Lessons from Amazon’s shareholder letters

Jeff Bezos’s [latest shareholder lette](https://www.entrepreneur.com/article/292797)r was shared across the web and people marvelled at the clarity and thought that went into the letter. “Day 2 is stasis”, ”Resist proxies” and other such maxims that make you go wow, damn he’s right. Amazon is en route to becoming [a trillion dollar company](http://fortune.com/2017/03/31/amazon-stock-trillion-dollar-company-apple-tesla-google/) and in a post for the ages was [described as a Whale by M.G.Siegler](https://500ish.com/the-whale-38c3cfa2cc3e) and [was compared to the Galactus of the business world in a TechCrunch post.](https://techcrunch.com/2017/05/14/why-amazon-is-eating-the-world/) A novice asked the Master: “I perceive that one computer company is much larger than all others. It towers above its competition like a giant among dwarfs. Any one of its divisions could comprise an entire business. Why is this so?” The Master replied, “Why do you ask such foolish questions? That company is large because it is large. If it only made hardware, nobody would buy it. If it only made software, nobody would use it. If it only maintained systems, people would treat it like a servant. But because it combines all of these things, people think it one of the gods! By not seeking to strive, it conquers without effort.” I decided to ask foolish questions and started digging in to the shareholder letters from ’97 to 2012 to get a look into the company’s philosophy and inner workings. They did not disappoint. Here are my favourite parts from the letters. ### [Lessons from 1997](http://media.corporate-ir.net/media_files/irol/97/97664/reports/Shareholderletter97.pdf) * We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position. 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. * Our decisions have consistently reflected this focus. 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. * “You can work long, hard, or smart, but at [Amazon.com](http://amazon.com/) you can’t choose two out of three” * “We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.” ### [Lessons from 1998](http://media.corporate-ir.net/media_files/irol/97/97664/reports/Shareholderletter98.pdf) * “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” * 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. One person here is a National Spelling Bee champion (1978, I believe). I suspect it doesn’t help her in her everyday work, but it does make working here more fun if you can occasionally snag her in the hall with a quick challenge: “onomatopoeia!” ### [Lessons from 2000](http://media.corporate-ir.net/media_files/irol/97/97664/reports/00ar_letter.pdf) * Real Estate Doesn’t Obey Moore’s Law ### [Lessons from 2003](http://media.corporate-ir.net/media_files/irol/97/97664/reports/2003_%20Shareholder_%20Letter041304.pdf) * Long-term thinking is both a requirement and an outcome of true ownership. Owners are different from tenants. I know of a couple who rented out their house, and the family who moved in nailed their Christmas tree to the hardwood floors instead of using a tree stand. Expedient, I suppose, and admittedly these were particularly bad tenants, but no owner would be so short-sighted. Similarly, many investors are effectively short-term tenants, turning their portfolios so quickly they are really just renting the stocks that they temporarily “own.” * For instance, shortly after launching [Amazon.com](http://amazon.com/) in 1995, we empowered customers to review products. While now a routine [Amazon.com](http://amazon.com/) practice, at the time we received complaints from a few vendors, basically wondering if we understood our business: “You make money when you sell things — why would you allow negative reviews on your website?” Speaking as a focus group of one, I know I’ve sometimes changed my mind before making purchases on [Amazon.com](http://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. * Another example is our Instant Order Update feature, which reminds you that you’ve already bought a particular item. Customers lead busy lives and cannot always remember if they’ve already purchased a particular item, say a DVD or CD they bought a year earlier. When we launched Instant Order Update, we were able to measure with statistical significance that the feature slightly reduced sales. Good for customers? Definitely. Good for shareowners? Yes, in the long run ### [Lessons from 2005](http://library.corporate-ir.net/library/97/976/97664/items/193684/shareholderletter2005.pdf) * 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. As our shareholders know, we have made a decision to continuously and significantly lower prices for customers year after year as our efficiency and scale make it possible. This is an example of a very important decision that cannot be made in a math-based way. In fact, when we lower prices, we go against the math that we can do, which always says that the smart move is to raise prices. We have significant data related to price elasticity. With fair accuracy, we can predict that a price reduction of a certain percentage will result in an increase in units sold of a certain percentage. With rare exceptions, the volume increase in the short term is never enough to pay for the price decrease. However, our quantitative understanding of elasticity is short-term. We can estimate what a price reduction will do this week and this quarter. But we cannot numerically estimate the effect that consistently lowering prices will have on our business over five years or ten years or more. 