Business Models

Amazon Business Model – How Amazon Makes Money

Defining Amazon Business Model can be kind of a curious task, as we observe that this global trade giant increases its reach year by year, both geographically and in terms of products and services offered.

In this post, you are gonna read about Amazon business model and how Amazon makes money and the breakdown of its revenue model.

The year was 1994 and Bezos was working diligently on Wall Street. At 30 years old, he began to see the internet revolution take place, and made the decision to quit his job and start an internet company.

That is when Amazon has taken its birth. The company started out as an online marketplace for books but went on to expand its market to selling electronics, music CDs and DVDs, tools, toys, software, video games, apparel, furniture, baby products, sporting goods, beauty products, clothing, and whatnot.

Amazon Business Model

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In recent years, Amazon has become a household name. It is popular worldwide because of its 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.

Today the company focuses not only on e-commerce but also on digital streaming, artificial intelligence, and cloud computing. Amazon is now the world’s largest online retailer and also the world’s most valuable brand.

It is considered to be one of the big five companies in the US information technology industry along with companies like Google, Facebook, Microsoft, and Apple.

Amazon Business Model – How Amazon Works

Amazon business model is a diversified one. However, 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 50%, came from their online marketplace.

While the rest comes from the physical stores, Amazon AWS, subscription services to their apps (like Amazon Prime), third-party seller services, and lastly the advertising revenues. This is how Amazon works.

Let us look at each of the revenue streams in more detail.

1. Third – Party Seller Services

The primary source of revenue for Amazon is the commissions and fees that it obtains by making the buyers and sellers meet. Amazon doesn’t sell a lot of stuff on its own. It just provides a marketplace guaranteeing a standardized experience for both the buyers as well as the sellers.

This process is called Fulfillment by Amazon (FBA). It is nothing but storing, packing, and shipping orders as well as handling returns and exchanges. With FBA, sellers send their products to Amazon’s fulfillment centers, and they pick, pack, ship, and provide customer service for those products.

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Amazon also derives a huge chunk of its revenues from affiliate programs. Amazon provides affiliates with stores within their sites. It then charges a larger commission on its sales.

2. Subscription Services

Amazon has also developed subscription-based business models via its Amazon Prime service. It plays an important role in the Amazon business model. For a fixed subscription users get two benefits.

Amazon Business Model

Firstly, users can stream movies and other video content via the internet. Secondly, Amazon Prime members are entitled to lightning-fast delivery of the products purchased from Amazon.

3. Amazon AWS

The company also has its cloud infrastructure called Amazon Web Services (AWS), which is a world leader and a business with high margins.

AWS started offering its IT infrastructure services in 2006. It provides services to businesses, government agencies, and academic institutions to store information and deliver content. The Amazon web services stand today as one of the most scalable and reliable platforms in its entire industry.

Amazon Business Model

What makes it stand out is its low-cost infrastructure that connects limitless businesses worldwide. AWS continues to function as Amazon’s cloud business as well as providing computing for everyone be it startups or government institutions.

AWS controls about a third of the global cloud market, nearly twice as much as its next closest competitor. AWS’s biggest rivals are Microsoft’s Azure and Alphabet Google Cloud. This forms one of the major constituents in Amazon business model.

4. Physical Stores

Four years ago, Amazon raised eyebrows when it launched its first brick-and-mortar location. Now the online retail giant runs all kinds of physical stores, from booksellers to grocery pickup locations to cashier-less (Amazon Go) convenience stores.

It’s clear the company is still experimenting, but it can be a lot for shoppers to process.

(picture of number of amazon stores)

Meanwhile, Amazon is also rolling out its own private-label food brands to stock its fresh stores. Recently, for instance, it announced new crackers, frozen food, and seasoning brand called Aplenty.

Amazon has harnessed its technology to transform the retail experience with Amazon Go stores. Even traditional retailers like Walmart are no longer safe from the threat of Amazon. Amazon Go, a high-tech supermarket, allows shoppers to buy groceries without ever having to wait in a queue for a cashier.

Read: How does Zomato work-Business model and Revenue model

Amazon Go stores are equipped with hundreds of cameras that utilize a similar type of technology that self-driving cars use. This technology keeps a virtual shopping cart that allows customers just to walk out when they finish shopping. A bill is automatically sent to their Amazon account. 

5. Advertising

Amazon also sells advertising space on its website. The Amazon site is one of the most visited pages in any region. It ranks 12th globally and 1st in its category (e-commerce). On average, Amazon attracts around 3 billion visitors to its site.

Hence, sellers can expect to boost sales by advertising on it. This is a minuscule portion of the Amazon’s but is nonetheless significant.

6. Amazon Kindle

Amazon also makes a huge chunk of money from the Kindle marketplace. It has developed and sold a device called Kindle. It can be used to read books in electronic format.

Thanks to this device, Amazon has a 75% market share in the eBook market. Also, this market is highly profitable for Amazon. Books sold by this model do not have to be published or transported.

Amazon Business Model

Amazon, therefore, pockets the share of the publisher as well as the logistics firm. Amazon gets close to 70% of the revenue generated by selling eBooks on Kindle.

The Kindle has been successful in winning over new users and converting them to buy Amazon products and content at an exceeding rate. Through this experience, users are then driven to opt for Prime. It usually comes with a Prime Trial which is free for approximately 30 days.

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7. Other Sources

The Amazon Company has already advanced to the next stage by entering the video and music marketing industry. This strategy has proven to be successful owing to the sizable revenue from which Amazon has accumulated since.

Amazon acquired IMBD in 1998 (Internet Movie Database) is considered to be the most popular TV, celebrity, and movie content source today. IMBD generates its revenue via subscriptions, advertisements, and promotions.

