I just came across one of the most transformative moments in recent American retail history, chronicled in the book The Everything Story.

In the spring of 2001, Amazon’s stock was at $10. It had dropped from $107 just a year ago.

Amazon’s then CFO had convinced Jeff Bezos to raise prices to improve their cash position. But a few weeks later Bezos would reverse that decision because of an hour long meeting with James Sinegal, the then CEO of Costco.

During that meeting, Bezos learned something that would change Amazon forever.

Sinegal explained the Costco business model to Bezos and it was all about customer loyalty.

Costco bought everything in bulk and applied a 14% standard markup, even when it could charge more. Costco did not advertise at all. Costco’s sales volume allowed it to get significant deals from suppliers and manufacturers. Sinegal believed that value trumps everything and Costco focuses on delivering value every single day by providing the best pricing and the best service.

A week later, Bezos met with his executive team and explained that if Amazon can deliver the best pricing, then along with unlimited selection and the convenience of ordering online, it would win the game.

Bezos demonstrated that Amazon’s business is like a flywheel.

Amazon’s lower prices would attract more customers, which would lead to greater sales volume, which would attract more commission paying 3rd party sellers.

Those commissions in turn would allow Amazon to get more out of its fixed costs such as warehouses, fulfillment centers and servers.

This higher efficiency would enable Amazon to further lower prices, which would attract even more traffic.

Improving any part of the above flywheel, would accelerate the loop even faster.

His executives were so thrilled that his CFO asked to share this strategy at the next investor call. Bezos suggested keeping it a secret for the moment.

Over the next fifteen years, Amazon would relentlessly execute on this strategy of building customer loyalty by providing constant value.

You too can build customer loyalty.

Signup for a demo of RewardCamp to learn more about increasing customer loyalty by delivering value without lowering prices.

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