Lessons for a Marketplace from Amazon’s Shareholders' Letters

Amazon has made itself the benchmark for all marketplaces. As part of planning for our team’s product and overall company strategy, I decided to look at how Amazon got to where it is today. As is often said, it is important not to emulate where someone is but how someone got there. In that spirit, I went through all the shareholder letters of Amazon, since its IPO in 1997 to 2017.

Bezos is long known for focusing on the long term instead of chasing short-term quarterly profits. His first articulation of the same occurs introduced in his very first shareholder letter titled “It’s all about the long term” in 1997. This letter has been appended to all subsequent shareholder letters to remind investors that Amazon continues to follow the investment philosophy of following long-term gains and not quarterly profits, each year.

While going through each year's shareholders’ letter, I have appended snippets which I found interesting, highlighted in blue.

1997 Shareholder Letter:

1. The very first mention of personalization and accelerating discovery happens in this letter — long before these words became synonymous with marketplaces.

Personalization & Discovery

2. Key metrics for Amazon — customer & revenue growth, %age of repeat customers and strength of brand. To survive in the then hot pool of internet startups, Amazon knew it had to create a strong brand to stay on top of the mind of its consumers.

Metrics which matter

3. Setting the bar high for hiring (amazon fiercely competed with Google and Microsoft to attract the best talent pool).

4. Word of mouth as the most powerful acquisition tool.

The paragraph tells how Amazon is overlaying digital retail with physical retail and the advantages it presents. Powerful concepts which still define today’s marketplace.

Massive growth

5. Continuously focussed on customer experience.

1998–1999 Shareholder Letter:

1. Focus on word-of-mouth growth due to ‘ease of use, low prices and services we deliver’

3. Reiterates the importance of setting the bar high for hiring

3. Virtuous cycle: use scale to make Amazon relevant for a wider group of customers and the frequency with which they visit

4. Each new product to leverage investments in brand, distribution, customer service and tech to improve

5. Focus on the internet as a megatrend: “Increased bandwidth will result in faster page views and richer content”

Be afraid of not your competition, but your customers

The importance of hiring good talent at the start — it is this talent which allowed Amazon to build the infra to sustain its massive growth

Personalizing the store for each and every customer — this is 1999. Long before ‘thinking backwards’ became cool

The virtuous cycle

Leveraging existing investments

The focus was on building good distribution

Reiterating and going back to his focus on building Amazon for the long term.

Riding the wave of the Internet — the whole reason Amazon became possible.

2000 Shareholder Letter:

1. Relentless improvement in customer experience to drive industry growth and new customer adoption
2. Improvements in CX to be driven by an increase in bandwidth, disk space and processing power and become cheaper — allowing more personalization for each user

2001 Shareholder Letter:

1. Focus on relentlessly lowering prices along with selection and convenience to drive growth (cost reduction loop)
2. Highest customer satisfaction score of 84 for any retailer ever

Invoking the flywheel again

Customer satisfaction is off the charts!

Concrete example of improving customer convenience

Not so obvious amongst large organisations.

2002 -2003 Shareholder Letters:

1. Transforming customer experience into fixed costs- extensive product info, personalized recommendations — all are software features, thereby reducing costs as %age of sales
2. Willing to forego revenue for improved CX e.g. displaying bad reviews of product, instant order update

3. We personalize the store for each and every customer

Cx as a fixed expense thanks to software

Negative reviews against products help people decide better.

Marginal cost of improvements gets reduced with scale.

2004–2008 Shareholders Letters:

1. Diversification strategy employed to enhance revenues from technology /practices/product creation
2. Focus on cashflow earnings, AWS, Kindle — away from the marketplace model
3. Durability of key customer needs enforces consistent investments — people will continue to want lower prices 10 years from now and faster delivery.
4. Our pricing objective is to earn customer trust, not optimize for short-term profit dollars

Basic customer needs driven by human nature will always remain the same.

Earning customer trust is paramount.

2010 Shareholders Letters:

Financials follow from good customer experience. As a company, objective is to solve the customer problems.

2011 Shareholder Letters:

The importance of advanced ML and data processing techniques to continuously learn from data instead of rule-based systems which are static and brittle — AI enabled search

AI-enabled search. Company are still catching up 12 yrs on

2013 Shareholder Letter:

1. Delivering customer delight via Amazon Prime
2. Decentralized distribution of invention throughout the company

2014 Shareholder Letter:

1. Focus on prime and AWS— seeds that grew organically from the scale which the marketplace acquired and the resources invested in building the platform

2015–17 Shareholder Letters:

1. Highlights on Prime, AWS, Marketplace and sustainability… investments in digital content.

Also combine it with the fact that you have read ‘brad stone’s book

Going through the shareholder letters was a wonderful experience in going through the mind of a shrewd operator and brilliant capital allocator.

If one pairs this shareholders' letters reading with Brad Stone’s book ‘The Everything Store’ — it gives one a distinct picture of how Amazon came to be the mammoth it is today. It is one of the most widely respected, feared and studied companies of our time — all in one breath.

For marketplaces especially, one thing that stands out is that Amazon didn't try to become everything all at once. It slowly started with books. Focussed on customer experience and distribution. And once he had the flywheel going in full motion, that is when Amazon upped its ambition through AWS with whatever it had built. AWS, in fact, was a byproduct of the scale which the marketplace reached. The goal was always to become the everything store on the planet.