The Amazon Flywheel

The ‘Amazon flywheel’—a model first sketched out by Jeff Bezos 20 years ago—is key to Amazon’s success. It starts from the principle that customer experience is the most critical aspect, and works back from there.  

To provide customers with a great experience, you need competitive prices and vast selection. For low prices, you need a low-cost structure and for a varied selection you need lots of sellers—which in turn means you will require abundant traffic. 

Delivered together, this generates the growth which keeps the flywheel turning. 

But success for brand owners hinges on incrementality. The massive number of shoppers on the Amazon platform certainly makes it attractive, but before deciding whether (and how) to jump in, brands must focus on the quality of the sales they will generate. Will the sales be truly incremental, or simply shifted from other channels? Will the pricing and transparency that Amazon brings impact their ability to earn margins in other channels?

4 levers to increment sales while protecting business

To deliver incremental sales while protecting existing business, brand owners stand to benefit from focusing on four levers:

1. Leveraging their compete portfolio of brands to decide on the right product mix for Amazon. These offerings can include niche brands that are not widely listed elsewhere and which will be less affected by Amazon’s price matching algorithm;

2. Utilising product variants: unique pack sizes (or colours, or flavours) to deliver better value without triggering pricing responses from other retailers. Consider large packs that are unattractive to physical retailers but more practical for delivery can be useful here;

3. Selecting the right channel. Amazon offers a range of different channel (Figure 2) which serve different needs;

4. Wielding Amazon as a platform for innovation with mass reach and ease of purchase from day one of launch.

The Amazon Algorithm

Amazon’s pricing algorithms and aggressive trading approach represent significant risks to be managed.

Amazon’s pricing algorithms seek to make sure that no product, sold directly by Amazon, is more expensive than the lowest price anywhere across online retail, including promotional prices. This is great for consumers scouring for the cheapest price available anywhere online, but not so great if you are a brand owner looking to manage margin tactically throughout the year through a series of promotional and non-promotional periods.

If your product is on promotion somewhere, Amazon’s algorithm will pick this up and this will become the maximum price displayed to shoppers on the Amazon site. This sparks a difficult conversation for an account manager, who must explain to existing customers how the promotional price that only runs for a limited number of periods, is constantly available on Amazon.

Amazon takes a long view on pricing economics. Ensuring that products sold directly by Amazon are the best value available online keeps the flywheel turning. Amazon accepts that many of the sales that come from price-matched products may be loss-making in the short term. This becomes exaggerated when Amazon enters a new category because the cost prices they receive from brand manufacturers in that segment are likely to be higher than those offered to established customers. This is the price of establishing a position in a new category.

However, brands need to think long term. Once a category has been developed by Amazon, with the sales of the associated brands becoming significant, operating within Amazon’s framework becomes more challenging due to significant investments in price improvements and marketing spend. Brands are left with the choice of walking away from a now with significant volume, or accepting the high levels of investment required by Amazon.

Some brands opt to walk away. PopSockets—a popular mobile phone accessory brand—is a notable example but most find it challenging.

To manage this risk, brands must to plan ahead—and have a clear vision, reinforced by best practices, if they’re to engage with Amazon in the first place.

Choosing how to engage

Amazon’s flexible model makes it hard for brand owners to stop their products from being sold by someone else within the platform. Beyond a small group of mostly luxury brands, it doesn’t make much sense to do so. This means that brand owners should choose from three broadly distinct approaches.