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](http://amazon.com/). We’ve made similar judgments around Free Super Saver Shipping and Amazon Prime, both of which are expensive in the short term and — we believe — important and valuable in the long term. ### [Lessons from 2007](http://media.corporate-ir.net/media_files/irol/97/97664/2007letter.pdf) * We started by setting ourselves the admittedly audacious goal of improving upon the physical book. We did not choose that goal lightly. 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. * The early days of [Amazon.com](http://amazon.com/) provide an analog. It was tempting back then to believe that an online bookstore should have all the features of a physical bookstore. I was asked about a particular feature dozens of times: “How are you going to do electronic book signings?” Thirteen years later, we still haven’t figured that one out! Instead of trying to duplicate physical bookstores, we’ve been inspired by them and worked to find things we could do in the new medium that could never be done in the old one. We don’t have electronic book signings, and similarly we can’t provide a comfortable spot to sip coffee and relax. However, we can offer literally millions of titles, help with purchase decisions through customer reviews, and provide discovery features like “customers who bought this item also bought.” The list of useful things that can be done only in the new medium is a long one. * We humans co-evolve with our tools. We change our tools, and then our tools change us. Writing, invented thousands of years ago, is a grand whopper of a tool, and I have no doubt that it changed us dramatically. Five hundred years ago, Gutenberg’s invention led to a significant step-change in the cost of books. Physical books ushered in a new way of collaborating and learning. Lately, networked tools such as desktop computers, laptops, cell phones and PDAs have changed us too. They’ve shifted us more toward information snacking, and I would argue toward shorter attention spans. I value my BlackBerry — I’m convinced it makes me more productive — but I don’t want to read a three-hundred-page document on it. Nor do I want to read something hundreds of pages long on my desktop computer or my laptop. As I’ve already mentioned in this letter, people do more of what’s convenient and friction-free. If our tools make information snacking easier, we’ll shift more toward information snacking and away from long-form reading. Kindle is purpose-built for long-form reading. We hope Kindle and its successors may gradually and incrementally move us over years into a world with longer spans of attention, providing a counterbalance to the recent proliferation of info-snacking tools.I realize my tone here tends toward the missionary, and I can assure you it’s heartfelt. It’s also not unique to me but is shared by a large group of folks here. I’m glad about that because missionaries build better products. I’ll also point out that, while I’m convinced books are on the verge of being improved upon, Amazon has no sinecure as that agent. It will happen, but if we don’t execute well, it will be done by others. ### [Lessons from 2008](http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MjAyOHxDaGlsZElEPS0xfFR5cGU9Mw==&t=1) * 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. “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. * Kindle is a good example of our fundamental approach. More than four years ago, we began with a long-term vision: every book, ever printed, in any language, all available in less than 60 seconds. The customer experience we envisioned didn’t allow for any hard lines of demarcation between Kindle the device and Kindle the service — the two had to blend together seamlessly. [Amazon](https://hackernoon.com/tagged/amazon) had never designed or built a hardware device, but rather than change the vision to accommodate our then-existing skills, we hired a number of talented (and missionary!) hardware engineers and got started learning a new institutional skill, one that we needed to better serve readers in the [future](https://hackernoon.com/tagged/future). ### [Lessons from 2009](http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Mzc2NjQ0fENoaWxkSUQ9Mzc1Mjc5fFR5cGU9MQ==&t=1) * For 2010, we have 452 detailed goals with owners, deliverables, and targeted completion dates. These are not the only goals our teams set for themselves, but they are the ones we feel are most important to monitor. None of these goals are easy and many will not be achieved without invention. We review the status of each of these goals several times per year among our senior leadership team and add, remove, and modify goals as we proceed. * A review of our current goals reveals some