I spent last week reading Amazon’s letter to it’s shareholders. It’s remarkable that in 20+ years of business how little Amazon’s core focus has changed. Every year’s letter reinforces the beliefs laid out in their original 1997 letter, tempered with the maturity and pragmatism that comes from years of shipping. The beliefs that stood the test of time are:

  • Customer obsession
  • Focus on investing in durable businesses
  • Systems thinking that emphasizes creating positive feedback loops
  • Culture of operational excellence

Customer obsession

It’s All About the Long Term

Amazon shareholder letter, 1997

We intend to build the world’s most customer-centric company. We hold as axiomatic that customers are perceptive and smart, and that brand image follows reality and not the other way around. I constantly remind our employees to be afraid, to wake up every morning terrified. Not of our competition, but of our customers.

Amazon shareholder letter, 1998

Our vision is to use this platform to build Earth’s most customer-centric company, a place where customers can come to find and discover anything and everything they might want to buy online. We won’t do so alone, but together with what will be thousands of partners of all sizes.

Amazon shareholder letter, 1999

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… Though negative reviews cost us some sales in the short term, helping customers make better purchase decisions ultimately pays off for the company.

Amazon shareholder letter, 2003

Our energy at Amazon comes from the desire to impress customers rather than the zeal to best competitors… We do work to pay attention to competitors and be inspired by them, but it is a fact that the customer-centric way is at this point a defining element of our culture.

Amazon shareholder letter, 2012

One advantage –perhaps a somewhat subtle one –of a customer-driven focus is that it aids a certain type of proactivity. When we’re at our best, we don’t wait for external pressures. We are internally driven to improve our services, adding benefits and features, before we have to. We lower prices and increase value for customers before we have to. We invent before we have to. These investments are motivated by customer focus rather than by reaction to competition. We think this approach earns more trust with customers and drives rapid improvements in customer experience –importantly –even in those areas where we are already the leader. “

Amazon shareholder letter, 2012

Doing it proactively is more expensive for us, but it also surprises, delights, and earns trust… Proactively delighting customers earns trust, which earns more business from those customers, even in new business arenas. Take a long-term view, and the interests of customers and shareholders align.

Amazon shareholder letter, 2012

One thing I love about customers is that they are divinely discontent. Their expectations are never static – they go up. It’s human nature. We didn’t ascend from our hunter-gatherer days by being satisfied. People have a voracious appetite for a better way, and yesterday’s ‘wow’ quickly becomes today’s ‘ordinary’. I see that cycle of improvement happening at a faster rate than ever before.

Amazon shareholder letter, 2017

Business

The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital.

Amazon shareholder letter, 1997

As we do not need to build physical stores or stock those stores with inventory, our centralized distribution model has allowed us to build our business to a billion-dollar sales rate with just $30 million in inventory and $30 million in net plant and equipment.

Amazon shareholder letter, 1998

We’ll listen to customers, invent on their behalf, and personalize the store for each of them, create a virtuous cycle for the whole business. The more frequently customers visit our store, the less time, energy, and marketing investment is required to get them to come back again. In sight, in mind. Further, as we expand, each new store has a dedicated team working to make it best-of breed in its category… Finally, each new product or service further leverages our investments in distribution, customer service, technology, and brand, and can yield increased leverage on our bottom line.

Amazon shareholder letter, 1999

Online selling (relative to traditional retailing) is a scale business characterized by high fixed costs and relatively low variable costs. This makes it difficult to be a medium-sized e-commerce company.

Amazon shareholder letter, 2000

Why focus on cash flows? Because a share of stock is a share of a company’s future cash flows, and as a result, cash flows more than any other single variable seem to do the best of explaining a company’s stock price over the long term. If you could know for certain just two things, a company’s future cash flows and it’s future number of shares outstanding- you would have an excellent idea of the fair value of a share of that company today. It’s not easy, but you can make an informed forecast of future cash flows by examining a company’s performance in the past and by looking at factors such as the leverage points and scalability in that company’s model.

