Product management lessons from Amazon’s success
Back in 2004, technology was much different than it is today. Facebook was at its infancy, Netflix was still delivering DVDs, and the coolest phone was Motorola Razr. Amazon was much smaller, and their ~$6Bn revenue was mostly coming from physical media.
In this setting, Jeff Bezos started envisioning Amazon’s entry in digital media. His first move was to assign Steve Kessel, then VP of Retail Media, to lead Amazon’s digital business. This was not a scope expansion move but a change in business priorities. Jeff understood that if the Head of Media was also responsible for the digital media business, the latter would never be a priority due to the lower revenue contribution, so the whole initiative would be doomed to fail.
The newly formed team went on to better understand the digital business landscape and identify a big enough opportunity to focus on. The first ideas were not groundbreaking and therefore not providing a competitive advantage to Amazon against other players in the space. Jeff’s vision was to create a novel experience for consuming digital media. After several thorough strategic sessions on the digital media value chain, the insight was that while for physical retail being an aggregator created a competitive advantage, this was not the case with digital. The team decided to focus, not in the middle, but in the ends of the value chain. And this is how the idea of Kindle reader came to be.
Obsess over customers
Today’s Amazon has a very large portfolio of hardware products, but back then the company didn’t have any expertise developing hardware. This could have been a non-starter for many trying to answer the “What can we do with our existing skill set?” question. However, Amazon’s mentality was starting from the customer and working backwards, while acquiring any skills needed to develop the end solution.
Through this exploration, the team concluded that to deliver an experience that would delight customers, they needed to “build an e-book store and a reader that was deeply integrated with a reading device. Through our research, we knew that relying on third parties, while operationally and financially less risky, was much riskier from the point of view of customer experience. If we start with the customer and work backwards, then the most logical conclusion is that we need to create our own devices.” After a few years of development, the first Kindle was launched in 2007 and sold out in six hours.
After proving product market fit, the team went on to execute fast, delivering ten more generations with several new features in the years to come, while building a broader ecosystem to support the device. The rest is history.
This is one of many stories of Amazon products that follow the same framework and some patterns start to emerge. While there are many details on how this approach works, it is essentially defined by three steps: Think big, obsess over customers, and execute fast. In this post I will go through some practical tips on how to execute each step. While this was initially written as advice to product managers, I believe it has broader application to startups and anyone who is attempting to build and innovate in similar settings.
ACT I - Think big
“Your time on this earth is limited, don’t live someone else's life, live by your vision.”
- Steve Jobs
Think big is self fulfilling
The first lesson is hidden in the leadership principles definition of think big: “Thinking small is a self-fulfilling prophecy. Leaders create and communicate a bold direction that inspires results. They think differently and look around corners for ways to serve customers”. If thinking small is a self fulfilling prophecy, so is thinking big. The more stretch goals you set, the higher the chances to meet or exceed them.
In their IPO year (1997), Amazon served “more than 1.5 million customers, yielding 838% revenue growth to $147.8 million”. For comparison, Amazon’s revenue in 2020 was around $386 billion - a 2,625x increase. Going from a US online bookstore to a global everything store while increasing revenue by several orders of magnitude is quite impressive, but this is not big enough. Surprising as it may seem, Jeff’s vision was not to become the best online everything store. Or more precisely, not only this.
A think big mentality stretches the team to accomplish more. Ken Norton explains this in the famous essay 10x not 10%:
“10x is a moonshot, an order of magnitude improvement. If you’re only thinking 10%, you’re taking the obvious path that everyone else is on. 10x requires a whole new mentality. If Kodak executives had asked what it would take for the world to snap one trillion photos a year, a new understanding would have emerged. Clearly you wouldn’t get there by selling film.”
Going back to the Amazon example, the “think big” became “think bigger”. The transformation from an online bookstore to an everything store was just Amazon 1.0. Amazon reinvented themselves several times, launching tens of other businesses including AWS - the largest cloud services provider, Amazon Prime - a subscription program that counts more than 200MM members, the Amazon Marketplace - a business that contributes to more than 50% of Amazon unit sales from third parties, and other very diverse initiatives like Alexa, Amazon Logistics, Amazon Fresh, Amazon Advertising, Prime Video, Amazon Studios, Amazon Kindle, Amazon Go, etc.
This didn’t happen by chance.
Kill your own business
As part of your big vision, you should be ready to cannibalize your own business before someone else does it for you. One of the most classic examples is Kodak, the company that invented the digital camera but decided to avoid a launch so that they don’t cannibalize their very profitable film making business. The story of another device, the Kindle, is the exact opposite. According to Brad Stone, sometime in 2004, Bezos called Steve Kessel who was then heading the book category at Amazon and told him: “Your job is to kill your own business.”
