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Amazon’s three core businesses and flywheel effect or Virtuous Cycle, as the vital of Amazon as a world-class company, we go through a multi-dimensional to look at the company. First of all, Amazon is also the same as companies like Apple, Facebook, Tencent, and Alibaba, it has really affected the lives of each of us in the past two decades; Its history of more than twenty years is very unique. Amazon is no longer an “online department store” in your impression, but a very diversified and open platform company.

Jeff Bezos, the head of Amazon for more than 20 years, can be said to be the greatest CEO in the world, not even one of them. His business insight and the philosophy behind it can be compared with business leaders such as Jack Welch, Jobs, Buffett, and Jack Ma.

So in this article, we will discuss Amazon as a company and Bezos’ business philosophy from various dimensions. I believe that after reading, you will have a deeper understanding of the business world and what kind of organization a company is.

Let me talk about what kind of company Amazon is now. As I mentioned just now, many people have the impression that Amazon is still an “online department store”, just like Chinese company Taobao or JD.com; or at most, they understand that it also has a business of Amazon cloud services.

However, the essence of Amazon’s core business, and the relationship between them, may be far more profound than you think. Today we will talk about Amazon’s three core businesses and the wonderful relationship between them.

In Amazon’s 2014 annual letter to shareholders, Bezos began by writing:

“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, and 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.

Well, I’m pleased to report that Amazon hasn’t been monogamous in this regard. After two decades of risk-taking and teamwork, and with generous helpings of good fortune all along the way, we are now happily wed to what I believe are three such life partners: Marketplace, Prime, and AWS. “

I can add a little bit here. The status of Amazon’s shareholder letter in the business world can be said to be the same as Buffett’s shareholder letter. From 1997 to 2016, Bezos personally wrote Amazon’s shareholder letter every year, in which he repeatedly explained his business philosophy. In the content of these two weeks, I will also tell you the most essential part of Amazon’s shareholder letter.

In the passage just now, Bezos mentioned Amazon’s three core businesses:

• Prime business – that is, Amazon’s membership service;
• Marketplace business – that is, third-party seller platform;
• AWS – Amazon’s cloud service.

Bezos has repeatedly said that these three businesses are the three pillars of Amazon, a company worth more than $400 billion. You will find it very interesting that he did not mention Amazon’s largest business, which is the part we are most familiar with selling goods online.

Why are these three parts of the business so important? What is the relationship between them? Let’s briefly discuss these three core businesses concisely first.

Prime business is Amazon’s membership service. Its basic logic is that if you pay Amazon a membership fee of $99 per year, you can enjoy a series of very valuable services, such as:

• All postage is waived. Free same-day delivery is also available on some items, as well as items that can be delivered within two hours;
• Watch and listen to tons of free entertainment on Amazon’s video and music platforms;
• Read some books and magazines on Amazon for free;
• There are also some other free businesses: such as game videos, audiobooks, and so on.

In fact, this service is super valuable, and the postage alone can earn back. So now there are more than 60 million users who have bought this service, and Amazon’s annual revenue from Prime membership fees exceeds 6 billion US dollars.

Amazon’s second business, Marketplace. The word itself means “marketplace,” and in Amazon’s system, refers to a third-party seller platform. The so-called third-party seller platform is that on Amazon’s platform, in addition to various products operated by Amazon, all other sellers, large and small, can also settle in Amazon and sell their own products directly. By 2016, there were more than 2 million third-party merchants on Amazon, contributing 40% of the total sales each year, and it is expected to exceed half of the total sales by 2020.

The third part of Amazon’s business is Amazon’s cloud service, AWS (Amazon Web Services), which has become more and more famous in recent years. AWS was established in 2005, and now it can contribute $12 billion in revenue to Amazon a year. Its main function is to provide enterprise-level cloud services to large and small enterprises, just like the domestic Alibaba Cloud.

Whether you are a start-up company or a large enterprise, you can build your entire IT system on Amazon’s cloud service system. The price is cheap and the stability is very high, which is far less troublesome and cost-effective than building a system yourself.

AWS now has some of the best customers in the world, including General Electric, Siemens, and even Netflix, a streaming media service provider with very high technical strength, as we mentioned before. A large part of the system is also built directly on AWS. It can be said that Amazon’s cloud service is currently the best cloud service provider in the world.

However, you may faintly find something wrong. It seem to have been praising how good Amazon’s three core businesses are, but they actually have some business logic problems. For example, the service of Prime membership for $99 a year is very good, but all the services provided-free shipping, various entertainment and book content, games, etc.-are not free, and on the contrary, the cost is very high. Isn’t the more you sell, the more you lose?