Amazon shareholder letter, 2001

…we transform much of customer experience—such as unmatched selection, extensive product information, personalized recommendations, and other new software features—into largely a fixed expense. With customer experience costs largely fixed (more like a publishing model than a retailing model), our costs as a percentage of sales can shrink rapidly as we grow our business. Moreover, customer experience costs that remain variable—such as the variable portion of fulfillment costs—improve in our model as we reduce defects. Eliminating defects improves costs and leads to better customer experience.

Amazon shareholder letter, 2002

Our ultimate financial measure, and the one we most want to drive over the long-term, is free cash flow per share. Why not focus first and foremost, as many do, on earnings, earnings per share or earnings growth? The simple answer is that earnings don’t directly translate into cash flows, and shares are worth only the present value of their future cash flows, not the present value of their future earnings. Future earnings are a component—but not the only important component—of future cash flow per share. Working capital and capital expenditures are also important, as is future share dilution.

Amazon shareholder letter, 2004

Free cash flow is defined as net cash provided by operating activities less purchases of fixed assets, including capitalized internal-use software and website development, both of which are presented on our statements of cash flows.

Amazon shareholder letter, 2004

Senior leaders that are new to Amazon are often surprised by how little time we spend discussing actual financial results or debating projected financial outputs. We believe that focusing our energy on the controllable inputs to our business is the most effective way to maximize financial outputs over time.

Amazon shareholder letter, 2009

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
  • It’s durable in time –with the potential to endure for decades.

Amazon shareholder letter, 2014

Marketplace Marketplace’s early days were not easy. nternally, Marketplace was known as SDP for Single Detail Page. The idea was to take our most valuable retail real estate –our product detail pages –and let third-party sellers compete against our own retail category managers. It was more convenient for customers, and within a year, it accounted for 5% of units… The success of this hybrid model accelerated the Amazon flywheel. Customers were initially drawn by our fast-growing selection of Amazon-sold products at great prices with a great customer experience. By then allowing third parties to offer products side-by-side, we became more attractive to customers, which drew even more sellers. This also added to our economies of scale, which we passed along by lowering prices and eliminating shipping fees for qualifying orders.

Prime Ten years ago, we launched Amazon Prime, originally designed as an all-you-can-eat free and fast shipping program. We were told repeatedly that it was a risky move, and in some ways it was. In its first year, we gave up many millions of dollars in shipping revenue, and there was no simple math to show that it would be worth it. Our decision to go ahead was built on the positive results we’d seen earlier when we introduced Free Super Saver Shipping, and an intuition that customers would quickly grasp that they were being offered the best deal in the history of shopping. In addition, analysis told us that, if we achieved scale, we would be able to significantly lower the cost of fast shipping… Among other things, we watch Prime free trial starts, conversion to paid membership, renewal rates, and product purchase rates by members entering through this channel. We like what we see so far and plan to keep investing here.

AWS Structurally, AWS is far less capital intensive than the mode it’s replacing –do-it-yourself datacenters –which have low utilization rates, almost always below 20%. Pooling of workloads across customers gives AWS much higher utilization rates, and correspondingly higher capital efficiency.

Amazon shareholder letter, 2014

Our technologies are almost exclusively implemented as services: bits of logic that encapsulate the data they operate on and provide hardened interfaces as the only way to access their functionality. This approach reduces side effects and allows services to evolve at their own pace without impacting the other components of the overall system. Service oriented architecture—or SOA— is the fundamental building abstraction for Amazon technologies.

Amazon shareholder letter, 2010

All the effort we put into technology might not matter that much if we kept technology off to the side in some sort of R&D department, but we don’t take that approach. Technology infuses all of our teams, all of our processes, our decision-making, and our approach to innovation in each of our businesses. It is deeply integrated into everything we do.

Amazon shareholder letter, 2010

I am emphasizing the self-service nature of these platforms because it’s important for a reason I think is somewhat non-obvious: even well-meaning gatekeepers slow innovation. When a platform is self-service, even the improbable ideas can get tried, because there’s no expert gatekeeper ready to say “that will never work!” And guess what –many of those improbable ideas do work, and society is the beneficiary of that diversity.

