The Amazon Flywheel is one of the most innovative strategies for success in today’s digital world. Leading companies have applied the strategy to drive growth and create value for customers, suppliers, and employees alike. By understanding what it is and how to use it, you can get ahead of the curve and gain a competitive edge in your industry.
Amazon Flywheel Explained: What Does It Mean?
You may have heard of it many times, but what is an Amazon Flywheel?
What Is A Flywheel By Definition?
A flywheel is a spinning wheel of heavy metal and other materials designed to store rotational energy in momentum. When cranked, the wheel’s stored kinetic energy helps keep a machine running even when there is no input power source or motor.
Breaking Down the Amazon Flywheel Business Model: What Is It?
Jim Collins’ famous book, Good To Great, brought forth the concept of “The Flywheel Effect” to demonstrate that companies don’t suddenly achieve greatness from a single plan or project but rather accumulate significant wins over years of dedication until an undeniable momentum takes off and propelling them towards rapid growth with minimal effort.
Inspired by this concept, Jeff Bezos, the founder, and CEO of Amazon, developed the Amazon Flywheel Model.
According to what Jeff Bezos drafted on a napkin when he first came up with this idea, he planned to put customer experience in the critical position of the company development strategy and take all the actions to improve customer experiences.
Consequently, with the flywheel moving, Amazon has become a substitute for customer loyalty and one of the most influential websites in the world, accounting for 37.8% of the online retail market share in the U.S. in June 2022.
The Key Components of the Amazon Flywheel: A Virtuous Cycle
Now let’s talk about the essential components of the Amazon Flywheel business model and how it works.
With growth at its center, here are the indicators of this business model:
- low prices
- huge selection
- fast delivery
As mentioned, Amazon values customer experience A LOT. So, to attract more buyers, Amazon provides competitive prices. At the same time, traffic increases since customers flood in to seek good bargains.
To provide its customers with more options, Jeff Bezos welcomed third-party sellers to join the e-commerce platform rather than monopolizing the e-market by selling its Amazon-exclusive products alone.
With more sellers actively starting their businesses on Amazon, people can now have a vast selection of various products in over 25,000 sub-categories. Amazon makes it the most diverse e-commerce platform in the world at the cost of losing short-term profits.
There is another advantage when more third party sellers pour into the market. Since the competition has become fierce, the sellers try to streamline their budget and lower the price. Thus, finding good deals on the platform will be even more accessible. Again, customer experience is further enhanced.
With the profit gained, Amazon reinvested into structures to help decrease prices. For instance, Amazon has built increasing FBA (Fulfillment by Amazon) warehouses to encourage more sellers to join the program and lower their operating costs. In addition, Amazon has also invested a lot in expanding its delivery team to ensure fast delivery.
This Amazon virtuous cycle is all about focusing on the profit in the long run and doing everything that leverages customer experience.
Does It Work: How Amazon Flywheel Model Helps It Achieve Success?
One may ponder if the Amazon Flywheel strategy works. The answer is a simple yes.
Despite the economic setbacks, Amazon’s revenue has skyrocketed from $3.12 billion (2001) to $502.19 billion (2022) in the past two decades. By adopting the flywheel effect concept into the business and having customer experience at the core of its business development, Amazon has grown into The Everything Store with worldwide economic and cultural forces from an online bookstore competing with local bookstores.
Advantages and Drawbacks: What Does Amazon Flywheel Strategy Mean to Third-Party Sellers?
The success of the Amazon Flywheel is undeniable. But what does it mean to third-party business owners?
Here are the advantages they can gain:
- Increase exposure: As the largest e-commerce platform in the world, Amazon has more than 2 billion visits per month in 2022. By joining this platform, the merchants can win massive exposure that block-and-mortar stores can not even imagine.
- Improve service: Amazon encourages sellers to enroll in its Fulfilled By Amazon (FBA) program, where sellers can enjoy Amazon Prime’s fast delivery and FBA storage and fulfillment services.
- Lower cost: Once a seller becomes part of the FBA program, they pay less to provide quality storage, fulfillment, and delivery services to their buyers since Amazon will cover these instead.
- Drive sales: By providing excellent customer service, the sellers have a higher chance to win customer favor; with a lower cost structure, they can give a lower price to the buyers – all leading to the possibility of sales increase.
However, third-party sellers should also be aware of the following drawbacks:
- Fierce competition: With increasing number of third-party stores on the Amazon marketplace, the competition is intense. Some sellers have no choice but to lower their prices to attract more traffic, leading to a very low-profit margin and unhealthy profit structure. The sellers will also need to invest more in optimizing their products and customer service.
- Decreasing customer satisfaction: Though proudly claiming itself as the most customer-centric company, the customer satisfaction index is declining and has been reported at a record low in 2021 (78 out of 100). Selling on Amazon itself can no longer guarantee you tons of happy customers. The buyers have high expectations from their shopping experience on Amazon, and the sellers, therefore, have more pressure to meet them.
What Is The Amazon Seller Flywheel?
Based on the Amazon’s Flywheel, there is also an Amazon Seller flywheel.
The three key elements of this flywheel are:
With more sales, you will gain more customer reviews; with positive reviews and ratings, you can get better rankings; as the ranking improves, attracting customers and increasing sales will be easier. As one action invigorates the other, a cycle of success will be set in motion.
How To Get The Amazon Seller Flywheel Spinning?
So increasing sales is Kickstarter, but how? Here are some helpful tips:
- Select a product with high demand and low competition: Before selecting the niche, do thorough product research. A good niche will save you efforts to stand out and outperform your competitors.
- Optimize the listing with keyword strategy: Use keyword research tools to determine what your competitors are ranking for and place these keywords in your listing.
- Improve the PPC strategy to drive traffic: It is worthwhile to invest in a proper PPC strategy to drive traffic to your listing and increase your ranking in specific keyword results.
- Make full use of the honeymoon period: Ensure you give the customers a good deal when launching the product. The honeymoon period is vital to your success and can win valuable traffic.
- Feature product selling points with images: Visual processing is important when shopping. So it is vital to have quality product images to win favor and increase the conversion rate.
- Win Best Seller or Amazon’s Choice Badges: These two badges, though determined by different algorithms, can increase the credibility of the listing and earn the trust of customers. They can help increase click-through and conversion rates and lead to more sales.
- Constantly improve the product: Read through the feedback left by the customers and optimize your product accordingly. This will help you get more positive reviews and higher ratings to win more sales.
The Amazon Flywheel has been an excellent success for the company proving that focusing on the long-run profit rather than short-term incentives may benefit the company more. At the cost of short-term revenue, it focuses on building a virtuous cycle to ensure the company keeps developing with its momentum. As an entrepreneur, it is essential to identify the flywheel that will best propel your business forward.