MDH 28 | The Bezos Letters

 

If it’s better for customers, it would be better for Amazon. Amazon’s success was largely founded on this principle by its creator, Jeff Bezos. In this interview with Victoria Wieck, Steve Anderson, the best-selling author of the book The Bezos Letters, talks about how Bezos built his company based on his obsession over customers. Tackling Bezos’ business model, Victoria and Steve also look into how you should take calculated risks, the importance of writing out your business plan as if it were an essay, the four cycles every business goes through, and more. Tune in and discover the growth principles Bezos has used to get to where he is now.

 

Steve Anderson can be reached at https://www.thebezosletters.com

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The Bezos Letters: Amazon’s Hidden Roadmap To Success With Steve Anderson

How Amazon Was Founded Largely Upon Obsessing Over Customers By Jeff Bezos

We have an amazing guest. I’m floored with the information that he has and the book that he has written. His name is Steve Anderson. He has written a book called The Bezos Letters as Jeff Bezos, the guy who runs our world right now. In this book, he deconstructs the 21 letters that Jeff Bezos sent to the Amazon shareholders over time. Otherwise, he’s an amazing insightful person with a lot of different industry backgrounds that culminated in this book. The book was the bestseller on The Wall Street Journal, USA Today and Amazon. It’s an international bestseller. He has got thousands of followers on LinkedIn. Without further ado, I want to welcome, Steve Anderson.

Victoria, thank you. It’s so great to be here with you.

I’m sure I’ve got everybody’s curiosity peaked. First of all, why did you deconstruct the 21 letters that he wrote to Amazon shareholders? Were you one of the shareholders?

No, I’m not. I haven’t been and now it’s a bit expensive. It’s one of those things I regret not doing this years ago. I came up with the idea through my work in the insurance industry, where I’ve spent my entire career. I’ve spent helping insurance agents or brokers understand and implement technology in their organizations. What I came to the realization of was that the biggest risk businesses face now is not taking enough risk. That’s counterintuitive certainly for the insurance industry because we’re all about reducing risk and mitigating it. I started researching companies that had done it well. Meaning embraced technology and implement it and those that hadn’t.

Those that hadn’t are well-known now, Kodak, BlackBerry, Blockbuster, Sears and Montgomery Ward. There’s a whole list of them out there. I also was researching who has done it well. I came across Amazon. I say now but at that time, it was like, “Amazon has done well. I wonder how.” That was the question I started asking. I came across the letters to shareholders that Jeff Bezos started writing in 1997 when they went public. I was astounded at the amount of information he gave and talked about what his thinking is and how they operate at Amazon. That started giving me some clues as to why Amazon was and is and continues to be as successful as they are. That resulted in the fourteen principles, four cycles and all of the growth principles that I believe Bezos has used to get to where he is now.

The biggest risk businesses face now is not taking enough risk.

I read the book The Everything Store. I found the book fascinating. It goes through his early years when he was moderately successful. When you read it, you do get the sense of how he does the four different phases of building any business meaning as a bookstore then a toy store and all the different stores. When you look at companies like Blockbuster and all these other companies that are not with us anymore, do you think that it’s necessarily how much risk they took or they just forgot to evolve or reinvest?

I’m going to put it in Bezos’ speak. What he would say is that those companies became day two companies. One of his mantras is, “It’s always day one. It’s still day one.” That idea is that Bezos still thinks of Amazon as a startup. That’s crazy to think about, given how big they are. For your readers, it’s also important to understand Bezos started like every one of you reading. Meaning on his hands and knees, putting books in packages and taking them to the post office so they could be mailed out to customers. One of the phrases I use in the book is, “One of the biggest risks of success is actual success because you tend to start protecting what got you there, not looking at what’s next.” Blockbuster is a great example of that, not being able to adjust their business model or kill it when they started understanding that streaming was going to be something. Success gets business owners in a mindset of, “I got to protect what got me here, not look at what’s next.”

