fixed prices unlike eBay where shoppers come with a different mindset. The desire for price certainty was important for Amazon customers.
So, Amazon ditched the auction model and moved on to another experiment called zShops which was its second successful failure.
With zShops, third-party sellers could list their products using a unique landing page on Amazon’s site with a separate log-in and search engine. They were separate from Amazon and paid a small commission to Amazon. Again, customers didn’t like the additional steps required, and Amazon had to shut it down. But the idea of allowing third-parties to sell on the platform survived and thrived into Amazon Marketplace, a billion-dollar business.
Bezos bet little on big ideas.
Remember earlier when Bezos started Amazon when the odds are low. Despite the odds, the potential is enormous, which is why he bet on it. However, Bezos didn’t go all in, instead he started small, at least in relative terms.
He did the same again with free shipping. Amazon started by experimenting with free Super Saver Shipping on orders above $25. When the experiment was a success, they bet bigger with Amazon Prime. The more the idea paid off, the more Bezos invested into it such as adding streaming videos and other services over time.
When Bezos knows in advance something isn’t going to work, it’s not an experiment. To invent, you must experiment.
“I was packing boxes, on my hands and knees with somebody else in our next segment kneeling next to me. We’re packing and I said ‘You know we need knee pads. This is killing my knees.’ And this guy packing alongside me said, ‘We need packing tables.’” – Bezos
Bezos was both demanding and secretive when it comes to dynamic invention.
Competitive advantage is paramount to companies like Amazon, Apple, Google and Facebook. And that doesn’t happen when everyone knows what you’re working on.
Lab126 is the Skunkworks of Amazon. They develop hardware and consumer electronic devices, the first of which was kindle. Insiders called their experiment “Project A”, which was Kindle in 2007, “Project B” which was Fire phone, “Project D” was the Echo, to name a few.
Lab126 wasn’t the only place where Bezos demanded invention and innovation. Everyone at Amazon was expected to create new things (invent) and improve existing things (innovate). The innovation culture at Amazon is far from a lip service. Every amazon employee is allocated with necessary resources to implement their ideas (given the idea is a go).
Bezos started with the customer and worked backwards.
This approach of Bezos is also featured in Amazon Leadership Principle – Customer Obsession. Leaders pay attention to competitors, but they obsess with their customers.
Becoming a customer-obsessed business requires you to get into your customer’s heads.
Most companies in business today say they care about their customers. Look no further than the cliché “The customer is always right.” But the phrase itself leans towards the ‘reactive’ approach.
Amazon tried to figure out what the customers wanted before anyone else, using data that it garnered over millions of customer transactions. Here are the questions 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?
Amazon took a gamble on Echo while no one was asking for it.
Market research doesn’t help. If you had gone to a customer in 2013 and said ‘would you like a black, always-on cylinder in your kitchen about the size of a Pringles that you can talk to and ask questions, that also turns on your lights and plays music?’ It seems most likely they’d have looked at you strangely and said, “No, thank you.”
AWS was willing to cut its profits to save the customers money.
Amazon reduced its AWS prices 27 times over 7 years, while adding improvements to support and innovation tools to help customers be more efficient. AWS Trusted Advisor notifies the customers where opportunities exist to improve performance, enhance security or even save money. Customers indeed saved millions through the service, which was only getting started then.
Bezos made short term sacrifices over long term gains.
Businesses have a tough choice to make. They want to implement strategies that may take years to pay off, but Wall Street doesn’t react too kindly. When Apple announced they would end its practice of reporting quarterly sales figures for individual units, its shares dropped 6.6% on the same day. The same way Apple believes a 90-day performance for Macs and iPhones isn’t a proxy for underlying strength of its product lines, Amazon is willing to buck the trend, sacrificing this year’s profits to invest in the long-term customer loyalty and product opportunities that will create even bigger profits next year and year after that.
Bezos even implored potential investors to stay consistent with the company’s philosophy. As Bezos put it:
“… we want to share with you our fundamental management and decision-making approach so that you, our shareholders, may confirm that it is consistent with your investment philosophy”
Growth is the primary goal of Bezos and Amazon.
Right in the center of Amazon flywheel is growth. Six activities that turn the flywheel are:
- Greater selection and convenience
- Customer experience
- Traffic to its website
- Number of sellers
- Lower cost structure
- Lower prices
The sketch shows lower prices led to more customer visits. More landings increased the chances of sales. The increased volume of sales attracted more commission-paying third-party sellers. That allowed Amazon to get more out of fixed costs like fulfillment centers and IT infrastructure. The greater efficiency then enabled it to lower prices further. This positive feedback loop accelerates the flywheel leading to faster growth.