The fact that Clayton Christiansen’s “The Innovator’s Dilemma”, happens to be one of Jeff’s favorite books is not a coincidence. Jeff has deeply embraced the principles to reinvent his company. While Amazon was doing well in selling books, he could see that the adoption of e-books was growing rapidly. If Amazon didn’t kill their own business, Apple or Google would. The Kindle team went on to set a very inspiring vision: “Every book ever printed in any language all available in 60 seconds”.
Another example of this type of decision was the launch of the Amazon Marketplace:
“In 2000 we invited third parties to compete directly against us on our “prime retail real estate”—our product detail pages. Launching a single detail page for both Amazon retail and third-party items seemed risky. Well-meaning people internally and externally worried it would cannibalize Amazon’s retail business, and—as is often the case with consumer-focused innovations—there was no way to prove in advance that it would work. Our buyers pointed out that inviting third parties onto Amazon.com would make inventory forecasting more difficult and that we could get “stuck” with excess inventory if we “lost the detail page” to one of our third-party sellers. However, our judgment was simple. If a third party could offer a better price or better availability on a particular item, then we wanted our customer to get easy access to that offer. Over time, third party sales have become a successful and significant part of our business. Third-party units have grown from 6% of total units sold in 2000 to 28% in 2005, even as retail revenues have grown three-fold
Be ok with failure
For a “think big” culture to have any chance to succeed, all stakeholders need to be open to the possibility of failure. There is no experimentation if the outcome is certain.
“As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you’re not going to be inventing at a size that can actually move the needle" , says Bezos.
By definition an experiment has an uncertain outcome, so not failing frequently and big enough likely means you don’t experiment at the scale you should be. Of course, you should get into every new bet, understanding the risk and working hard to make it work, but eventually some bets won’t work and that’s ok. Make sure you document your learnings and move on to the next opportunity.
In essence, successful innovators are taking a VC type approach. A VC knows that most investments will fail but the very few that will work can return the fund multiple times. Based on Seth Levine, more than 50% of VC investments don’t even return the initial capital, however ~4% of investments have an ROI of at least 10x.
Amazon has placed multiple bets during the years and many have failed, but the ones that have succeeded have more than paid off for all failures. Three of them are the biggest winners. Marketplace, Prime, and AWS significantly impact the company’s valuation and contribute market share and cash flow while delighting customers. AWS alone closed 2020 on revenue of $45Bn, growing 30% YoY.
Good ideas take time to develop
Long term thinking has been a pillar of Amazon’s strategy. Here is Jeff once again:
“Our fundamental approach remains the same. Stay heads down, focused on the long term and obsessed over customers. Long-term thinking levers our existing abilities and lets us do new things we couldn’t otherwise contemplate. It supports the failure and iteration required for invention, and it frees us to pioneer in unexplored spaces. Seek instant gratification – or the elusive promise of it – and chances are you’ll find a crowd there ahead of you. Long-term orientation interacts well with customer obsession. If we can identify a customer need and if we can further develop conviction that that need is meaningful and durable, our approach permits us to work patiently for multiple years to deliver a solution.”
As companies get larger, they are prone to be impatient with smaller projects and won’t let them grow to their full potential. It is important to remember that no billion dollar business was a billion dollar business on day one. Operators should instead align on the vision and focus on growth rates and the potential market size. Jeff explains:
“In our experience, if a new business enjoys runaway success, it can only begin to be meaningful to the overall company economics in something like three to seven years. We’ve seen those time frames with our international businesses, our earlier non-media businesses, and our third party seller businesses. Today, international is 45% of sales, non-media is 34% of sales, and our third party seller businesses account for 28% of our units sold.”
Two main ideas here:
Optimize for the long term: This thinking ensures that you optimize for providing value over a long term horizon, avoiding short term optimizations that sacrifice long term success. For example, Amazon could have easily increased prices or stopped investing in R&D. While these actions would have increased short term profits, they would have been the wrong moves for the business in the long term.
Good ideas take time to develop: “In some large companies, it might be difficult to grow new businesses from tiny seeds because of the patience and nurturing required. In my view, Amazon’s culture is unusually supportive of small businesses with big potential, and I believe that’s a source of competitive advantage.”
ACT II - OBSESS OVER CUSTOMERS
“It is better to stay focused on customers as they are the ones paying for your services. Competitors are never going to give you any money.”
- Jeff Bezos
I hope you are enjoying this so far, but if you had to leave with one takeaway, that would be to obsess over customers. If Bezos had to attribute his success to a single factor that would be customer obsession.
“I constantly remind our employees to be afraid, to wake up every morning terrified. Not of our competition, but of our customers. Our customers have made our business what it is, they are the ones with whom we have a relationship, and they are the ones to whom we owe a great obligation. And we consider them to be loyal to us – right up until the second that someone else offers them a better service.”