There’s a lot of truth to that. I came across this quote by Winston Churchill. You might have come across that too because you seem like you’re a well-read guy. It said something like, “Success is not final and failure is not fatal.” If you look at that and go, “What an interesting quote,” I wonder if success is the cause of their failure because success is not final.

Failure can be the cause of success. My first principle is called Encourage Successful Failure because Bezos has instilled in Amazon this idea that experimentation is key to invention. If you’re going to do an experiment, you don’t know if it’s going to work because if you did, it’s not an experiment. The whole nature of it is, “We don’t know what to do next. Let’s try this.” Amazon has been built on that mindset of experimenting. It’s not doing stupid stuff. It’s calculated. You protect the downside. In fact, Amazon has intolerance for incompetence. If it’s a failure because of incompetence, you’re probably gone. If it’s a failure because you’re trying to test something new then you’re probably encouraged to keep going, even in the midst of failure.

You’re protecting your downside and what’s working. Would you say that they are looking at the 80/20 Rule where the 20% that’s bringing you the 80%, they are going to always protect that but they’re going to have to look for the new 20%?

MDH 28 | The Bezos Letters

The Bezos Letters: 14 Principles to Grow Your Business Like Amazon

Yes, that’s a great way to look at it.

For my readers, would you explain that a little bit more in granular detail? That’s an important lesson. Going back to what you said about how Jeff Bezos started his company very much like everybody reading, I would go even further than that. If you look at companies like Google, Facebook, Amazon and Apple, they all started their companies with $5,000 capital doing everything themselves. This is a relevant question in regard to taking the experimental risks because when we’re talking about taking more risks, Steve is not telling you to go and take more risks for the sake of taking them.

To try and answer that question, let me give you an idea of what is one of the pivotal tools that Bezos instilled at Amazon that has led to its continued growth. That’s called the six-page narrative. In 2004, they were fairly “old” at that point. Bezos banned PowerPoint at Amazon or Keynote. Any slide-oriented presentation was no longer acceptable to pitch an idea to a new product. It developed over a few years. You were required to write out an essay. It’s called a six-page narrative. It starts with a press release called a future press release on the day the product you’re pitching is released to the public. It follows an FAQ.

Here’s the point. It requires so much thinking to write out your ideas and anticipate, “Here are the problems. Here are the questions. Here’s what we don’t know how to do that we’ll have to learn.” That’s protecting crazy ideas because you’ve got to think it through and Bezos believes in writing things out. Even if you look back at the shareholder letters, that’s the core of what he did. He wrote out for shareholders and everybody else his thought process and that’s why they’re so valuable.

What you’re saying of this whole thing is to have a pulse on your business and customers so that you understand where your business is, where your stomach is as far as how much risk you can take and where your customers are going. One thing whether you’re evolving or not, the customers are always evolving. You are always evolving. You have to have a pulse and pick an accurate thing. Also, I like the idea of writing out your business plan or anything that you’re getting into because the act of being able to write it out will get you thinking about all the execution details. When you write things out, you’re like, “This sounds stupid.”

Encourage successful failures because failure can be the cause of success.

Going back to protecting the downside is, if it doesn’t make sense on paper when you write it out, it probably won’t make sense as you implement it. It’s the whole idea of slowing down to speed up. A quote from Andy Jassy, who’s the former CEO of Amazon Web Services now becoming and replacing Jeff Bezos as CEO of Amazon. What he said is, “Too often, engineers go into a project and they work and work. They get to the end and they end up with something that doesn’t work. Whereas if they had taken the time beforehand to think through all of the issues and problems, they save more time than they waste having to write out those ideas.”