Amazon’s music store called Amazon Music much like its competitors like Spotify, encourages users to subscribe to get their favorite music at an unlimited rate. The music subscription is offered at a fixed monthly cost.

Amazon also has a strong range of products like Fire products which include phones, tablets, Tv, and Mobile OS. It also sells a hands-free speaker, Amazon Echo. Echo is connected to the Alexa voice service and can be controlled with your voice.

Amazon Revenue Model – A Breakdown of How Amazon Makes Money

Here is how Amazon revenue model looks and how Amazon makes money.

2019 – 2020 Data
2015 – 162016 -172017 – 182018 -19
Online Stores76.991.4108.4123
3rd Party Sellers16.1 $2331.942.7
AWS7.912.217.525.7
Subscription Services4.56.49.714.2
Physical Stores NANA5.817.2
Others1.734.710.1
(in Billion Dollars)

Value Proposition of Amazon

Jeff Bezos regularly points out Amazon’s three customer value propositions:

  1. Low prices
  2. Fast delivery speed (often same day and with options of free 2-hour delivery) and
  3. Vast selection

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1. Low Prices

They offer the most convenience, the widest range, and the lowest prices. Amazon makes the lowest prices possible by leveraging technology. Firstly, it has leveraged technology in such a way that it does not have to stock inventory of any kind.

While other stores are reeling under the massive cost burdens of stocking inventory, Amazon can afford to undercut the competition on this.

2. Fast delivery speed

The faster delivery speed makes Amazon stand out. Normally, Amazon delivers products in 2-3 business days. However, with the inception of Amazon prime, now it just takes less than a day for the delivery.

Amazon is also working on the same-day shipping concept and already had this rolled out in cities like Dallas, Orlando, Philadelphia, and Phoenix.

3. Vast selection

Amazon has expanded beyond books and media for a long time as we all know. But you’d be forgiven for not knowing just how far Amazon has gone. From diapers to car tyres to jewellery and everything in between, Amazon almost certainly has anything you’re after.

This vast selection of products helped Amazon displace Wal-Mart as being the leader in offering wide range of products at very low prices.


10 Quick Amazing Amazon Facts!

  • Amazon was almost named “Cadabra,” which is short for the magic term, “abracadabra.”
  • There are about 6,000 dogs that “work” at Amazon HQ in Seattle – they even have a dog park on-site.
  • Amazon hasn’t paid federal taxes for two years.
  • Before Google had its “Street View” on its map application, Amazon started a project called Block View. It was a visual yellow page that allowed its users to see the street view of addresses and directions to their destinations.
  • When Amazon first started, they rang a bell every time a customer made a purchase. 
  • Amazon is developing a futuristic delivery system, Prime Air, which would let Amazon deliver packages to customers within 30 minutes using small drones.
  • The first book ever sold on Amazon was “Fluid Concepts and Creative Analogies,” by Douglas Hofstadter.
  • In 2012, an Oklahoma business came under fire for offering four and five-star reviews in exchange for fees—up to $999 for 50 glowing endorsements. Similar services were sued by Amazon on the grounds the company has policies against manipulating reviews.
  • In August 2013, the Amazon website went down for 40 minutes. While this may seem like a small blip in time, it ended up costing Amazon an estimated $4.8 million—or $120, 000 per minute. That ain’t chump change!
  • In 2014, Amazon launched a “Pay to Quit” program aimed at reducing the number of unmotivated warehouse employees at its fulfillment centers.

Amazon FAQs

1. What is Amazon Pay Later?

Amazon Pay Later is the hassle-free way to get instant credit, via a completely digital process, for purchases using EMI on Amazon. You have to complete the one-time setup process, post which you can avail Amazon Pay Later payment option during checkout on Amazon, and pay later next month or over EMIs ranging from 3 to 12 months.

2. What is Amazon Web Services?

AWS started offering its IT infrastructure services in 2006. It provides services to businesses, government agencies, and academic institutions to store information and deliver content. The Amazon web services stand today as one of the most scalable and reliable platforms in its entire industry.

3. Why is Amazon named Amazon?

Bezos selected the name by looking through a dictionary; he settled on “Amazon” because it was a place that was “exotic and different”, just as he had envisioned for his Internet enterprise.

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4. Why is Amazon so successful?

One of the reasons why Amazon is so successful is due to its customer-focused approach. In every step of the buyer’s journey, no time is wasted, and right away customers are given what they want. Amazon has always worked hard on making things as seamless and user-friendly as possible.

5. Who is the founder of Amazon? / Who is the real owner of Amazon?

Jeff Bezos, by name of Jeffrey Preston Bezos, (born January 12, 1964, Albuquerque, New Mexico, U.S.), is the founder and chief executive officer of Amazon.

6. Who invested in Amazon first?

Amazon was founded in the garage of Bezos’ rented home in Bellevue, Washington. Bezos’ parents invested almost $250,000 in the start-up.

7. Why Amazon changed logo?

The first time the logo changed, the Amazon executives wanted it to resemble the Amazon boxes we receive when we order a package. So, it had the classic Amazon smiley arrow on a tan square with some blue scraggly tape above it. Many web users, however, noticed a resemblance to a certain historical figure: Adolf Hitler.

Conclusion

It can be said that Amazon is the face of the current market – global, digital, constantly expanding. It is an increasingly productive brand, which adapts quickly to new demands, in a fast, effective and original way.

For this reason, for now, even though Amazon Business Model faces competition on all its fronts, individually, its corporate umbrella remains unparalleled and, therefore, must remain in the lead, years to come.


Thanks for reading the post. Are you an Amazon seller? If yes, write your answer in the comment section below.

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