Amazon shareholder letter, 2011

Vision and product development approach

In closing, consider this most important point: the current online shopping experience is the worst it will ever be. It’s good enough today to attract 17 million customers, but it will get so much better. Increased bandwidth will result in faster page views and richer content.

Amazon shareholder letter, 1999

Anything that has persisted in roughly the same form and resisted change for 500 years is unlikely to be improved easily. At the beginning of our design process, we identified what we believe is the book’s most important feature. It disappears. When you read a book, you don’t notice the paper and the ink and the glue and the stitching. All of that dissolves, and what remains is the author’s world. We knew Kindle would have to get out of the way, just like a physical book, so readers could become engrossed in the words and forget they’re reading on a device. We also knew we shouldn’t try to copy every last feature of a book—we could never out-book the book. We’d have to add new capabilities—ones that could never be possible with a traditional book.

Amazon shareholder letter, 2007

Our vision for Kindle is every book ever printed in any language, all available in less than 60 seconds.

Amazon shareholder letter, 2007

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. “Working backwards” from customer needs can be contrasted with a “skills-forward” approach where existing skills and competencies are used to drive business opportunities. The skills-forward approach says, “We are really good at X. What else can we do with X?” That’s a useful and rewarding business approach. However, if used exclusively, the company employing it will never be driven to develop fresh skills. Eventually the existing skills will become outmoded. Working backwards from customer needs often demands that we acquire new competencies and exercise new muscles, never mind how uncomfortable and awkward-feeling those first steps might be.

Amazon shareholder letter, 2008

Decision making

We first measure ourselves in terms of the metrics most indicative of our market leadership: customer and revenue growth, the degree to which our customers continue to purchase from us on a repeat basis, and the strength of our brand. We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise.

Amazon shareholder letter, 1997

We will continue to make investment decisions in light of long-term market leadership considerations rather than short term profitability. We will continue to measure our programs and the effectiveness of our investments analytically, to jettison those that do not provide acceptable returns, and to step up our investment in those that work best. We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows. We will balance our focus on growth with emphasis on long term profitability and capital management. At this stage we choose to prioritize growth because we believe that scale is central to achieving the potential of our business model.

Amazon shareholder letter, 1997

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… 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.

Amazon shareholder letter, 2005

Before we invest our shareholders’ money in a new business, we must convince ourselves that the new opportunity can generate the returns on capital our investors expected when they invested in Amazon. And we must convince ourselves that the new business can grow to a scale where it can be significant in the context of our overall company. Furthermore, we must believe that the opportunity is currently underserved and that we have the capabilities needed to bring strong customer-facing differentiation to the marketplace. Without that, it’s unlikely we’d get to scale in that new business.

Amazon shareholder letter, 2006

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.

Amazon shareholder letter, 2015

“Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.”

Amazon shareholder letter, 2016

Here’s a starter pack of essentials for Day 1 defense:

  • Customer obsession
  • Skeptical view of proxies
  • Eager adoption of external trends
  • High-velocity decision making. Customer obsession Obsessive customer focus is by far the most protective of Day 1 vitality. Why? There are many advantages to a customer-centric approach, but here’s the big one: customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf. Resist Proxies As companies get larger and more complex, there’s a tendency to manage to proxies… A common example is process as proxy. Good process serves you so you can serve customers. But if you’re not watchful, the process can become the thing. You stop looking at outcomes and just make sure you’re doing the process right. Good inventors and designers deeply understand their customer. They spend tremendous energy developing that intuition. They study and understand many anecdotes rather than only the averages you’ll find on surveys. They live with the design. Embrace External Trends The outside world can push you into Day 2 if you won’t or can’t embrace powerful trends quickly. High-velocity decisions Speed matters in business –plus a high-velocity decision making environment is more fun too. We don’t know all the answers, but here are some thoughts.
  • First, never use a one-size-fits-all decision-making process. Many decisions are reversible, two-way doors. Those decisions can use a light-weight process. For those, so what if you’re wrong? I wrote about this in more detail in last year’s letter.
  • Second, 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. Plus, either way, you need to be good at quickly recognizing and correcting bad decisions. If you’re good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure.
  • Third, use the phrase “disagree and commit.” This phrase will save a lot of time. If you have conviction on a particular direction even though there’s no consensus, it’s helpful to say, “Look, I know we disagree on this but will you gamble with me on it? Disagree and commit?” By the time you’re at this point, no one can know the answer for sure, and you’ll probably get a quick yes.
  • Fourth, recognize true misalignment issues early and escalate them immediately. Sometimes teams have different objectives and fundamentally different views. They are not aligned. No amount of discussion, no number of meetings will resolve that deep misalignment. Without escalation, the default dispute resolution mechanism for this scenario is exhaustion. Whoever has more stamina carries the decision. So, have you settled only for decision quality, or are you mindful of decision velocity too? Are the world’s trends tailwinds for you? Are you falling prey to proxies, or do they serve you? And most important of all, are you delighting customers? We can have the scope and capabilities of a large company and the spirit and heart of a small one. But we have to choose it.