From the business point of view, like from the business planning and getting stockholders to listen to you, we’ve covered all this. When it comes to what Amazon did, in my mind, in terms of their competitive advantage, there are so many different advantages and he has built all kinds of barriers to entry, which is outside of the scope now. What I do want to mention is that the one thing from the business I come from is how he revolutionized customer service. There needs to be another word for customer service now that he had set a whole new standard because the customer service that most of us experienced before Amazon wasn’t customer service. It was an afterthought. If they gave it to you, it’s fine. There has been nobody who has built a company around that.

A key principle, it’s my principle number four, called Obsess Over Customers. Obsess is Bezos’ words. In that first 1997 letter is that, “We will obsess over customers.” You explained what the implications of that mindset have been, which is an extraordinary development of all kinds of things that are focused on the customer. You said we talked about customer experience, customer journey and customer focus but obsess over customers has a different connotation to the point where Amazon has created automated customer service. Meaning they monitor people’s interaction. If it’s not up to a standard that they have set, they might automatically refund money without the customer even knowing something was wrong.

That happened to me twice. I bought a pair of athletic leisure yoga pants. I wanted to have them for my business trip and I was leaving. Amazon Prime delivered it in two days. I ordered it three days ahead. I didn’t receive it on day two. I tracked it and it says it was delivered. I live in an area where there was no theft. I emailed and told them I hadn’t received it but the double thing says I had it. I don’t know if I was ever going to get it or not because I was leaving for a trip for fourteen days. By the time this person got back to me, they had already credited my account. Lo and behold, by the time the person got on the phone with me, I’m looking at a package in front of my door.

I told them, “I’m going to let you know.” She was like, “We can either send you another.” I said, “No.” I was looking at this thing at my door. They anticipated. They have great anticipation. The other thing I would say about Amazon with their business model, too, is that there are so many things he did that are revolutionary. I have dealt with department stores, specialty stores and in-flight duty-free. I’ve dealt with people and companies. We’re talking like Harrods and all these companies all over the world, the discussions about customer service, how obsessed they are about customer service and all the things they do for their customers.

MDH 28 | The Bezos Letters

The Bezos Letters: One of the biggest risks of success is actual success because you tend to start protecting what got you there and not look at what’s next.

 

I’ve been in large companies in America where senior management will say these things but they didn’t care for their customers. They didn’t even like the customers they have. They come up with a new campaign to get a whole new group of customers. Sometimes they think it’s one group or the other. Bezos elevated that. He blew it off the chart. The second thing that he did that was revolutionary in my mind is that he was probably the first person who has built a part of his success from collaborations. He let all third-party people come in and do all that stuff. It was a brilliant business model because he was able to get reach from everybody.

I haven’t read the 21 letters and your book yet, which I’m going to. I would highly suggest that you read Steve’s book called The Bezos Letters, where he deconstructs 21 letters that Jeff Bezos wrote to Amazon shareholders. It’s valuable because I don’t know that he would write the same letters now with that same transparency and eagerness to his shareholders because he doesn’t have to. It’s a different company now but that’s relevant. As successful as Jeff Bezos has been, there hasn’t been a lot of books written about him. There are strategies. There have been portions of it. If you are a small businessperson, I would highly recommend that you read that because he did a lot of things. The poor man struggled for the first 10 to 15 years. He struggled downright dogfight every quarter for decades. Getting back to my question about the idea of collaboration, was that part of his goal?

For him, it was obsessing over customers. In the early 2000s, two-day shipping for Prime, his senior leadership team thought he was crazy. They fought him tooth and nail to not pay free two-day shipping. What he said was, “If it’s better for customers, it will be better for Amazon and our shareholders.” Now we look back, going, “Of course.” What did free two-day shipping do? It removed a barrier and friction point. Do you remember the days when we would go online and you get all the way through the shopping cart and all of a sudden there was a $20 shipping fee? We stopped and abandoned carts. That’s one example. I’ll get to your question on the next one. Amazon Marketplace is allowing third-party sellers to sell their products on Amazon’s most valuable real estate, their website.