Marketplace provides users with more choices, but this business is actually “introducing wolves into the house”-this is equivalent to introducing a large number of external merchants to compete with itself.

Because customers will definitely choose cheaper and better products – for example, when a person is searching for yoga mats and sees that third-party sellers are cheaper and better, he will definitely choose to buy the product that is not Amazon. Isn’t this hurting Amazon itself? Business, let your profits flow to outsiders?

In the end, the AWS business looks good, and it provides convenience to many companies, but it has nothing to do with Amazon’s main business, right? And the contribution of 12 billion US dollars a year is less than 10% of Amazon’s total sales of 130 billion US dollars a year. Why does Amazon do such a business?

The real wisdom here is also the key to understanding the various business lines of Amazon, which is a business concept repeatedly emphasized by Amazon and Bezos himself – the Flywheel Effect.

“Flywheel effect” means that various business modules of a company will organically promote each other, just like meshing gears. It takes a lot of effort to turn from stationary to turning at the beginning, but the effort of each circle will not be in vain. Once turned, the gear will turn faster and faster. And that’s the real secret sauce of Amazon as a company.

So how are the gears of Amazon’s business turning?

First, the $99 Prime business will greatly increase customer loyalty. The most direct impact is that Amazon members have much higher purchase frequency and purchase amount than non-members. This logic is also easy to understand. Since a fixed fee of 99 US dollars has been paid, the more users buy and consume, the more valuable it will be.

Second, the introduction of the Marketplace platform, that is, allowing third-party merchants to sell products, has greatly increased the number of products that customers can choose. When customers have more choices, Prime membership will be more valuable, so the number of users who buy membership services will also increase.

Third, when Amazon has more and more customers, more third-party merchants are willing to open stores on Amazon.

Fourth, when Amazon has enough customers and sales are increasing, Amazon’s bargaining power over upstream suppliers will also be greatly improved. Therefore, Amazon can get a lower purchase price of goods and pass the profits to consumers. Then more consumers will be attracted to Amazon by cheap things, become users, and buy Prime members.

Fifth, when the prices of Amazon’s self-operated products are getting cheaper and cheaper, it is impossible for third-party sellers to sell similar products more expensive than Amazon. This requires third-party sellers to also control costs, or sell some that Amazon does not sell. s things.

In order to help third-party sellers sell better, Amazon also launched an FBA service (Fulfillment By Amazon). This service is that, as a third-party seller, you can store your goods in Amazon’s fulfillment center. Once a customer places an order, the entire pick-up and delivery process is handled by Amazon, so that merchants can concentrate on doing what they are good at, and only need to pay a service fee. After all, logistics is very professional, and a small seller will never be able to compete with Amazon’s global logistics system.

Sixth, don’t forget we mentioned Prime Fast Shipping. When third-party sellers use the FBA service and store their goods in Amazon’s logistics center, the delivery time is guaranteed, so they can also be added to the category that Prime members can choose. As a result, the range of products that Prime members can choose from further increases, and this membership is even more valuable.

Seventh, when Amazon handles enough goods every day, the cost of logistics itself will also drop. For example, you can put the products ordered by non-members in the spare space of the truck, process the orders of Prime members first when sending, and then send the non-members, so there is no need to transport them a second time. Therefore, when the scale is large enough, the cost of logistics is also reduced.

Finally, any merchant and third-party enterprise can put their entire system on AWS. In this way, you not only sell goods on Amazon, but also use Amazon’s FBA service for logistics, and run your own IT system on AWS. It is even more difficult to leave Amazon.

Therefore, the Prime business, Marketplace, and AWS have achieved Amazon’s business secret: the flywheel effect. Simply put, the logic is as follows.

The more products, the more choices customers have; the more choices customers have, the more membership services they buy; the more memberships they buy, the more frequency and amount of consumption; the more frequency and amount of consumption, the more Amazon will The more suppliers lower prices; the more Amazon lowers prices, the more customers will benefit… This flywheel keeps spinning, and it has also made the Amazon empire thrive for 20 years.

There is a short paragraph that best reflects the power of this business model. The movie “Manchester by the Sea” previously invested by Amazon won an Oscar. Bezos joked internally: “Getting this award will allow us to sell more toilet paper and dog food.”

Because these businesses seem unrelated, but in fact, award-winning films will attract more Prime members, which will also trigger more consumption on the e-commerce platform. This is the magic of Amazon’s business model. In this article we talked about Amazon’s three core businesses and the “flywheel effect”. So, the next question should be, how did Amazon do this? In the next column, we will answer this question.