Working Backwards is Amazon’s signature methodology for ensuring a customer obsessed product development. As the name implies, the main idea is to deeply understand the customer needs and then work backwards to develop a product.
The main elements of a working backwards document are a Press Release (PR) and several FAQs about the new product before proceeding with execution. By putting ideas in writing, product managers minimize the risk of misunderstandings and test how they can effectively pitch their idea. Stakeholders, team members, and prospective customers provide feedback on the new concept and the PM team can decide if the product is actually solving an interesting problem and is worth an investment. As a side benefit, the company ends up with great documentation across projects and teams, which speeds up new member onboarding and ensures business continuity. You can read more about the value of writing in business in one of my older posts on the subject.
A common misunderstanding is that the process is not efficient. This doesn’t mean that the process doesn’t require time. On the contrary, a good process includes a lot of writing with several feedback cycles and iterations to arrive at a compelling product definition. Often ideas evolve over several months or even years until they mature and become a vision that the company is willing to invest on. Despite being quite involved, the process is cost efficient as it doesn’t waste resources on a half baked idea. Iterating on paper is faster and cheaper than iterating on an actual product, while developing it. While you will eventually do both, you should try to maximize paper iteration.
The PR part looks like any PR published in a newspaper or blog with the customer as the target audience. In most cases these are external customers (e.g. B2C users of a service/product), but in other cases these might be internal customers (e.g. a team within the company that will use a new internal analytics tool). See here for an example by Ian McAllister, former Director at Amazon. FAQs can be external or internal. External FAQs are ones that could be published on a customer facing website or manual to provide more details on the product’s benefits and use. Internal FAQs are addressed to an internal audience and focus on the business case, financials, tech designs, operational changes, and other implementation details.
How to predict the future
“I very frequently get the question: "What's going to change in the next 10 years?" And that is a very interesting question; it's a very common one. I almost never get the question: "What's not going to change in the next 10 years?" And I submit to you that that second question is actually the more important of the two - because you can build a business strategy around the things that are stable in time. ... [I]n our retail business, we know that customers want low prices, and I know that's going to be true 10 years from now. They want fast delivery; they want vast selection. It's impossible to imagine a future 10 years from now where a customer comes up and says, "Jeff, I love Amazon; I just wish the prices were a little higher." "I love Amazon; I just wish you'd deliver a little more slowly." Impossible. And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.”
While predicting the future is impossible, it is actually quite straightforward to identify the constants around which the core customer experience evolves, and make large bets that improve performance. Amazon was very clear about selection, convenience, and low prices which enabled puting large bets and spending tens of billions of dollars to improve across these dimensions. These advantages accrue over time and create a moat around your business.
The power of wandering
Getting to the actual product requires a lot of iteration, but also a bit of wandering. At Amazon one of the famous expressions is to “invent on behalf of a customer”. This means try to understand the actual customer need in depth and then take these insights to get to the best possible solution. Jeff explains how the team created AWS:
“Much of what we build at AWS is based on listening to customers. It’s critical to ask customers what they want, listen carefully to their answers, and figure out a plan to provide it thoughtfully and quickly (speed matters in business!). No business could thrive without that kind of customer obsession. But it’s also not enough. The biggest needle movers will be things that customers don’t know to ask for. We must invent on their behalf. We have to tap into our own inner imagination about what’s possible. AWS itself – as a whole – is an example. No one asked for AWS.”
Not surprisingly, the story of inventing Echo is similar:
“No customer was asking for Echo. This was definitely us wandering. Market research doesn’t help. If you had gone to a customer in 2013 and said “Would you like a black, always-on cylinder in your kitchen about the size of a Pringles can that you can talk to and ask questions, that also turns on your lights and plays music?” I guarantee you they’d have looked at you strangely and said - No, thank you.”
Talk to your customers
Some of the above tips might be counterintuitive but this one should not be. Talking to your customers as much as you can is time well spent. Setting interviews, auditing customer support tickets, shadowing support calls, reading online reviews, or getting feedback from mailing lists are great ways to identify and eliminate blindspots. The Kindle launch had one such feedback loop. “The first Kindle included a thank you note with an email alias for customer feedback. Kessel and the rest of the team personally reviewed those emails and the overwhelming sense they got was that people loved the bold new invention. They also received feedback that led to new features in subsequent launches, like adding a light for the display.”
One way to complement customer insights is to become your own customer and use your product as much as possible. One common practice at the Amazon Marketplace was that as part of a new team member’s onboarding, they would set up a seller account and sell a few items to better understand the different flows and challenges. This was an eye opening experience for me as I better understood some - until then - theoretical concepts like how you list and price a product, check inventory, fulfill an order, and get paid. While these sales netted me just a few bucks, the value to my understanding of the product was worth much more.