Back to successful failure, that was the third iteration of them experimenting with what would work. The first was called Amazon Auctions. They were trying to compete with eBay. The second was called zShops, which was third-party sellers but in a whole different section of the website, bad customer experience. The third was third-party seller, Amazon product, literally next to each other on the same page. The senior leadership team thought he was crazy but what he said was, “If somebody else can have the inventory and/or at a better price, it’s better for customers. Therefore, it will ultimately be better for Amazon.” They created a whole business around fulfillment services for third-party sellers who could never afford to do what Bezos did for those first 10 or 15 years, which is built this amazing logistics infrastructure to get packages to someone’s porch.

I’m no Bezos and neither are you. There’s only one of him out there. You can pick a lot of different things about his business model and we are now seeing some cracks of his success as well. I’m sure he’ll deal with that. For me, I’m a customer service-centric person. I work with a lot of corporations that compete with Amazon. I’ve seen their reactions like, “Amazon doesn’t exist. They don’t do our category well.” I’m like, “Give it time. They will fight,” and they have. Having that incredible customer-centric mindset and when I say that, it’s not like you’re giving them lip service.

Experimentation is key to invention.

I’m not going to mention names. I’ve been in companies where they had names for customers like, “We’re going to call our customer Megan. We’re going to call the 50-year-old customers Elena.” They got their lifestyle demographics but they are completely missing the point. They have the name, demographics, gender and income group isn’t going to solve the problem. You have to understand the mindset of the person and preferences on how they want to shop and want to be delivered. I also love how Amazon has the anticipated shipping so that if I’m going to buy for four days, you can choose your ship date. They do make it so easy that you feel like you’re an idiot if you go somewhere else to shop for something.

Several times in 2020, which for everybody has been unique and different, I can go to the store and buy that and my wife would say, “It was easier to let Amazon ship and bring it to your door.” Because they have built that up and they can fulfill that promise 99.99% of the time.

You say here there are four key growth cycles that every successful business company is always intentionally moving through. What are the four key growth cycles?

Test, cycle one. Once you figure out what’s going to work, you build it. You accelerate the growth once you see it’s working right and then you scale. Even you can look at Amazon in the early days, testing, building, accelerating and scale. One of my questions when I wrote the book was, “How in the world do they have the number of employees they have?” In 2020, they added over 450,000 employees to that company. How in the world can you do that and still maintain culture? Those are the four cycles. The fourteen principles are grouped into each of those cycles that seem appropriate for that stage.

Maybe you want to recap. In the 21 letters that he wrote to the shareholders, what do you think for a small businessperson are the top three main takeaways? We already discovered the customer service part. Any other relevant things that you haven’t mentioned?

MDH 28 | The Bezos Letters

The Bezos Letters: Once you figure out what’s going to work, build it. You accelerate the growth once you see it’s working right and then scale.

 

I’ll go back to a couple of things we talked about. Encourage Successful Failure tends to be something that resonates with people. Amazon and Bezos have had some spectacular failures, which you don’t tend to remember because they’ve had some great successes, too.

Let’s go over the failures just a couple because people would like to know.

Amazon Auctions and zShops, that’s just an example. Probably their biggest failure is the Amazon Fire Phone.

I remember that.

Most people don’t. It was released in 2014. Jeff Bezos was up on stage saying, “This is the next great thing.” In 2014, iPhone had been out for seven years. Android phones were already out. Who needed another phone? Nobody. That was Bezos’ pet project. He pushed that and thought it was a great idea. It shows you, as smart as he is, he even makes bad decisions sometimes. At the end of 2014, they wrote off $178 million in development and inventory costs. The price of the phone dropped to $0.99 and they couldn’t give it away.

Obsess over customers.

That’s a spectacular failure.

Tying this, the success out of that is that same group that created the Fire Phone was also working on another project. That project turned out to be the Amazon Echo and then Alexa. All that voice processing work that they learned about creating a phone, they were able to apply into the Echo hardware. We can agree that the combination of Echo and Alexa has been successful.

