Design your pricing to keep that flywheel spinning
By Steven Forth
"In his book The Amazon Way on IoT (Internet of Things) John Rossman talks about the importance of designing a flywheel for your business. The flywheel is the positive feedback loop that keeps your business growing and becoming more and more efficient. He sees the flywheel as being at the centre of Amazon's success.
What is the Amazon Flywheel?
In his book The Amazon Way on IoT (Internet of Things) John Rossman talks about the importance of designing a flywheel for your business. The flywheel is the positive feedback loop that keeps your business growing and becoming more and more efficient. He sees the flywheel as being at the centre of Amazon's success.
From The Amazon Way on IoT by John Rossman
The original Amazon flywheel was built on growth and everything within the organization was about driving growth. Profit was way down the on the list of things to be optimized.
Having a huge selection of goods (initially books) and a well designed user interface plus rapid delivery, led to a great customer experience that increased traffic. Increased traffic drew in more and more sellers that led to increased selection. Increased selection improved the customer experience and on and on around the circle. All this led to GROWTH that drove down the cost structure, enabling Amazon to lower costs and to further improve the customer experience.
This is a great example of the application of systems thinking to business design. The key concepts of system thinking are feedback loops (positive and negative) and how they interact. At Ibbaka, we have been applying this approach to the analysis of 2-sided and 3-sided marketplaces and we are extending it to our overall analysis of pricing strategy. An example is our recent post on designing pricing that encourages the behaviors that increase the value of a solution to the customer.
John Rossman goes on to show how Amazon is building its Amazon Web Services flywheel and the role that the Internet of Things plays in increasing its momentum. His sketch looks like this.
From The Amazon Way on IoT by John Rossman
Infrastructure scale drives innovation up and costs down, leading to greater adoption of AWS. This creates Big Data. Amazon's IoT devices (and other devices using the AWS infrastructure) generate data used in Machine Learning, that provides customer insights and further drives up Infrastructure scale.
I don't think this is quite right. I would it tweak it a bit so that the IoT devices are feeding BiG Data, which is used for Machine Learning, which in turn generates Customer Insights, and drives Innovation.
From The Amazon Way on IoT by John Rossman tweaked by Steven Forth
This is a second powerful flywheel for Amazon. AWS already accounts for about 10% of Amazon's revenues and was a US$17.46 billion business in 2017. In the fourth quarter of 2017, AWS operating income equated to more than 60% of the operating income for the entirety of Amazon.
What does the flywheel have to do with pricing?
Your pricing strategy should be designed to add to the momentum, and should not be a break on any of the feedback loops that feed the momentum. If your flywheel is leveraging Big Data for Machine Learning, don't price the actions that are contributing to the data generation that will inform your future innovations, and that is creating value for your customers.
Actionable recommendations to price for the flywheel:
Model the flywheel for your business (if you don't have a flywheel that is a deeper problem), look at the positive and the negative feedback loops. A positive feedback loop builds the momentum, a negative feedback loop acts like a break.
Check the feedback loops and see how you are pricing them. If you are pricing positive feedback loops, can you stop or reduce prices? If you are not pricing the negative feedback loops, can you do so?
Search for new positive feedback loops. How can you evolve your business to add new positive feedback, like Amazon has done by adding IoT devices to its AWS flywheel? How will these new feedback loops impact your pricing and revenue model? Can you monetize them while still having them function?
Systems thinking is a powerful way to organize and design your business. Pricing needs to account for the system of feedback loops and as the song says, you want to "Accentuate the positive, eliminate the negative." (from Ac-Cent-Tchu-Ate The Positive by Jimmy Mercer.)
A couple of good resources on systems thinking are the book Thinking in Systems: A Primer by Donella H. Meadows and Introduction to Systems Thinking by Daniel Kim.
