First step for start-ups: What’s the secret sauce of your business?
It’s not your idea. It’s not your product. It’s your magic sauce where the more you stir it, the more it grows.
Jeff Bezos came across Amazon’s secret sauce 15 years ago over a coffee with Jim Sinegal, the founder of one of Amazon’s biggest competitors, CostCo. Jim shared with Jeff the ‘virtuous circle’ that made CostCo the leading discount retailer:
“You can fill Safeco Field with the people that don’t want to sell to us, but over a period of time, we generate enough business and prove we are a good customer and pay our bills and keep our promises. Then they say, ‘Why the hell am I not doing business with these guys. I gotta be stupid..”
The next Monday, Jeff got his team together and they cut the price of all their products by 20 to 30 percent to be the very lowest in the market. Jeff went out and announced:
“There are two kinds of retailers: There are those folks who work to figure out how to charge more, and there are companies that work to figure how to charge less, and we are going to be the second, full-stop.”
Jeff then ran a two-day off-site management meeting with the bestselling author of “Good to Great”, Jim Collins. That’s where the team came up with the “Amazon Flywheel” –
1. Lower prices led to more customer visits,
2. More customers increased volume of sales,
3. Volume of sales attracted more 3rd party sellers,
4. More 3rd party sellers led to better economies of scale
5. Better economies of scale led to lower prices…
While others were waiting to get to economies of scale to lower prices, Amazon decided to lower prices to get to economies of scale.
For many at the meeting, it was the first time they finally had a clearly defined strategy that explained their business. Every division within Amazon had a focus on a different part of the flywheel, and each small improvement in any part made the wheel spin faster.
Jeff re-focused Amazon on the flywheel, but kept it out of public presentations as this was their secret sauce. Amazon got criticized for bringing prices down so low they were losing money on each sale, partners complained the pricing strategies were unviable, and many stock market analysts predicted the company would fail.
Jeff’s response? “Entrepreneurs must be willing to be misunderstood for long periods of time.”
While Jeff attracted critics from all directions, there was something he attracted a lot more of – customers. They came in their thousands. They kept on coming. And they kept coming back.
Now, fifteen years after that meeting (and through many years of being misunderstood), Amazon has grown from a start-up struggling through the dotcom crash to an expected $100 billion+ in sales this year, and is now worth over $300 billion.
What’s your secret sauce? What is that one thing that makes you stand out in the market? It may not be lowest prices. It may be the highest quality product, or the best service in the industry. Once you know your secret sauce, set up your flywheel, and start with the end in mind.
Don’t start with the part that you think you can afford to do. Start with the part that you know you can’t afford not to do. And start today!
“Do not wait to strike till the iron is hot; but make it hot by striking”
~ William Butler Yeats