What are the things that you think that Amazon has room to improve? What are the things that they can’t do as well as other people? I’ve got my ideas on that.

There are several. You’ve hinted at this. We’ve had a bit more of some questions about their size, “Could they be too big?” About the third-party marketplace, “Are they using data from third-party sellers to create their own private label products?” Employees, it’s focused on fulfillment center workers and warehouse workers, “Could they treat them better?” Those are at least three areas and they’re working on them. The last letter is the 2020 letter. My book stops at the 2018 letter. There’s now been 2019 and 2020. We’re starting to think about writing a second edition to wrap up those last two letters into it.

One of the things in the 2020 letter that Bezos said was, “We need to rethink or improve our relationship with employees.” Here’s a downside of customer obsession potentially, which is, why do warehouse workers have a hard time? Because they’re always pushing to get it out faster. That’s because of the three customer pillars at Amazon, wide selection, low prices and fast delivery. Everything they do for their customer focuses on those three pillars. That means employees have to get things picked off the shelves and packaged out to the trucks so they can be delivered. They’ve had already made steps in helping or working on improving those work conditions.

MDH 28 | The Bezos Letters

The Bezos Letters: The three customer pillars at Amazon: wide selection, low prices, and fast delivery. Everything they do for their customer focuses on those three pillars.

 

It’s a tough job. I’ve been to two different fulfillment centers. It’s fast-paced and hard work. They were the first company to increase their minimum wage to $15 an hour in 2018. If you look at these factors, they all work together. One of the things that I’ve noticed at Amazon with Bezos and I assume that will continue is that if you show him them, you can do it better. Once they become convinced they need to, they will. It’s not just political pressure. I believe he has a concern for all employees. There’s that interesting balance. Customer obsession fast, “Is it too fast for employees? How do we balance that off?” Every company goes through those kinds of decisions.

I have dealt with them for a long time ago. I’ve known quite a few people that worked for Amazon on the merchandising side, vice president of this and that. At the buyer, vice president and director levels, the turnover are high. They burn them out. You can make a fortune but they don’t ask for more than 3 or 4 years. They’re ready to like, “Get lost.” There’s a lot of work to do on that end in terms of their employee relationships, not just at the warehouse. Even these people that are telling you, they hire them well, too. They hire people with a lot of experience but they do burn them out at a faster rate than other Corporate America pieces.

Regarding using the third-party private label, that’s going on actively. That was partly responsible for their success because they were able to get good reach. Even if they’re not making it white-label, they were able to get overall trends faster. For example, if you were selling shoes, Amazon would typically stock the bestsellers like the black, brown and off-white. A third party might have the blues, grays and pinks that Amazon didn’t want to carry but then if they see a spike in the blue then you’ll know that even in branded pieces, they will start to stock that. It looks to me like it’s happening. I’m not in there.

Because Amazon is so algorithm, robots, systems and computers-driven, things that have an emotional connection like jewelry, for example, they don’t do that all that well. They can’t sell the upper-end pieces that you need a little bit romancing because you can’t only do 150 words. Writing those descriptions out isn’t going to cause somebody to go, “I want my wedding ring to be this.” They’re still losing out on that. The thing that I wish that somebody would get done quickly is groceries. They don’t have their gig down yet but I’m sure they’ll find it. We’re going to wrap up this whole session with the main takeaways. We’ve already covered the customer obsession and the pros and the down. Is there any one thing that you haven’t covered yet that you might want to leave our audience with?

If a business plan doesn’t make sense on paper when you write it out, it probably won’t make sense as you implement it.