Amazon used Flywheel model to gain clarity and drive strategy.
It helps organizations understand what risks and opportunities to take and what to walk away from. Remember as you filter your decisions through your flywheel, focus on resources on doing things that turn your flywheel toward the goal of your business. You will gain momentum and grow like Amazon.
Bezos makes high-velocity decisions.
In today’s fast-paced economy, businesses don’t’ have the luxury of taking their time to make decisions, like they did even a few years ago. Either a company becomes paralyzed into making no decision or they rush into big decisions that expose them to unnecessary risk.
Bezos solves this by articulating two types of decisions:
- Type 1 – one-way doors with big consequences and no turning back (e.g. quitting your job without another job lining up, selling your company)
- Type 2 – two-way doors with little consequences and can be course corrected (e.g. starting a side business, introducing a new product, changing a pricing…)
Bezos knows most failures are not fatal and most decisions are not irreversible. As he put it:
“We don’t’ know all the answers, but here are some thoughts.
Bezos never use a one-size-fits-all decision-making.
Many decisions are reversible two-way doors. Those decisions can use a lightweight process. For those, so what if you’re wrong?
Bezos makes decisions with just enough information.
Second, most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases you’re probably being slow. Plus, either way, you need to be good at quickly recognizing and correcting bad decisions. If you’re good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure.
Bezos seeks commitment rather than agreement.
‘Disagree and commit’. This phrase will save you a lot of time. If you have conviction on a direction even though there’s no consensus, it’s helpful to say ‘Look, I know we disagree on this, but will you gamble with me on it? Disagree and commit?’
The key here is that not everyone has to agree for a decision to be made at Amazon. Bezos doesn’t require a unanimous vote. Instead he emphasizes commitment once a decision is made. It’s a philosophy they strive to have permeate every part of their culture.
Six-page narrative is the Amazon’s method of slowing down by speeding up.
At Amazon, type 1 decisions are not made on the fly. The six-page narrative process makes sure everyone is extremely well informed before the idea is given a go for testing and additional resources. The narrative forces the author to think things through and present their idea in a story format, which better engages the readers at the meeting.
When the narrative isn’t great, it’s not the writers’ ability to recognize the high standard. But instead a wrong expectation on scope. They mistakenly believe a high standard six-page narrative can be written in a day or two when I reality it might take a week or more. Great memos are written and re-written, shared with colleagues who are asked to improve the work, set a side for a couple of days and then edited again with a fresh mind. (As a side-note, by tradition at Amazon, author’s name never appears on the memos- the memo is from the whole team)”
Each meeting starts with a thirty-minute quiet time where everyone thoroughly reads the memo. From there, all attendees are asked to share their gut reactions – senior leaders typically speak last – and then delve into what might be missing, ask probing questions, and drill down into any potential issues that may arise.
Creating a six-page narrative
- Write the press release.
- Write the FAQs.
- Define user interaction (explain how it works).
- Write the manual (give instructions how it works).
- Answer these questions:
- Who is the customer?
- What is the customer problem or opportunity?
- What is the most important (singular) customer benefit?
- How do you know what the customer needs? (the origin of the project)
- What does the customer experience look like? (anticipate how the customer will react and respond)
Bezos made complexity simple.
Coined ‘Frustration-free Packaging’, the idea was for Amazon to work .with product manufacturers to create special ‘Amazon-only” packaging for items to be sold on Amazon. The packaging would need to be easy to open and recyclable. No twists. No scissors. No frustration. No tears. No blood.
Bezos promotes ownership at Amazon, whether they be employees, shareholders or partners.
Bezos realizes many investors are effectively short-term tenants, turning their portfolios so quickly that they’re just renting the stocks they temporarily own. He looks for potential investors with like-minded ownership mindset. When someone acts like the owner of something, they think of it differently and treat it more like their own. In 2002, Bezos started using the term ‘shareowners’ when referring to Amazon’s investors.
Amazon continue to focus on hiring and retaining versatile and talented employees and weight their compensation to stock options rather than cash. Bezos knows Amazon success will be largely affected by their ability to attract and retain a motivated employee base, each of whom must think like, and therefore must, be an owner.
Promoting ownership, the Amazon way
- Address people as owners
- Give employees stock in the company.
- Teach type-1 and type-2 decision-making.
- Create opportunity to invent and innovate.
- Encourage leadership.
- Give opportunity to ‘opt-out’ (Zappos way).
- Practice disagree and commit.
For Bezos and Amazon, it’s always Day 1.
The greatest challenge as the organizations grow is maintaining day 1 culture. Don’t take this the wrong way. The scale is good because it makes you robust. A big boxer can take a punch to the head, but you also want to dodge those punches. So, you’d like to be nimble; you want to be big and nimble. Bezos find and protect a lot of things, customer obsession is one of them, that date back to day 1.