Amazon shareholder letter, 2016

Culture

We don’t celebrate a 10% increase in the stock price like we celebrate excellent customer experience. We aren’t 10% smarter when that happens and conversely aren’t 10% dumber when the stock goes the other way. We want to be weighed, and we’re always working to build a heavier company.

Amazon shareholder letter, 2012

As the famed investor Benjamin Graham said, ‘‘In the short term, the stock market is a voting machine; in the long term, it’s a weighing machine.’’ We’re a company that wants to be weighed, and over time, we will be—over the long term, all companies are.

Amazon shareholder letter, 2000

You can write down your corporate culture, but when you do so, you’re discovering it, uncovering it –not creating it. It is created slowly over time by the people and by events –by the stories of past success and failure that become a deep part of the company lore. If it’s a distinctive culture, it will fit certain people like a custom-made glove. The reason cultures are so stable in time is because people self-select.

Amazon shareholder letter, 2015

One area where I think we are especially distinctive is failure. I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment. Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs.

Amazon shareholder letter, 2015

I believe high standards are teachable. In fact, people are pretty good at learning high standards simply through exposure. High standards are contagious. Bring a new person onto a high standards team, and they’ll quickly adapt. The opposite is also true. If low standards prevail, those too will quickly spread.

What do you need to achieve high standards in a particular domain area? First, you have to be able to recognize what good looks like in that domain. Second, you must have realistic expectations for how hard it should be (how much work it will take) to achieve that result – the scope.

Often, when a memo isn’t great, it’s not the writer’s inability to recognize the high standard, but instead a wrong expectation on scope: they mistakenly believe a high-standards, six-page memo can be written in one or two days or even a few hours, when really it might take a week or more!

More subtle: a culture of high standards is protective of all the “invisible” but crucial work that goes on in every company. I’m talking about the work that no one sees. The work that gets done when no one is watching. In a high standards culture, doing that work well is its own reward – it’s part of what it means to be a professional.

Amazon shareholder letter, 2017

Operational excellence

To us, operational excellence implies two things: delivering continuous improvement in customer experience and driving productivity, margin, efficiency, and asset velocity across all our businesses… Often, the best way to drive one of these is to deliver the other. For instance more efficient distribution yields faster delivery times, which in turn lowers contacts per order and customer service costs. These, in turn improve customer experience and build brand, which in turn decreases customer acquisition and retention costs.

Amazon shareholder letter, 1999

Hiring

During our hiring meetings, we ask people to consider three questions before making a decision:

  • Will you admire this person? If you think about the people you’ve admired in your life, they are probably people you’ve been able to learn from or take an example from. For myself, I’ve always tried hard to work only with people I admire, and I encourage folks here to be just as demanding. Life is definitely too short to do otherwise.
  • Will this person raise the average level of effectiveness of the group they’re entering? We want to fight entropy. The bar has to continuously go up. I ask people to visualize the company 5 years from now. At that point, each of us should look around and say, “The standards are so high now –boy, I’m glad I got in when I did!”
  • Along what dimension might this person be a superstar? Many people have unique skills, interests, and perspectives that enrich the work environment for all of us. It’s often something that’s not even related to their jobs.

Amazon shareholder letter, 1998