interesting statistics: * 360 of the 452 goals will have a direct impact on customer experience. * The word revenue is used eight times and free cash flow is used only four times. * In the 452 goals, the terms net income, gross profit or margin, and operating profit are not used once. * Taken as a whole, the set of goals is indicative of our fundamental approach. Start with customers, and work backwards. Listen to customers, but don’t just listen to customers — also invent on their behalf. We can’t assure you that we’ll meet all of this year’s goals. We haven’t in past years. However, we can assure you that we’ll continue to obsess over customers. We have strong conviction that that approach — in the long term — is every bit as good for owners as it is for customers. ### [Lessons from 2010](http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9OTA4ODB8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1) * Invention is in our DNA and technology is the fundamental tool we wield to evolve and improve every aspect of the experience we provide our customers. We still have a lot to learn, and I expect and hope we’ll continue to have so much fun learning it. ### [Lessons from 2011](http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTM0NDcxfENoaWxkSUQ9LTF8VHlwZT0z&t=1) * Invention comes in many forms and at many scales. The most radical and transformative of inventions are often those that empower others to unleash their creativity — to pursue their dreams. That’s a big part of what’s going on with Amazon Web Services, Fulfillment by Amazon, and Kindle Direct Publishing * 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. ### [Lessons from 2012](http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTc5ODc4fENoaWxkSUQ9LTF8VHlwZT0z&t=1) * 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. * We build automated systems that look for occasions when we’ve provided a customer experience that isn’t up to our standards, and those systems then proactively refund customers. One industry observer recently received an automated email from us that said, “We noticed that you experienced poor video playback while watching the following rental on Amazon Video On Demand: Casablanca. We’re sorry for the inconvenience and have issued you a refund for the following amount: $2.99. We hope to see you again soon.” Surprised by the proactive refund, he ended up writing about the experience: “Amazon ‘noticed that I experienced poor video playback…’ And they decided to give me a refund because of that? Wow…Talk about putting customers first.” * When you pre-order something from Amazon, we guarantee you the lowest price offered by us between your order time and the end of the day of the release date. “I just received notice of a $5 refund to my credit card for pre-order price protection. . . What a great way to do business! Thank you very much for your fair and honest dealings.” Most customers are too busy themselves to monitor the price of an item after they pre-order it, and our policy could be to require the customer to contact us and ask for the refund. Doing it proactively is more expensive for us, but it also surprises, delights, and earns trust. * We’ve reduced AWS prices 27 times since launching 7 years ago, added enterprise service support enhancements, and created innovative tools to help customers be more efficient. AWS Trusted Advisor monitors customer configurations, compares them to known best practices, and then notifies customers where opportunities exist to improve performance, enhance security, or save money. Yes, we are actively telling customers they’re paying us more than they need to. In the last 90 days, customers have saved millions of dollars through Trusted Advisor, and the service is only getting started. All of this progress comes in the context of AWS being the widely recognized leader in its area — a situation where you might worry that external motivation could fail. On the other hand, internal motivation — the drive to get the customer to say “Wow” — keeps the pace of innovation fast * To me, trying to dole out improvements in a justin-time fashion would be too clever by half. It would be risky in a world as fast-moving as the one we all live in. More fundamentally, I think long-term thinking squares the circle. 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. * I know that we will make mistakes along the way — some will be self-inflicted, some will be served up by smart and hard-working competitors. Our passion for pioneering will drive us to explore narrow passages, and, unavoidably, many will turn out to be blind alleys. But — with a bit of good fortune — there will also be a few that open up into broad avenues. * “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” 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. All letters end with — “As always, I attach a copy of our original 1997 letter. Our approach remains the same, and it’s still Day 1”. Great companies can often be described by a single sentence. Amazon can be described with a single word, relentless. Try visiting [relentless.com](http://relentless.com) .

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