When Amazon was just starting out, Bezos had to make every penny count. When the employees needed desks, Bezos relied he could make simple desks by adding legs to solid core doors. They sound a lot cheaper than shopping at Home Depot. And so, Bezos create the Amazon ‘Door Desk’.
While the Door Desk was a necessity in 1995, thousands of employees still use to this day (although it was refined over the years). The Door Desk pays tribute to and remind each employee it’s always Day 1 every time they sit at their desk.
“There’s so much stuff that has yet to be invented. There’s so much new that’s going to happen. People don’t have any idea yet how impactful the Internet is going to be and that this is still Day 1 in such a big way” – Bezos (1997)
At Day 1, there are few, if any, things are more important than customers.
Like employees living paycheck-to-paycheck, many businesses live customer-to-customer at the beginning. In the early days, some businesses are only one or two customers away from catastrophe. During the launch, Bezos knew there’s no way Amazon would grow without adding customers. They needed to add customers as well as earn repeat business from each of those customers to become the company they’re today.
Bezos isn’t afraid of bending the rules for exceptional service.
It’s ok at Amazon to deviate from policies and procedures when it’s the right thing to do for customers. Policies are intended to help guide decisions but not at the expense of the needs of the customer.
At Day 1, speed trumps perfection, passion trumps profits.
When your business is small, decisions are made usually fast. Somebody with authority is available to make a quick decision. Usually that person is the founder. It can be exhausting to maintain that speed and passion as the business grows. But it’s much more exhausting to lose your Day 1 mentality and slip into Day 2 with excruciating decline.
14 Amazon Leadership Principles
- Customer obsession
- Invent and simplify
- Are right, a lot
- Learn and be curious
- Hire and develop the best
- Insist on the highest standards
- Think big
- Bias for action
- Earn trust
- Dive deep
- Have backbone; disagree and commit
- Deliver results
Bezos and ‘Bar Raisers’ set the highest standards in job applicants.
If you think it’s expensive to hire a professional, wait until you hire an amateur.
- Need 10 people to assemble products? It will only happen as fast as the slowest contributor.
- Does attention to detail matter? You’ll be dragged down to correcting mistakes made by your least attentive member.
Bar raisers are a group of hand-picked people within Amazon who have demonstrated success at hiring people with very high standards and who have received specialized training. During the interview process (especially true with higher-ups), there’s at least one bar raiser present. Bar raisers have the veto power that no one can override. No one at Amazon is hired without a blessing from the bar raiser.
Ask yourself 3 questions before you hire anyone.
- Will I admire this person?
- Will this person raise the average level of effectiveness of the team?
- Along what dimension might this person be a superstar?
Interviewing Amazon way
Interviews at Amazon are deeply rooted in behavior-based questions which as about past stations or challenges the candidates have faced, how they handled them using Leadership Principles to guide the discussion.
Amazon avoid brain teasers (such as ‘How many windows are in Singapore?) as part of the Interview process because Bezos found them unreliable when it comes to predicting candidate’s success at the company. Here are some behavioral-based questions:
- Tell me about a time when you were faced with a problem that had several possible solutions. What was the problem and how did you determine the course of action? What was the outcome of that choice?
- When did you take a risk, make a mistake, or fail? How did you respond, and how did you grow from that experience?
- Describe a time you took the lead on a project.
- What did you do when you needed to motivate a group of individuals or promote collaboration on a project?
- How have you leveraged data to develop a strategy? (remember Amazon is a data-centric company)
Bezos uses anecdotal information (stories) to make sense of number.
Many businesses let the data and analytics mislead them about what’s going on in their business. The data they’re measuring may be accurate, but if they’re measuring the wrong thing, it’s effective the same as the inaccurate data.
A/B Testing is a standard way of determining what change will have the most positive impact on consumer behavior. It divides test subjects into two groups, gives one option to one group and another option to the other, then see which option performs better.
Bezos measures its financial performance with ‘free cash flow’ per share.
Most publicly traded companies focus on earnings, earnings per share and earnings growth rate. Not Bezos. The term free cash flow is the amount of cash flow a company has left over after paying fixed expense it needs to keep the doors open such as rent, necessary equipment, technology upgrades and keep current in its debt obligations. In Bezos words:
“People always accused us of selling dollar bills for 90 cents and said, look, anybody can do that and grow revenues. That’s not what we were doing. We always had positive gross margins. It’s a fixed-cost business. And so, what I could see from the internal metrics is that at a certain volume level, that we would cover our fixed costs, and the company would be profitable.