Working Backwards: Insights, Stories, and Secrets from Inside Amazon

by Colin Bryar

Our core competencies did not extend to either end of the value chain. Steve did not let this get in the way. In one of our meetings, he said that a typical company that wanted to grow would take stock of its existing capabilities and ask, “What can we do next with our skill set?” He emphasized that Amazon’s approach was always to start from the customer and work backwards. We would figure out what the customers’ needs were and then ask ourselves, “Do we have the skills necessary to build something that meets those needs? If not, how can we build or acquire them?” Once we determined what was necessary to create value for our customers and to differentiate ourselves from our competitors, we didn’t let our lack of ability deter us from achieving this important end result—our own device.

Like nearly everyone at Amazon outside our Digital leadership team, I had a really hard time accepting that it was a good idea to make our own hardware when it seemed that nearly every leader in the company and on the board of directors was questioning it. Like everyone else, I thought it was super expensive (not adhering to the Frugality leadership principle!) and would fail. I now recognize that going through that process and seeing the outcome transformed my understanding of how innovation works.

I regularly pointed out to Steve that he knew nothing about hardware—he wasn’t a gadget guy, and his ancient Volvo didn’t even have a car stereo.

Furthermore, outsourcing in this context offers a classic example of short-term decisions with devastating long-term implications. Practically every day, Amazon could tweak its offering to make things a little better. And so practically every day, the distance between itself and its competitors widened. Outsourcing turned out to be the more expensive path.

Jeff stayed so deeply involved in the project that he was unofficially known as the chief product manager for Kindle.

The other key feature we debated was the use of E Ink, a nascent technology. It had been developed in the MIT Media Lab and spun out as a company in 1997, but there were no major commercial applications in 2005. Although Jeff and the team were unified in their desire to use the new E Ink technology,2 we recognized there would be some trade-offs. E Ink screens were black-and-white only, so the Kindle could not support color graphics or video. The transition from one page to the next was slow. But the E Ink screen was much easier on the eyes than the traditional backlit computer screen and was readable in direct sunlight. It would also allow for a much longer battery life, enabling the device to stay on for up to one week without needing a charge. Both of these features were ways for the Kindle to “get out of the way” so customers would forget they were reading on a machine.

At every review, Jeff would spend several minutes holding each prototype in one hand, then the other, then in both. When he rejected a prototype it was typically not because the design wasn’t sleek or hip enough but rather because something about it would “get in the way” of the customer’s reading.

These two features—wireless delivery and the E Ink screen—proved to be two of the keys to making the Kindle great. Wireless delivery meant that customers could search, browse, buy, download, and start reading a new book in under 60 seconds. The E Ink screen’s paper-like display meant that, unlike with an iPad, you could read by the pool, and its low power consumption meant you could read throughout a 12-hour plane flight without worrying about the device dying on you. We take these features for granted today, but in those days they were unheard of.

Now, this may be one of those moments when you’re thinking, “But we don’t have a Jeff.” The good news is that you don’t need a Jeff to make this type of decision. You only need to ruthlessly stick to the simple-to-understand (but sometimes hard-to-follow) principles and process that insist on customer obsession, encourage thinking long term, value innovation, and stay connected to the details.

After all, retail customers don’t care about a company’s revenue—they care about what they get back in return for parting with their hard-earned dollars. Amazon customers cared about three main things that we could deliver for them: Price. Is the price low enough? Selection. Does Amazon have a wide range of products—ideally everything? Convenience. Is the product in stock, and can I get it quickly? Can I easily find or discover the product? Price, selection, and convenience were therefore the inputs for our business. And we could control all three.

Shipping promotions drove significantly higher growth than any other type of promotion. The perceived value of free shipping was higher than straight discounting of product prices. Put another way, if the average discount of a free shipping promotion was 10 percent, we’d see significantly more demand lift (called elasticity) by offering free shipping than by discounting product prices by 10 percent. It wasn’t even close. Free shipping drove sales.

Super Saver Shipping had set a new standard. But it would not last. Customer expectations are not static. They rise over time, which means you cannot rest on your laurels.

Even though Super Saver Shipping made sense for Amazon’s supply chain and was a popular feature, we realized that it could not be the driver of significant growth for the retail business. First, this was because many of our heaviest buyers needed the fastest possible delivery—they were not willing to wait three to five days for an item to ship. Second, some of our price-sensitive customers were not willing to up their order to $25 just to qualify for Super Saver Shipping. It didn’t make sense to them to spend more on goods just to pay less on shipping. As a result, they would do what 98 percent of other consumers did at the time—shop at a brick-and-mortar store. So, while Super Saver Shipping was popular, it did not appeal to large segments of our customer base.

Loyalty Programs So, we brainstormed solutions to the fundamental shipping problem. Our marketing, retail, and finance teams set three criteria that any new marketing initiative would have to meet to go forward: It had to be affordable (an eye-catching but financially unsustainable approach was out of the question). It had to drive the right customer behavior (that is, nudge customers to buy more from Amazon). It had to be a better use of funds than the obvious alternative, which was to invest those same funds into actions that would improve the customer experience, such as lowering prices even further or improving our in-stock rate.

Crafting an affordable program that we felt would lead customers to buy more—rather than continuing on with our tried-and-true method of funneling cost savings back into lower prices—seemed difficult, if not impossible, at the time, especially given the constraints of our fulfillment and delivery supply chain.

Despite the many free shipping ideas circulating around the company, none of the proposals that were initially put forward met all three criteria we had established for the shipping solution. We worried that the membership programs that involved an annual fee for free standard shipping or for free two-day shipping would encourage customers to purchase fewer items per order. This would not generate enough money to cover shipping costs, which meant it would not be sustainable.

A few days later, in the middle of the month, Jeff sent the house-on-fire email and said rather than presenting the set of ideas in three weeks, we should select the best one and launch the program by the end of the year. I think at some point he had decided that it wasn’t the idea that was flawed, but the decision-making process, a process encumbered by institutional risk-aversion. The “October surprise” email arose out of his realization that you simply could not prove a priori that free shipping would work. You just had to try it.

Fortunately for me, Amazon’s commitment to long-term thinking includes its investment in people. They understand that when you innovate and build new things, you will frequently fail. If you fire the person, you lose the benefit of the learning that came along with that experience. Jeff would say something like this to a leader who had just laid an egg: “Why would I fire you now? I just made a million-dollar investment in you. Now you have an obligation to make that investment pay off. Figure out and clearly document where you went wrong. Share what you have learned with other leaders throughout the company. Be sure you don’t make the same mistake again, and help others avoid making it the first time.”

But one implication of being at the earth’s most customer-centric company is that you don’t spend money on things that don’t benefit customers.

In the TVOD business, differentiation based on selection wasn’t possible—Amazon, Apple, Microsoft, and Sony all had the same titles—but in the subscription business, a unique catalog was key.

The cost structure is very different from the DVD rental-by-mail business, where the costs—warehouses, wages, shipping, replacement discs—are variable. The major benefit of establishing a popular subscription service with a fixed-cost base is that once you exceed a certain number of subscribers, every new dollar of subscription revenue is pure profit. The hard parts of pulling off this strategy are (a) acquiring a large number of subscribers, and (b) building a catalog of must-see movies and TV series.