One of the ways Bezos displays his relentless focus on customers is by ensuring they have access to him even as Amazon scales. Jeff made his email address public - jeff at amazon.com - so that any customer that has a problem can email him about it. I don’t know the exact amount of emails that Jeff is receiving every day but “a lot” sounds like a good guess. Jeff’s team would look for patterns - for example several issues with package delivery - and then would select some emails and forward to the respective teams with a single character - a “?”.
The team would then deep dive into the issue and put together an “escalation response” explaining the background, root cause, impact, and any actions they need to take. Jeff's idea was that "when the anecdotes and the data disagree, the anecdotes are usually right. There's something wrong with the way you are measuring" which I found surprisingly true. While this process has been covered several times, what the press usually gets wrong is that this was some kind of punishment to the team. Very far from that; it is a way to effectively address issues that impact the customer experience and eliminate blindspots as companies become too big. In addition, it is a way to empathize with customers as you hear about their real problems and challenges, as opposed to the more abstract metrics you review on a weekly basis. A percentage of delayed orders in a metrics deck at 0.01% might look good enough, but the hundreds of customers that had their order delayed are a real source of inspiration for eliminating this defect.
ACT III: EXECUTE FAST
“Speed, or more accurately velocity, matters in business. All other things being equal, the organization that moves faster will innovate more, simply because it will be able to conduct a higher number of experiments per unit of time”
- Colin Bryar & Bill Carr
You might have heard that speed matters in business. You want to be the first to launch, iterate fast, and move to new opportunities before competition arises. At the same time you want to make good decisions which require time to collect data, consider diverse perspectives, and debate different angles before deciding on the way forward. There is an inherent tension between moving fast and thinking thoroughly. Where do the two converge? The main idea is to take as much time as you need to identify product market fit. If you optimize for speed before finding product market fit, you are wasting your resources. However, as soon as you identify product market fit, execute as fast as possible.
Microservices & two pizza teams
Amazon’s secret sauce on fast execution lies in a combination of the right tech architecture and organizational structure. As companies scale, seemingly straightforward features have to be carefully planned and deployed, requiring other teams’ support, as a small mistake can bring down the whole business. A traditional response to this problem is to start introducing processes and control mechanisms, while hiring more gatekeepers and coordinators. While this minimizes the probability of a large scale event, it slows down teams even further.
A more groundbreaking approach is to eliminate the need for coordination. In their excellent book “Working Backwards”, Colin Bryar and Bill Carr give more context.
“In my tenure at Amazon I heard Jeff say many times that if we wanted Amazon to be a place where builders can build, we needed to eliminate communication, not encourage it. When you view effective communication across groups as a “defect,” the solutions to your problems start to look quite different from traditional ones”.
Bezos’s idea was to substitute the need for human to human coordination with machine to machine communication through APIs. This was the initial idea that evolved to the emergence of microservices.
However, transitioning to a microservices architecture is a necessary but not sufficient condition to solving this problem. An organization also needs the right team structure to ensure the initiative’s success. After a lot of iterations Amazon teams evolved to what was initially known as the “two pizza team” model - small enough teams that could be fed with two large pizzas. Not surprisingly, the main characteristics of these teams are very similar to the microservices principles: small, autonomous, and owning both business and tech in their space.
What this accomplishes is a combination of speed increase, ownership improvement, and risk reduction. All key requirements for innovation. I have written an extensive post on this transition here.
Optimize your decision making approach
You won’t go too far without some solid decision making. Jeff offers some advice on the tension of moving fast vs. taking time to think things through.
Avoid one size fits all decision making:
“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 decisions. 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. As organizations get larger, there seems to be a tendency to use the heavy-weight Type 1 decision-making process on most decisions, including many Type 2 decisions. The end result of this is slowness, unthoughtful risk aversion, failure to experiment sufficiently, and consequently diminished invention. We’ll have to figure out how to fight that tendency.”
The one/two way doors framework is a great way to classify decisions and then apply the decision making process that best fits each. If the decision is related to a fundamental product change that will impact most of our customers and put a lot of revenue at risk, let’s debate it more and think through the consequences and implementation details. However, if the decision is a simple change that we can A/B test, requires limited resources, and independent of the outcome it will help us learn, let’s go forward and roll back if the result is not optimal.
Don’t wait for all data to make a call:
“Most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow.”
There is no doubt that using data, research, customer interviews, and other types of inputs improve decision making. However, there is a point where collecting more data is counter productive as it delays decision making, while not having a real impact on the outcome of the decision. You should get comfortable with moving forward with partial information. Even if that means that at times the additional information would have improved the decision, on average the speed gains will more than make up for it.
Note: For Greek speakers, I gave a talk based on this post for Product Community Greece which you can watch here.
I was not around to experience this. The story is based on this article from the Entrepreneur which is in turn based on the book “Working backwards”.
“The Everything Store: Jeff Bezos and the age of Amazon.”
This value is much higher today.