I can do two and I’ll do the first one quickly, which is to generate high-velocity decisions. One of the reasons as companies grow that they tend to slow is that their decision-making process gets more complicated. Bezos describes it as type-1 and type-2 decisions. Type-1 decisions are bet-the-farm big decisions. He says those should be made slowly with lots of data but most decisions that accompany are not that kind. They’re type-2 and easily reversible. By adding bureaucracy, meaning, “I have to get this decision of the supervisor and then this decision for the manager and this decision for the regional VP,” all that does is slow things down. If you believe in encouraging failure, if somebody makes a bad decision, you’re much better off changing that decision once you realize it than trying to prevent any failure at all.

Back to what we talked about as companies grow, there are reasons why they slow down and that is one of them that I see a lot. The final one is this idea of, believe it’s always day one. Continue to think like a startup.” In an all-hands meeting, Bezos was asked the question, “Jeff, what does day two look like?” He always talks about day one. Paraphrasing, he said, “Day two is stasis followed by irrelevance, followed by a painful, excruciating decline, followed by death.” He goes on to say, “What I’m interested in is, how do you fend off day two? How do you not go to day two?” He has four points there that he talks about. This is in the letters. It was in 2016. He says, “It’s customer obsession, high-velocity decisions, eagerly embracing external trends even when you don’t know what that might mean.” I can’t think of the fourth one off the top of my head now. That to me encapsulates that mindset of thinking like a startup. It’s always day one.

I have some friends who are in the restaurant business on a smaller scale. Why do restaurants fail? When the restaurants opened on opening day, they put on the best linens, clean the carpet and do all the stuff. Think of every day as opening day and the same way. He has got that similar mindset. Steve couldn’t think about the fourth one because I put him on the spot here. None of my interviews are scripted or interviewed ahead of time so these things happen. The good news is you could find him at TheBezosLetters.com for all things regarding Steve Anderson and his upcoming project, as well as the 21 letters and the book. The book is going to be a must-read.

If you’re in small business or even if you’re not in small business, aren’t you curious about how our lives have changed? I’m old enough to remember 1998 and 1997. First of all, if you order anything online, you had to call a 1-800 number. When you finally get somebody at the other end, about 30% of the time, they got your address and order wrong. There was a $30 charge for a gym outfit that costs me $29. It wasn’t even an option. I’ve got my laundry detergent and everything coming on a schedule. I’m going to have to go to the stores for any of that stuff. My daughter is expecting a baby. She ordered almost everything for post-delivery. They sell a whole pack for a post-delivery package. She’s going to be able to have the heavy stuff like the laundry and cleaning stuff delivered so she wouldn’t have to leave with the baby.

MDH 28 | The Bezos Letters

The Bezos Letters: Think like a start-up. Believe it’s always day one. Day two is stasis followed by irrelevance, followed by a painful, excruciating decline, followed by death.

 

Are you not curious as to how all of our lives, not just here in America but all over the world, have been transformed in some way? Even if you decided that you don’t want to shop at Amazon anymore, some people say, “They’re getting too big. I don’t want to shop there anymore.” Even if you are that person, Jeff Bezos has set the standard for customer service that whoever you’re shopping with now has still up the game. The whole world has changed. I’m not his agent or anything like that but I’m just curious as a human being how this all transpired and who’s going to be the next. If you’re Bezos, Mark Zuckerberg or any of these people and they started their company with $5,000 or less, you got to be lying awake at night thinking there’s going to be some new person who could do the same thing and make you irrelevant. That person might be you. Get yourself educated. I love having you here. Thank you so much for your time. Good luck to you with all your endeavors.

Victoria, thank you. It’s a great pleasure to have a conversation with you.

All of you readers, please go ahead, subscribe, rate and review. Remember, stay healthy and happy. Until next time, happiness is your choice.

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About Steve Anderson

Steve Anderson is an expert in strategic risk and business growth. Drawing on decades of experience in the insurance industry, he wrote The Bezos Letters: 14 Principles to Grow Your Business Like Amazon, which has become a Wall Street Journal, USA Today, and international bestseller. With hundreds of thousands of followers, Steve has been handpicked by LinkedIn as one of the world’s most influential thought leaders.

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