The year 2022 proved to be a difficult one for mega-cap tech stocks, including Amazon, which was hit particularly hard. Despite beginning the year with a remarkable valuation of $1.7 trillion, a substantial rise from its $172 billion valuation just six years prior, the company's value declined to around $834 billion. Although this decline led to Amazon falling out of the trillion-dollar club, there is a lot to be learned from the company's practices, particularly in the area of budgeting. Here are five of Amazon’s budgeting strategies that are worth getting familiar with.
1) Customer-focused even in budgeting.
Amazon's success can be attributed to its customer-focused approach to budgeting, which differs significantly from traditional methods. Traditional budgeting approaches tend to be internally focused, emphasizing departmental objectives and internal metrics. This often results in an individualistic approach that prioritizes the needs of specific departments within the organization, rather than the overall customer experience.
Rather than using internal metrics and input-output relationships, Amazon's budgeting process is centered on metrics that measure the value provided to customers and the efficiency of reaching them. This external focus is the foundation of Amazon's budgeting strategy.
2) The unconventional way to plan.
The distinction between budgeting and planning can be ambiguous, leading to conflicting data. Amazon takes an unconventional approach in this situation by implementing a planning process for customer impact that requires a significant amount of time and resources which tends to result in many changes from previous policies.
By doing so, the budgeting process is simplified as most of the challenging decisions have already been made during planning. Therefore, the focus shifts to determining which changes need to be funded, rather than how much each unit should receive.
In contrast, many companies place minimal emphasis on assessing customer reach during the planning process and instead focus more on budgeting. This leads to wasted time and disorganization as budgeting without proper planning can cause conflicts between departments. As a result, the budget often remains similar to previous years, as little has been done to justify significant changes.
While having hundreds of billions of dollars in revenue certainly makes it easier to change budget mindsets, many other profitable companies do not do this. Amazon's innovative approach to planning, with a focus on the customer, sets them apart from other organizations and contributes to its continued success.
3) Real-time updates like no other.
One of the most important planning and budgeting factors is real-time updates. Thanks to the speed of change that exists in today’s world, many companies are following suit with real-time updates, but few do it better than Amazon. The size and scale of their activity are unprecedented.
Weekly reviews on every activity are only the beginning. These reviews are based on customer metrics of individual activities- not sales units. Once again, customer experience is key and everyone from top to bottom follows this motto.
In comparison, traditional budgeting gets out of sync with customers rather easily when the metrics are not updated in real time. The more the differences build up, the more difficult it is to adjust the budget later on, which creates a backlog.
Depending on the product, quarterly reviews are usually not frequent enough, and this makes change harder on a practical level when the time comes. Top-down reviews focus on units and not enough on customer experience. If a company the size of Amazon can conduct real-time updates and weekly reviews, then there is no doubt that many others can learn from this as well.
4) Fostering teamwork and boosting efficiency with low compensation.
One of Amazon’s most famous differentiators is its corporate salary cap. The salary limit of $160,000 is relatively low compared to what many employees could make working for competitors such as Google or Apple. The salary cap has created many questions and speculations. In fact, it wasn’t until February, 2022 that Amazon increased the salary cap by more than double to $350,000.
How did Amazon retain employees throughout the Great Resignation, with lower salaries and fewer incentives than competitors? Why did they have a salary cap to begin with? Why does Amazon avoid individual bonus structures? And most importantly, how does this connect to their budgeting and planning?
Jeff Bezos sums up the reasoning behind it: “What drives Amazon’s compensation strategy?... We pay very low cash compensation relative to most companies. We also have no incentive compensation of any kind. And the reason we don’t is because it is detrimental to teamwork. If you lose some people over this, you’re likely better off having it happen early”.
The company’s reasoning behind keeping relatively low salaries and individual bonus structures is that it is bad for teamwork. If goals are individual based, then it causes employees to focus on these metrics alone and not necessarily on what is best for the company or customers.
Until recently, the only compensation or bonus in the company was stock grants. This encourages company-wide goals to be the focal point instead of individual metrics or accomplishments. Stocks became less relevant due to Amazon’s relatively slow stock growth in 2021, which caused the only bonus available to be worth less. Only then did the company introduce salary raises.
A salary cap is a very unconventional way of conducting business, and is especially risky at a time when retaining talent is difficult. However, there is still much to be learned from Amazon’s policy: Rethinking company incentives, team budgets, or future planning, could be exactly what the company needs in order to get ahead of the competition and increase efficiency.
5) No money gets lost between the cracks.
Many companies have tried to come up with a solution for teams asking for inflated budgets in order to finish the year under the projected deadline without working too hard. Minimizing commitment tends to be a big problem, and creates a scenario where using all the funds unnecessarily in order to receive the same budget the following year is an all too common occurrence.
Amazon cuts this out by changing the budget process from company teams asking for higher budgets, to focusing on what each team brings in terms of customer impact, all while keeping cost and risk in mind. This means that spending money just to reach the "easy" budget would not be a good idea. The customer impact for this activity would be far more costly than it needs to be, and the justification for the funding wouldn't pass in the next valuation.
Usually the larger the organization, the easier it is for money to get lost between the cracks, but Amazon is one of the biggest corporations that found a way to solve this. Although it is hard to measure the impact, there is no doubt that this is one of Amazon’s successes in budgeting. Companies big and small can follow suit and create far more efficient budgets by studying this system.
Personalize processes to achieve success
Amazon is a unique company and its size and often unconventional ways of doing things make it hard to learn from. However, one thing stands out and that is the way it conducts budgeting. Its unconventional ways of conducting the process create business efficiency, and perhaps open-mindedness is one of the factors that contributed to creating Amazon Prime. One thing is certain. When creating an efficient budgeting and planning system that is individualized for each company, good things will happen.