Build your business on your fixed costs
Jeff Bezos letter to shareholders 2001 6/22
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.
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.
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
- 1998: Stay terrified of your customers
- 1999: Build on top of infrastructure that’s improving on its own
- 2000: In lean times, build a cash moat
- 2001: Measure your company by your free cash flow
- 2002: Build your business on your fixed costs
- 2003: Long-term thinking is rooted in ownership
- 2004: Free cash flow enables more innovation
- 2005: Don’t get fixated on short-term numbers
- 2006: Nurture your seedlings to build big lines of business
- 2007: Missionaries build better products
- 2008: Work backwards from customer needs to know what to build next
- 2009: Focus on inputs — the outputs will take care of themselves
- 2010: R&D should pervade every department
- 2011: Self-service platforms unlock innovation
- 2012: Surprise and delight your customers to build long-term trust
- 2013: Decentralize decision-making to generate innovation
- 2014: Bet on ideas that have unlimited upside
- 2015: Don’t deliberate over easily reversible decisions
- 2016: Move fast and focus on outcomes
- 2017: Build high standards into company culture
- 2018: Wandering is an essential counterbalance to efficiency