“Our profitability is not our customer’s problem” – Jeff Bezos


I was wandering around YouTube and serendipity kicked in and led me to this Charlie Rose interview with Jeff Bezos (2010). It’s the most power packed 9-minutes I’ve heard from the intelligent fanatic.

Here is an excerpt that I’d like to focus on:

“Our profitability is not our customer’s problem. We don’t take the point of view that we’re going to price products at a particular margin. We price products competitively and if that means on that product that we lose money that’s ok. We need to take care of the customer and earn trust and we’ll figure out over time if we can or if we can’t ever make money with that product. If we can’t we’ll stop selling it but we’re not going to make customers pay for any of our inefficiencies.” – Jeff Bezos

Warren Buffett recently said, “We haven’t seen any businessmen like him [Jeff Bezos].” Which begged the question, “Well then why don't you own Amazon?” which Buffett replied:

“Well, that’s a good question. But I don’t have a good answer. Obviously, I should’ve bought it long ago because I admired it long ago, but I didn’t understand the power of the model. And the price always seemed to more than reflect the power of the model at that time. So it’s one I missed big time.”

Bezos just thinks differently than most people, including Buffett. In many ways, Amazon represents the opposite type of company Buffett typically invests in which is why he never bought it and likely never will. And to a lesser degree it’s why Berkshire never really owned a significant stake in Costco even though Charlie Munger sits on Costco’s board and adores the company.

In HBO’s recent documentary on Warren Buffett, Buffett talks about why he likes Coca-Cola and how the company and its affiliates serve 2 billion 8 oz servings worldwide per day. He says something like, “If you just get an extra 1 penny per day that is $20 million more profit per day, just 1 penny more”. I think that is a classic way he looks at a brand and its potential and it’s the opposite way Jeff Bezos thinks about Amazon.

Even Jeff Bezos himself makes mention of this disparity:

“There are two ways to build a successful company. One is to work very, very hard to convince customers to pay high margins [think Coca-Cola model]. The other is to work very, very hard to be able to offer customers low margins [think Costco, Amazon]. They both work. We’re firmly in the second camp. It’s difficult – you have to eliminate defects and be very efficient. But it’s also a point of view. We’d rather have a very large customer base and low margins than a small customer base and higher margins.”

Fund manager Nick Sleep refers to this business concept as Scale Economies Shared. Businesses like Amazon, Costco, and others that choose to keep margins low, and in doing so share their growing scale with their customers. As the company grows, they actually gain more efficiencies and momentum. Bezos calls this the “Flywheel effect”. In other words, the moat surrounding the firm deepens as the firm grows.

Even Ty Warner, creator and founder of Ty Inc and Beanie Babies, mentions this concept in The Great Beanie Baby Bubble. His obsession with the product and low prices gave him better terms with his suppliers which he ended up passing on the saving from his lower cost of capital onto stores in the form of reduced prices.

Past intelligent fanatics like Henry Ford, Harvey Firestone (founder of Firestone Tire), and Thomas Edison (he sold his lightbulbs below cost for years to gain adoption), also believed in the scale economies shared concept. [Read Vagabonds]

“Our policy is to reduce the price, extend the operations, and improve the article. The reduction in price comes first…the low price makes everybody dig for profits”. – Henry Ford

And you could see the power of it in Ford Motor Company’s numbers:

As entrepreneurs and investors, it is often good to think about businesses you are creating and/or investing in from a variety of angles. Jeff Bezos is obsessed with his customers and nothing else.

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Jeff Bezos speaks on Thinking Long-Term, Customer Focus, and Innovation