What is the Flywheel Effect? ​​Flywheel Effect Review

The Flywheel Effect refers to the fact that the various business modules of a company will organically promote each other, just like meshing gears driving each other. It takes a lot of effort to go from static to rotation at first, but every effort will not be in vain. Once the gears start to rotate, they will rotate faster and faster. This is also the secret of Amazon's success.

Amazon flywheel effect visual diagram

Flywheel Effect Theory

1. The starting point of the flywheel is customer experience, and excellent customer experience is driven by data.

A common case I hear about from Amazon is that someone bought a book or a piece of clothing from Amazon, but applied for after-sales service because they didn’t like it or it was not suitable for them. The customer service said that there was no need to return the product and they would just pay for it. This was because Amazon fully evaluated the importance of membership and the trouble of returning products and made the decision. Amazon’s customer experience is truly admirable. Data-driven improvement of customer experience and even industry transformation is already a trend, such as Hongling Group and Shangpin Home Delivery.

2. The formation of the flywheel has built a "new barrier" in the Internet era - the customer experience barrier.

Real boundaries and barriers such as technology can be broken, but once cognition or loyalty is established, it is difficult to accommodate or change, and such barriers are difficult to break.

Analysis of the Flywheel Theory

1. The driving force behind the rapid operation of the entire gear set: Prime - Amazon's membership service.

The Prime business can bring huge traffic to Amazon and greatly improve customer loyalty. The most direct impact is that Amazon members have much higher purchase frequency and purchase amount than non-members. The more users buy and consume, the more worth it is.

2. Marketplace-third-party seller platform.

When Amazon has enough customers, more third-party merchants will be willing to open stores on Amazon.

With a large number of loyal consumers and third-party sellers, Amazon's bargaining power will be enhanced, and it will reduce costs when purchasing, thereby passing the benefits to consumers. Consumers can buy more high-quality and low-priced products on the Amazon platform, so they will continue to remain Prime members, and there will also be a steady stream of new members joining.

As a result, third-party sellers will find that Amazon's self-operated bargaining power is so strong that it is cheaper than their own, so they can only choose to cut costs. At this time, Amazon will take the opportunity to provide third-party sellers with a full set of logistics, warehousing and system storage FBA (Fulfillment By Amazon) services. When third-party sellers use FBA services and store their goods in Amazon's logistics center, the delivery time is guaranteed, so they can also be included in the range of options for Prime members. As a result, the range of products available to Prime members is further expanded, and this membership is more valuable. When Amazon handles enough goods every day, the cost of logistics itself will also decrease.

3. AWS-Amazon's cloud service.

Any merchant or third-party company can put their entire system on AWS. In this way, you not only sell goods on Amazon, but also use Amazon's FBA service for logistics, and run your own IT system on AWS. It will be extremely difficult to leave Amazon.

The Logic of the Flywheel Effect

The more products there are, the more choices customers have; the more choices customers have, the more membership services they purchase; the more people purchase memberships, the more frequently and in what amounts they spend; the more frequently and in what amounts they spend, the more Amazon will push prices down on suppliers; the more Amazon pushes prices down, the more customers will profit... This flywheel keeps spinning, and has made the Amazon empire flourish for twenty years.