Articulate Value Creation Like Jeff Bezos

How do you measure how much value your business creates? It is a legitimate topic, whether you are a Silicon Valley startup or a large corporation. Some startups are often criticized for taking in massive amounts of money while accumulating losses. From a strict accounting perspective, the instant math doesn't seem to make sense. The math only makes sense if a particular business creates value. Even though it is now a massive digital powerhouse, Amazon was a money-losing startup once. Let's see how Jeff Bezos frames it.

1. Why Should We Care How Amazon Builds Value?

Since he began the tradition in 1997, Jeff Bezos' letter to Amazon's shareholders has rivaled Warren Buffett's as an annual thought leadership event in the business world.

In the 2021 edition of the letter, the last one while he was CEO, Bezos powerfully quantified value creation for Amazon's various constituencies: consumers, third party sellers, Amazon Web Services customers, and employees.

And while criticized for many years for running a money-losing business, Bezos has now firmly established his credibility in the area of value creation:

• as the first person to ever reach a personal net worth of $200B (in 2020);
• as the founder of one of the most valuable corporations in the world. Amazon's market capitalization was around $1.7T at the time of this writing, with a headcount of 1.3M employees. If Amazon were a country, at a $1.7T Gross National Product level, it would be in the top 10, edging out Canada -- a country with a population of 38M.

2. How Jeff Bezos Thinks About Value Creation

Here is how Jeff Bezos mathematically explains Amazon's value for consumers:

"We offer low prices, vast selection, and fast delivery, but imagine we ignore all of that for the purpose of this estimate and value only one thing: we save customers time.

Customers complete 28% of purchases on Amazon in three minutes or less, and half of all purchases are finished in less than 15 minutes.

Compare that to the typical shopping trip to a physical store -- driving, parking, searching store aisles, waiting in the checkout line, finding your car, and driving home.

Research suggests the typical physical store trip takes about an hour. If you assume that a typical Amazon purchase takes 15 minutes and that it saves you a couple of trips to a physical store a week, that's more than 75 hours a year saved. That's important. We're all busy in the early 21st century.

So that we can get a dollar figure, let's value the time savings at?$10?per hour, which is conservative. Seventy- five hours multiplied by?$10?an hour and subtracting the cost of Prime gives you value creation for each Prime member of about?$630. We have 200 million Prime members, for a total in 2020 of?$126 billion?of value creation."

And this is just for one fiscal year -- and doesn't include any transportation costs saved for shoppers or potentially better pricing found via Amazon. In the rest of his piece, Bezos similarly calculates the value creation for his other constituencies, including employees.

With that masterful demonstration, Bezos proves the massive value created by Amazon. While they appear in the letter to shareholders, the talking points can obviously be repurposed for conversations with local government, legislators, regulators and employee groups as well as to shape public opinion about the company.

3. Other Examples Of Well Articulated Value Creation

On a similar note, in a recent investor day presentation, healthcare powerhouse Cigna pegged at $425 the average savings for a telemedicine session compared to an in-person visit at a medical facility.

$425 Average Savings Per Telemedicine Visit Compared to In-Person

Given the high healthcare costs in the United States compared to OECD benchmarks, that figure is a very potent way to express the value that Cigna generates.

How does your company express its value?