Amazon Business Model: How Amazon Generates Revenue

PV Vyshnavi PV Vyshnavi
Nov 10, 2020 8 min read
Amazon Business Model: How Amazon Generates Revenue

In the recent years, Amazon has become a household name, whether it’s because of their unlimited options for selection, custom made services, cheaper prices, customer services or good quality search tool that helps in finding items of one’s choice, it is popular worldwide. Amazon is a US based multinational e-commerce company that focuses on e-commerce, digital streaming, artificial intelligence and cloud computing. Amazon is now the world largest online retailer, and also been referred to as the world’s most valuable brand.

Amazon was founded by Jeff Bezos in 1994 and is headquartered in Seattle, Washington. The company started out as an online marketplace for books but went on to expand its market to selling electronics, music CD and DVDs, tools, toys, software, video games, apparel, furniture, baby products, sporting goods, beauty products, clothing and jewelry among others. In 2008, the main domain attracted 615 million visitors.

Amazon is considered to be one among the big five companies in the US information technology industry along with companies like Google, Facebook, Microsoft and Apple. Amazon went on to surpass Walmart as the most valuable retailer in the US by market capitalization in 2015. However in 2018, Jeff Bezos announced that its two day delivery service Amazon Prime, had surpassed 100 million subscribers worldwide.

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Business model of Amazon

Amazon has a well-known diversified business model. According to the annual report, the company recorded net sales of over $280 billion and net profit of over $11 billion. Amazon business model is an e-commerce model, but over the years it has made acquisitions and created a portfolio of business models and revenue streams. However, the biggest proportion of sales which is fifty per cent, came from their online marketplace.

While the rest comes from the physical stores, Amazon AWS, subscription services to their apps, third party seller services and lastly the advertising revenues. Amazon prime which is a subscription based service, plays an important role in the business model, as it gets the company more loyal customers who are willing to spend more for their services. Amazon also has cloud infrastructure called AWS which yields high margins. Besides that, Amazon also has advertising business which is worth billions of dollars.

The Amazon Business Model
The Amazon Business Model 

Amazon measures its success based on the lower prices, reliable tech infrastructure, free cash flow generation and customer experience obsession. The company’s service sales have been growing at a fast pace helping the company to expand globally. In US alone, Amazon has over 2.7 billion visits, while the people spend more than six minutes on the site to look at a minimum of nine pages in order to look for what they are searching for.

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How does Amazon work and what does it sell

Amazon runs a platform business model as a core which has several other business units within the main model. Some units, like Prime and the Advertising business, are highly tied to the e-commerce platform. For instance, Prime helps Amazon reward repeat customers, thus enhancing its platform business. Other units, like AWS, helped improve Amazon’s tech infrastructure. Amazon sells various products of its own on the platform but also allows third party sellers to sell to customers.

Currently the platform offers products and services like Amazon Prime Video, Amazon Music, Appstore for Android, Echo and Alexa, Fire Tablet and TV, Kindle e-readers and books, merchants products and vendor products. The target audience of amazon are the customers that buy the products, subscribe to their services. So the sellers sell their products on the platform and developers are focus using the AWS tech for infrastructure, digital products and services.

The main products and services of Amazon
The main products and services of Amazon

Amazon business model revolves around four main players:

  • Consumers – Amazon has a good customer service and makes sure they serve their consumers through their online websites. The company focuses on selection, convenience and price. Amazon website is designed in a way that allows the customers to browse dozens through product categories and use it with ease on various different gadget. The company strives to offer their customers the lowest price possible through everyday product pricing and shipping offers.
  • Sellers – Amazon gives sellers an opportunity to grow their business, sell their products on the websites and fulfill orders through us. Amazon earn fixed fees a percentage of sales, per unit activity fees, interest or some combination thereof for our sellers programs.
  • Developers and Enterprises – Amazon serves developers and enterprises of all sizes, which includes startups, academic institutions, government agencies through their AWS segment which promises to offer a broad set of global compute, storage, database and other services.
  • Content creators – Amazon also helps authors and independent publishers with Kindle direct publishing, an online service that lets independent authors and publishers to choose a 70% royalty option and make their books available in the kindle store. They also offer programs that will allow musicians, filmmakers, app developers, authors to publish and sell their content.

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Revenue model of Amazon

With a market capital of $1.7 trillion, Amazon is currently the most valuable retailer in the world. By the end of 2020, the company will account 4.6% of the total US retail sales. The online stores of Amazon bring in high margins, while the other parts of the Amazon business model, like Amazon advertising services, Amazon Prime and Amazon AWS run with much higher margins.

Thus, Amazon’s online stores are the foundation for those other businesses that make the overall company more profitable in the long run. The product sales from Amazon website generated $163 billion from 2019 to 2020. A significant day for online sales is the Prime Day, which has grown into a major shopping event comparable to Black Friday and Cyber Monday.

In 2020, prime day was projected to generate almost $10 billion in global revenue. The third party sellers is the company’s second largest unit in terms of net sales, with the total of $63 billion over the course of a year. A key factor in the company's success is its diversification into other areas.

How Amazon Makes Money

The primary source of revenue for Amazon is the commissions and fees that it obtains by making the borrowers and sellers meet. Amazon provides a marketplace that provides a standardized experience for both buyers and sellers. Amazon also derives a huge chunk of its revenue from affiliate programs, to get a larger commission on their sales. The company also sells advertising space on its website so the sellers can boost their sales by advertising on the site. Amazon also generates a huge revenue from the Kindle marketplace.

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Here is the breakdown of the Amazon revenue mix:

  • Online stores – Includes product sales and digital media content where we record revenue gross. Amazon leverage our retail infrastructure to offer a wide selection of consumable and durable goods that includes media products available in both a physical and digital format, such as books, videos, games, music and software. The digital product subscriptions that provide unlimited viewing or usage rights are included in the Subscription services.
  • Physical stores – This includes product sales where our customers physically select items in a store. The sales from a customers who order goods online for delivery or pick up at our physical stores are included in online stores.
  • Third party seller services – The commissions and any related fulfilment and shipping fees and other third party seller services, the company benefits a lot of revenue from third party sellers.
  • Subscriptions – Amazon Prime memberships gives out annual and monthly fees. Amazon also gives out subscription services for audiobook, digital video services, digital music, eBooks and other non-AWS services. Amazon’s standard Prime subscription rate is $119 per year, which would translate into revenue of more than $17.8 billion, although the company offers discounted memberships for students and others.
  • AWS – The AWS includes global sales of computing, storage, database and other services.
  • Other services – These can include sales of advertising services, as well as sales related to our other service offerings.

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Value proposition of Amazon

The value proposition provided by Amazon is actually quite simple, they offer the most convenient and a wide range of products and services for the cheapest prices. The prices of their products and services are so low that they have managed to displace Walmart, making the company a leader in the price category. While the goods and services are at the lowest prices, the quality of the products are not compromised by any means.

Amazon makes the lowest prices possible by leveraging technology, in such a way that it does not have to stock inventory of any kind. While other stores have the burden of spending money on stocking inventory, Amazon can afford to cut the competition on this. It is a mix of a retail company as well as a technology company. Unlike retail companies, Amazon seldom hires stock clerks and floor managers and has employees with high technological skills.

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