Jeff Bezos: 10 Core Ideas
Jeff Bezos is undoubtedly one of the most successful entrepreneurs of all time. We have read all of his Amazon shareholder letters, distilling more than 50,000 words into what we consider to be Jeff's 10 Core Ideas.
1. Scaled Economies Shared
A concept that Jeff learned from Walmart's Sam Walton and Costcos's Jim Sinegal, which became a defining factor for Amazon's success.
2001: This balance began to pay off in the fourth quarter when we both significantly exceeded our own goals on the bottom line and simultaneously reaccelerated growth in our business. We lowered prices again in January when we offered a new class of shipping that is free (year-round) on orders over $99. Focus on cost improvement makes it possible for us to afford to lower prices, which drives growth. Growth spreads fixed costs across more sales, reducing cost per unit, which makes possible more price reductions. Customers like this, and it’s good for shareholders. Please expect us to repeat this loop.
2005: We have made a decision to continuously and significantly lower prices for customers year after year as our efficiency and scale make it possible. This is an example of a very important decision that cannot be made in a math-based way. In fact, when we lower prices, we go against the math that we can do, which always says that the smart move is to raise prices. We have significant data related to price elasticity. With fair accuracy, we can predict that a price reduction of a certain percentage will result in an increase in units sold by a certain percentage. With rare exceptions, the volume increase in the short term is never enough to pay for the price decrease. However, our quantitative understanding of elasticity is short-term. We can estimate what a price reduction will do this week and this quarter. But we cannot numerically estimate the effect that consistently lowering prices will have on our business over five years or ten years or more.
2003: Among the most expensive customer experience improvements we’re focused on are our everyday free-shipping offers and our ongoing product price reductions. Eliminating defects, improving productivity, and passing the resulting cost savings back to customers in the form of lower prices is a long-term decision. Increased volumes take time to materialize, and price reductions almost always hurt current results. In the long term, however, relentlessly driving the “price-cost structure loop” will leave us with a stronger, more valuable business. Since many of our costs, such as software engineering, are relatively fixed and many of our variable costs can also be better managed at a larger scale, driving more volume through our cost structure reduces those costs as a percentage of sales.
2008: In our retail business, we have a strong conviction that customers value low prices, a vast selection, and fast, convenient delivery and that these needs will remain stable over time. It is difficult for us to imagine that ten years from now, customers will want higher prices, less selection, or slower delivery. Our belief in the durability of these pillars is what gives us the confidence required to invest in strengthening them. We know that the energy we put in now will continue to pay dividends well into the future. Our pricing objective is to earn customer trust, not to optimize short-term profit dollars. We take it as an article of faith that pricing in this manner is the best way to grow our aggregate profit dollars over the long term. We may make less per item, but by consistently earning trust, we will sell many more items. Therefore, we offer low prices across our entire product range.
2. Customer Value = Shareholder Value
From very early on, Jeff has been almost religiously determined that there is a direct long-term link between customer value and shareholder (or shareowner) value. The words "customer" + "customers" was used 813 times in his 24 letters.
2001: As I’ve discussed many times before, we are firm believers that the long-term interests of shareholders are tightly linked to the interests of our customers. If we do our jobs right, today's customers will buy more tomorrow, we’ll add more customers in the process, and it will all add up to more cash flow and more long-term value for our shareholders. To that end, we are committed to extending our leadership in e-commerce in a way that benefits customers and, therefore, inherently, investors--you can’t do one without the other. As we kick off 2002, I am happy to report that I am as enthusiastic as ever about this business. There is more innovation ahead of us than behind us, we are close to demonstrating the operating leverage of our business model, and I get to work with this amazing team of Amazonians all over the world. I am lucky and grateful. We thank you, our owners, for your support, your encouragement, and for joining us on this adventure. If you’re a customer, we thank you again.
2003: We emphasized our long-term views in our 1997 letter to shareholders, our first as a public company, because that approach really does drive making many concrete, non-abstract decisions. I’d like to discuss a few of these non-abstract decisions in the context of customer experience. At Amazon.com, we use the term customer experience broadly. It includes every customer-facing aspect of our business - from our product prices to our selection, from our website’s user interface to how we package and ship items. The customer experience we create is by far the most important driver of our business. As we design our customer experience, we do so with long-term owners in mind. We try to make all of our customer experience decisions - big and small - in that framework.
2012: Our heavy investments in Prime, AWS, Kindle, digital media, and the customer experience in general strike some as too generous, shareholder indifferent, or even at odds with being a for-profit company. “Amazon, as far as I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers,” writes one outside observer. But I don’t think so. To me, trying to dole out improvements in a just-in-time fashion would be too clever by half. It would be risky in a world as fast-moving as the one we all live in. More fundamentally, I think long-term thinking squares the circle. Proactively delighting customers earns trust, which earns more business from those customers, even in new business arenas. Take a long-term view, and the interests of customers and shareholders align.
