In the first quarter of 2000, Amazon’s shares traded as high as $91.50. In the third quarter of 2001, they traded as low as $5.97.
The company had lost money since it began doing business. Early in 2001 it announced a restructuring that cut about 1,300 positions and consolidated some of its fulfillment and customer service operations. By the end of the year its accumulated deficit reached $2.86 billion, and the annual report warned that it might keep losing money for the foreseeable future.
In July 2001, Amazon cut its prices. Books over $20 would now sell at 30 percent off list.
Jeff Bezos later explained the timing to shareholders. “After four years of single-minded focus on growth, and then just under two years spent almost exclusively on lowering costs,” he wrote, “we reached a point where we could afford to balance growth and cost improvement.” Until July, he wrote, the company had stood on two pillars, selection and convenience. Now it added a third: “relentlessly lowering prices.”
That autumn, the business writer Jim Collins visited. By his account, Amazon invited him to a dialogue with Bezos and a few of his executives “right in the middle of the dot-com bust, when some wondered how (or if) Amazon could recover.” Collins taught them what his research called the flywheel effect: no single defining action, just a heavy wheel pushed turn after turn until momentum builds. The Amazon team, Collins wrote, “grabbed onto the flywheel concept.”
The price cut had come before the visit. What Collins supplied was a name for a loop.
In the fourth quarter of 2001, Amazon had its first billion-dollar quarter of sales and, on its own pro forma measure, an operating profit of $59 million. In January 2002 it lowered prices again, with free shipping on orders over $99. Marketplace, where other sellers offered new and used goods on Amazon’s own product pages, had grown to 15 percent of US orders in that quarter.
In his letter for 2001, Bezos laid out the loop in four sentences: “Focus on cost improvement makes it possible for us to afford to lower prices, which drives growth. Growth spreads fixed costs across more sales, reducing cost per unit, which makes possible more price reductions. Customers like this, and it’s good for shareholders. Please expect us to repeat this loop.”
Thirteen years later, writing about Marketplace, the idea of letting outside sellers compete on the same product pages as Amazon’s own retail category managers, he used his visitor’s word. “The success of this hybrid model accelerated the Amazon flywheel.”