Build your business on your fixed costs

Build your business on your fixed costs

Jeff Bezos letter to shareholders 2001 6/22 

Takeaway

Companies driven by technology have an incredible advantage because much of their value hinges on fixed costs.

If you want to provide the best possible customer experience and the lowest possible prices in your industry, it’s only possible if you can make much of your customer experience expenses fixed.

Challenge

Traditionally, you have a trade-off between customer experience and price. Sell your products at a higher price and you reap enough money to hire and train more people to provide a better experience. Sell at a lower price and the customer experience will take a hit.

Achieving both low prices and a great customer experience would seem to be a contradiction.

Solution

To achieve both low prices and a great customer experience, harness the power of fixed costs.

Amazon turned their customer experience — their recommendations engine, personalization, etc. — into a fixed cost. It is based on technology that it built and now only pay to maintain, which means it doesn’t get (much) more expensive over time.

That allows the cost of running Amazon to actually shrink over time as a percentage of the revenue that Amazon makes.

Remaining disciplined while keeping its operating cash flow steady was one of the tactics that brought Amazon through the dot-com bust in 2000. Not only was the company continuing to generate sales, but it didn’t spend much on its platform. Being relatively low-cost to begin with, the platform was able to continue functioning on a low budget. While competitors folded, Amazon survived, took a leading market position, and was able to invent and grow.

Jeff Bezos has been writing a letter to shareholders since 1997 and looking at all if them gives an insight to the organisation and a masterclass in leadership. This is a series of short blogs  that gives you a snap shot / key takes outs of each letter, along with links to them all.

“One of our most exciting peculiarities is poorly understood. People see that we’re determined to offer both world-leading customer experience and the lowest possible prices, but to some this dual goal seems paradoxical if not downright quixotic. Traditional stores face a time-tested tradeoff between offering high-touch customer experience on the one hand and the lowest possible prices on the other. How can Amazon.com be trying to do both?”

link to all letters to shareholders

• 1997: Bring on shareholders who align with your values

Jeff Bezos Letter to Shareholders 1997

• 1998: Stay terrified of your customers

Jeff Bezos Letter to Shareholders 1998

• 1999: Build on top of infrastructure that’s improving on its own

Jeff Bezos Letter to Shareholders 1999

• 2000: In lean times, build a cash moat

Jeff Bezos Letter to Shareholders 2000

• 2001: Measure your company by your free cash flow

Jeff Bezos Letter to Shareholders 2001

• 2002: Build your business on your fixed costs

Jeff Bezos Letter to Shareholders 2002

• 2003: Long-term thinking is rooted in ownership

Jeff Bezos Letter to Shareholders 2003

• 2004: Free cash flow enables more innovation

Jeff Bezos Letter to Shareholders 2004

• 2005: Don’t get fixated on short-term numbers

Jeff Bezos Letter to Shareholders 2005

• 2006: Nurture your seedlings to build big lines of business

Jeff Bezos Letter to Shareholders 2006

• 2007: Missionaries build better products

Jeff Bezos Letter to Shareholders 2007

• 2008: Work backwards from customer needs to know what to build next

Jeff Bezos Letter to Shareholders 2008

• 2009: Focus on inputs — the outputs will take care of themselves

Jeff Bezos Letter to Shareholders 2009

• 2010: R&D should pervade every department

Jeff Bezos Letter to Shareholders 2010

• 2011: Self-service platforms unlock innovation

Jeff Bezos Letter to Shareholders 2011

• 2012: Surprise and delight your customers to build long-term trust

Jeff Bezos Letter to Shareholders 2012

• 2013: Decentralize decision-making to generate innovation

Jeff Bezos Letter to Shareholders 2013

• 2014: Bet on ideas that have unlimited upside

Jeff Bezos Letter to Shareholders 2014

• 2015: Don’t deliberate over easily reversible decisions

Jeff Bezos Letter to Shareholders 2015

• 2016: Move fast and focus on outcomes

Jeff Bezos Letter to Shareholders 2016

• 2017: Build high standards into company culture

Jeff Bezos Letter to Shareholders 2017

• 2018: Wandering is an essential counterbalance to efficiency

Jeff Bezos Letter to Shareholders 2018