2010: We live in an era of extraordinary increases in available bandwidth, disk space, and processing power, all of which continue to get cheap fast. We have on our team some of the most sophisticated technologists in the world–helping to solve challenges that are right on the edge of what’s possible today. As I’ve discussed many times before, we have an unshakeable conviction that the long-term interests of shareowners are perfectly aligned with the interests of customers.
3. It's All About the Long Term
Every year still, Amazon attaches Jeff's first (1997) letter at the bottom of each year's new letter and reminds shareholders to reread his section about long-term thinking.
1997: Because of our emphasis on the long term, we may make decisions and weigh tradeoffs differently than some companies. Accordingly, 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 [...]. We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions. We will continue to measure our programs and the effectiveness of our investments analytically, to jettison those that do not provide acceptable returns and to step up our investment in those that work best. We will continue to learn from both our successes and our failures.
Jeff Bezos, 1998: The most important thing I could say in this letter was said in last year’s letter, which detailed our long-term investment approach. Because we have so many new shareholders (this year we’re printing more than 200,000 of these letters – last year we printed about 13,000), we’ve appended last year’s letter immediately after this year’s. I invite you to please read the section entitled It’s All About the Long Term. You might want to read it twice to make sure we’re the kind of company you want to be invested in. As it says there, we don’t claim it’s the right philosophy, we just claim it’s ours!
4. Embrace Failure
"In business [...], when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments." Failed experiments are a key part of the Amazon DNA.
2015: One area where I think we are especially distinctive is failure. I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment. Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten.
2015: We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.
2015: We want to be a large company that’s also an invention machine. We want to combine the extraordinary customer-serving capabilities that are enabled by size with the speed of movement, nimbleness, and risk-acceptance mentality normally associated with entrepreneurial start-ups. Can we do it? I’m optimistic. We have a good start on it, and I think our culture puts us in a position to achieve the goal. But I don’t think it’ll be easy. There are some subtle traps that even high-performing large organizations can fall into as a matter of course, and we’ll have to learn as an institution how to guard against them.
2015: One common pitfall for large organizations – one that hurts speed and inventiveness – is “one-size-fits-all” decision-making. Some decisions are consequential and irreversible or nearly irreversible – one-way doors – and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation. If you walk through and don’t like what you see on the other side, you can’t get back to where you were before. We can call these Type 1 decision. But most decisions aren’t like that – they are changeable, reversible – they’re two-way doors. If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through. Type 2 decisions can and should be made quickly by high-judgment individuals or small groups.
5. A Dreamy Business Offering
The four characteristics of what Jeff calls a dreamy business offering:
2014: A dreamy business offering has at least four characteristics.
Customers love it
It can grow to very large size
It has strong returns on capital
It’s durable in time – with the potential to endure for decades.
When you find one of these, don’t just swipe right, get married.
6. Think Like An Owner
Jeff wrote as early as in his first letter that Amazon's success would be largely determined by their ability to attract and retain talent, highlighting the importance of incentives:
1997: We will balance our focus on growth with emphasis on long-term profitability and capital management. At this stage, we choose to prioritize growth because we believe that scale is central to achieving the potential of our business model. We will continue to focus on hiring and retaining versatile and talented employees, and continue to weigh their compensation to stock options rather than cash. We know our success will be largely affected by our ability to attract and retain a motivated employee base, each of whom must think like, and, therefore, must actually be an owner.
2003: Long-term thinking is both a requirement and an outcome of true ownership. Owners are different from tenants. I know of a couple who rented out their house, and the family who moved in nailed their Christmas tree to the hardwood floors instead of using a tree stand. Expedient, I suppose, and admittedly these were particularly bad tenants, but no owner would be so short-sighted. Similarly, many investors are effectively short-term tenants, turning their portfolios so quickly that they are really just renting the stocks that they temporarily “own”.
7. FCF Per Share
What matters, in the long run, is not net income or percentage margins, but free cash flow per share. Amazon has, from the beginning, viewed this as its "ultimate financial measure."
2004: Our ultimate financial measure, and the one we most want to drive over the long term, is free cash flow per share. Why not focus, first and foremost, as many do, on earnings, earnings per share, or earnings growth? The simple answer is that earnings don’t directly translate into cash flows, and shares are worth only the present value of their future cash flows, not the present value of their future earnings. Future earnings are a component—but not the only important component—of future cash flow per share. Working capital and capital expenditures are also important, as is future share dilution.
2005: Our judgment is that relentlessly returning efficiency improvements and scale economies to customers in the form of lower prices creates a virtuous cycle that leads over the long term to a much larger dollar amount of free cash flow and, thereby, to a much more valuable Amazon.com. We’ve made similar judgments around Free Super Saver Shipping and Amazon Prime, both of which are expensive in the short term and - we believe - important and valuable in the long term.
1997: We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case. When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we'll take the cash flows. We will share our strategic thought processes with you when we make bold choices (to the extent competitive pressures allow), so that you may evaluate for yourselves whether we are making rational long-term leadership investments.
Harvard Business Review 2012: Percentage margins are not one of the things we are seeking to optimize. It’s the absolute dollar-free cash flow per share that you want to maximize, and if you can do that by lowering margins, we would do that. So if you could take the free cash flow, that’s something that investors can spend. Investors can’t spend percentage margins. What matters always is dollar margins: the actual dollar amount. Companies are valued not on their percentage margins, but on how many dollars they actually make, and a multiple of that.
