The Philosophy of Jeff Bezos | Part 2

Originally Published on May 8, 2021

This is the second of six posts in the series that maps out Jeff's philosophy in his own words. In short, this particular post is the thematic compilation of the most interesting ideas from the shareholder letters written by Bezos from 2001 to 2005. To understand more about the series and my reasons behind writing it, read the preface from Part 1 of this series.

On the Economics of Amazon

Editor's Note: While reading the last few letters I have realised that I will have to do another post explaining the economics of Amazon using Jeff's quotes. Quotes alone will be insufficient for people with limited knowledge of terms like future cashflows, GAAP accounting and EPS ratio. I will write it at the end of this series. However, if you do understand these terms, you can read the letter from 2004 and that will be enough to understand the core of Amazon's economic logic.

In the meantime, I have chosen to include this section as there are many quotes that are context-independent and self-explanatory.

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...2001

Since we expect to keep our fixed costs largely fixed, even at significantly higher unit volumes, we believe Amazon.com is poised over the coming years to generate meaningful, sustained, free cash flow...2001

One of our most exciting peculiarities is poorly understood. People see that we’re determined to offer both world-leading customer experience and the lowest possible prices, but to some this dual goal seems paradoxical if not downright quixotic...We believe our ability to lower prices and simultaneously drive customer experience is a big deal, and this past year offers evidence that the strategy is working...2002

Our pricing objective is not to discount a small number of products for a limited period of time, but to offer low prices every day and apply them broadly across our entire product range...2002

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...2003

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...2005

On Customers

Amazon.com had been primarily built on two pillars of customer experience: selection and convenience...we added a third customer experience pillar: relentlessly lowering prices...2001

Our pricing strategy does not attempt to maximize margin percentages, but instead seeks to drive maximum value for customers and thereby create a much larger bottom line—in the long term...2003

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...2001

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...2003

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...2003

I know I’ve sometimes changed my mind before making purchases on Amazon.com as a result of negative or lukewarm customer reviews. Though negative reviews cost us some sales in the short term, helping customers make better purchase decisions ultimately pays off for the company...2003

Again this year, the widely followed American Customer Satisfaction Index gave Amazon.com a score of eighty-eight—the highest customer satisfaction score ever recorded in any service industry, online or off. A representative of the ACSI was quoted as saying, “If they go any higher, they will get a nosebleed.” We’re working on that...2003

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...2005

You can count on us to combine a strong quantitative and analytical culture with a willingness to make bold decisions. As we do so, we’ll start with the customer and work backward. In our judgment, that is the best way to create shareholder value...2005

Editor's note: 'we’ll start with the customer and work backward' is a great summary of Amazon's core philosophy relating to customers.

On Mistakes and Errors

I’ll just point out that one of the most important things we’ve done to improve convenience and experience for customers also happens to be a huge driver of variable cost productivity: eliminating mistakes and errors at their root. Every year that’s gone by since Amazon.com’s founding, we’ve done a better and better job of eliminating errors, and this past year was our best ever. Eliminating the root causes of errors saves us money and saves customers time...2001

On Long-Term Thinking

Editor's Note: Read the 1997 letter again. This is what Bezos says year after year, in every letter. Literally, in every single letter. That letter maps the philosophy of long term thinking in a set of bullet points. Bezos reiterates this philosophy in different ways, with different examples, but the core remains the same. You can find it in the appendix of post one of this series.

...many investors are effectively short-term tenants, turning their portfolios so quickly they are really just renting the stocks that they temporarily “own.”...2003

On Decision Making

Many of the important decisions we make at Amazon.com can be made with data. There is a right answer or a wrong answer, a better answer or a worse answer, and math tells us which is which. These are our favorite kinds of decisions...Quantitative analysis improves the customer’s experience and our cost structure...2005

...decisions require us to make some assumptions and judgments, but in such decisions, judgment and opinion come into play only as junior partners. The heavy lifting is done by the math...2005

however, not all of our important decisions can be made in this enviable, math-based way. Sometimes we have little or no historical data to guide us and proactive experimentation is impossible, impractical, or tantamount to a decision to proceed. Though data, analysis, and math play a role, the prime ingredient in these decisions is judgment...2005

Math-based decisions command wide agreement, whereas judgment-based decisions are rightly debated and often controversial, at least until put into practice and demonstrated. Any institution unwilling to endure controversy must limit itself to decisions of the first type. In our view, doing so would not only limit controversy—it would also significantly limit innovation and long-term value creation...2005

The foundation of our decision-making philosophy was laid out in our 1997 letter to shareholders...2005

Editor's Note: Read the previous note.