8. Surround Yourself With Superstars
Jeff early on understood the importance of setting the bar high when it came to hiring. The three key questions Amazon considers when hiring a new employee (left):
1998: During our hiring meetings, we ask people to consider three questions before making a decision:
Will you admire this person?
If you think about the people you’ve admired in your life, they are probably people you’ve been able to learn from or take an example from. [...]
Will this person raise the average level of effectiveness of the group they’re entering?
We want to fight entropy. The bar has to continuously go up. I ask people to visualize the company five years from now. At that point, each of us should look around and say, “The standards are so high now - boy, I’m glad I got in when I did!”
Along what dimension might this person be a superstar?
Many people have unique skills, interests, and perspectives that enrich the work environment for all of us. It’s often something that’s not even related to their jobs. One person here is a National Spelling Bee champion (1978, I believe). I suspect it doesn’t help her in her everyday work, but it does make working here more fun if you can occasionally snag her in the hall with a quick challenge: “onomatopoeia!”
1997: The past year's success is the product of a talented, smart, hard-working group, and I take great pride in being a part of this team. Setting the bar high in our approach to hiring has been, and will continue to be, the single most important element of Amazon.com's success. It's not easy to work here (when I interview people, I tell them, “You can work long, hard, or smart, but at Amazon.com, you can't choose two out of three”), but we are working to build something important, something that matters to our customers, something that we can all tell our grandchildren about. Such things aren't meant to be easy. We are incredibly fortunate to have this group of dedicated employees whose sacrifices and passion build Amazon.com.
9. Writing - A Thinking Tool
In the summer of 2004, Jeff made a decision that rattled his leadership team. He banned PowerPoint and replaced it with "narratively structured six-page memos” and implemented the now widely known writing culture at Amazon.
2017: We don’t do PowerPoint (or any other slide-oriented) presentations at Amazon. Instead, we write narratively structured six-page memos. We silently read one at the beginning of each meeting in a kind of “study hall.” Not surprisingly, the quality of these memos varies widely. Some have the clarity of angels singing. They are brilliant and thoughtful and set up the meeting for high-quality discussion. Sometimes they come in at the other end of the spectrum. [...] I find that much of the time, readers react to great memos very similarly. They know it when they see it. The standard is there, and it is real, even if it’s not easily describable.
2017: Here’s what we’ve figured out. Often, when a memo isn’t great, it’s not the writer’s inability to recognize the high standard, but instead a wrong expectation on scope: they mistakenly believe a high-standards, six-page memo can be written in one or two days or even a few hours, when really it might take a week or more! They’re trying to perfect a handstand in just two weeks, and we’re not coaching them right. The great memos are written and re-written, shared with colleagues who are asked to improve the work, set aside for a couple of days, and then edited again with a fresh mind. They simply can’t be done in a day or two. The key point here is that you can improve results through the simple act of teaching scope – that a great memo probably should take a week or more.
10. It Is Always Day 1
"Staying in Day 1 requires you to experiment patiently, accept failures, plant seeds, protect saplings, and double down when you see customer delight" The Day 1 culture is crucial to maintain and can almost be described as the Amazon operating system.
2017: There are many ways to center a business. You can be competitor focused, you can be product focused, you can be technology focused, you can be business model focused, and there are more. In my view, obsessive customer focus is by far the most protective of Day 1 vitality. Why? There are many advantages to a customer-centric approach, but here’s the big one: customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf. No customer ever asked Amazon to create the Prime membership program, but it sure turns out they wanted it, and I could give you many such examples. Staying in Day 1 requires you to experiment patiently, accept failures, plant seeds, protect saplings, and double down when you see customer delight. A customer-obsessed culture best creates the conditions where all of that can happen.
2016: “Jeff, what does Day 2 look like?” That’s a question I just got at our most recent all-hands meeting. I’ve been reminding people that it’s Day 1 for a couple of decades. I work in an Amazon building named Day 1, and when I moved buildings, I took the name with me. I spend time thinking about this topic. “Day 2 is stasis. Followed by irrelevance. Followed by an excruciating, painful decline. Followed by death. And that is why it is always Day 1.” To be sure, this kind of decline would happen in extremely slow motion. An established company might harvest Day 2 for decades, but the final result would still come. I’m interested in the question, how do you fend off Day 2? What are the techniques and tactics? How do you keep the vitality of Day 1, even inside a large organization? Such a question can’t have a simple answer. There will be many elements, multiple paths, and many traps. I don’t know the whole answer, but I may know bits of it. Here’s a starter pack of essentials for Day 1 defense: customer obsession, a skeptical view of proxies, the eager adoption of external trends, and high-velocity decision-making.
And 26 years after founding Amazon, Jeff - still laser-focused on the core mission - wrote the following in his last shareholder letter (2020): "We have always wanted to be Earth’s Most Customer-Centric Company. We won’t change that. It’s what got us here."