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Everything You Need To Know About Amazon’s Business Model

Amazon has come a long way as an online book store. 

It is now one of the biggest eCommerce companies globally and offers just about everything you could need to buy for work or home. 

According to their 2020 Q2 earnings call, Amazon posted a net profit of $386.1 billion, up from 280.5 billion in 2019. That’s a staggering amount when you consider that in 2011 they posted a net profit of just $17.43 billion.  

Amazon's success is attributed to its low-cost business model. The company sells goods at a lower price than its competitors and in addition, they also offer a wide selection of high-quality products. Amazon also caters to customers that want to receive products quickly. This customer service is an essential aspect of the customer journey.

This year has seen record-breaking Amazon acquisitions. They opened 50 new warehouses, 11 new cargo planes, and much more. Let’s explore how Amazon has arrived at this stage by looking at how they started.

A Brief History Of Amazon

Amazon started in 1994 as a web-based online bookstore. It was not the first, but it quickly became the largest bookstore. 

One of the most significant decisions was opening up to third-party sellers on Amazon. This move created opportunities for entrepreneurs without much capital or experience in retailing. 

Third-party sales now account for 56% of all items sold on Amazon today.

Jeff Bezos’s idea was that if they let others sell books through Amazon, they could make it easy for customers to find the books they want at the lowest price possible. As a result, third-party sellers wouldn’t have to worry about shipping, inventory, or returns.

Jeff Bezos

“There are two kinds of companies, those that work to try to charge more and those that work to charge less. We will be the second”.

The following then happened:

  • Within a short time, Amazon expanded its inventory to include other products shipped by mail. They offered music, videos, games, electronics, apparel, tools, anything you could buy in a department or specialty store.
  • In 2020, Amazon evolved from a computer retailer to a technology company with the launch of Amazon Web Services.
  • In 2006, Amazon’s web services division expanded its AWS portfolio with Elastic Compute Cloud (EC2). This was followed up by their Simple Storage Service (S3) soon after.
  • In October 2007, Amazon unveiled the Kindle e-reader, a device that could download and store thousands of digital books. By 2012, Kindle sales constituted around 50% of all Android-operated tablet sales.
  • In 2014, the company acquired Twitch TV for $970 million, primarily focused on gaming.
  • Amazon has also made an effort to increase its presence in online retail by opening up physical stores. The first physical bookstore opened in November 2015, with others following shortly after, including a store that sells only toys.
  • In 2018, Amazon launched its impressive logistics arm with Amazon Logistics, which is now trying to establish itself as the leading logistics provider in the country.
  • In 2020, Amazon Logistics delivered 4.2 billion parcels, up from 1.9 billion in 2019. Currently, it accounts for 21% of all parcel shipments in the U.S., behind the USPS (38%), UPS (24%), and FedEx (16%).
  • Amazon provides transportation, packaging, last-mile delivery, and returns management services for third-party sellers on Amazon's marketplace.
  • The company is currently investing in delivery infrastructure like sorting centers and planes to ensure timely customer service.

Amazon’s Business Model

Amazon's model is unique but incredibly difficult to copy or compete with because its primary source of revenue comes from third-party sellers. 

Their business model is not to compete directly with third-party sellers as other retailers do. Instead, they make money on every product sold. 

They use a combination of long-term orientation, obsessive customer focus, willingness to invent, and zeal for technological innovation. 

These principles are critical for success because they enable continuous investment in building a better company.

Who Are Amazon’s Customers And What Value Do They Provide?

Amazon’s primary customers are those who shop at Amazon Marketplace as well as subscribe to Amazon Prime. At the moment, Amazon has 9.7 million customer accounts worldwide, but only 1.9 million are actively selling. 

The platform provides an array of options at low prices, along with fast delivery and an overall enhanced shopping experience.

Customer service is one of the company's top priorities, which has allowed it to provide an unmatched customer experience. 

Amazon uses a review system to help customers make informed purchasing decisions, enjoy quick shipping times, and increase the number of purchases.

Amazon's Customer Segments

There are three basic types of Amazon customers: sellers, buyers, and developers.

  • Sellers are all the companies that use Amazon’s e-commerce platform to sell their products to its wide audience.
  • Buyers are the millions of people across the world who acquire products and services through Amazon’s channels.Amazon uses data analytics to track the behavior of online shoppers. This information is quantified and analyzed using machine learning to improve targeted advertisements. 
  • Developers are part of or partners with AWS. They provide a platform that developers can use to build their ideas into successful businesses.

Amazon’s Value Proposition

According to Jeff Bezos, Amazon's business model is built on three value propositions: low prices, quick delivery, and a wide variety of products. As evidence of this philosophy, the company continues to dominate several industries with low prices and fast shipping times, which gives them an edge over competitors who rely heavily on brick-and-mortar stores.

In addition, the online retailer offers free two-day shipping for any order greater than $35, thus giving its shoppers access even when out of town. 

Yet, Amazon's most significant value proposition is convenience.

Customers know they can access the latest products of the world's largest retailer via their mobile phones at an affordable price and receive a fast, safe, and reliable delivery service.

Amazon's Customer Relationships

Amazon is a customer-centric company. The company enjoys a long and healthy relationship with its customers. 

Their website allows shoppers to leave reviews or comments that other shoppers can view. Amazon also offers customer service by phone, online chat, or email.

Amazon Key Activities

The company's main activities revolve around the building, maintaining, and expanding of this gigantic platform.

The brand invests in:

  • Developing and managing websites and apps
  • Supply chain and logistics management
  • Providing storage and distribution
  • Providing information security across all platforms, such as e-commerce, streaming, cloud computing, and other productions
  • Marketing the company's products and services

Key Resources Of Amazon

Amazon has a vast and highly secure tech infrastructure, making it possible to operate without interruption and minimize losses.   

Additional essential resources include office space, warehouses, supply chains, and automation, among others.

And, also human resources are essential for Amazon, such as designers, engineers, developers, etc

Key Partners Of Amazon

Amazon is a company that values its partners, especially its sellers. Sellers generate the most sales. Amazon’s website is its largest sales channel. 

Affiliates also promote sales on the Amazon Associates program by using their web pages or blogs that they own. 

In turn, Amazon promotes the affiliate on the site's Affiliate Network, increasing traffic to their page and potentially bringing in sales for them. Many affiliates have taken over the role of acting as a channel for Amazon through the Affiliate Program. 

Logistics partners provide assistance when shipping goods out or handling any customer service issues that may arise.

How Does Amazon Make Money?

Amazon makes money by being an extremely efficient intermediary.

When Jeff Bezos founded Amazon, his goal wasn't just to create an online book store but an online marketplace as well - by lowering prices, increasing selection, improving service, and making it easier to buy and sell.

Amazon has a diverse revenue model that rivals other retailers.

Business Segment

Net Sales (June 2019 - 2020)

Online Stores

$163

Third-Party selling services

$63B

Amazon Web Services

$40B

Subscription Services

$22B

Physical Stores

$17B

Other

$17 B

Total Revenue

$322

Source: Visual Capitalist

Here are a few ways Amazon makes money.

Amazon Marketplace

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Amazon is the largest online retailer in the United States and the world. 

Sellers list their products on Amazon's website, and it handles all the details of the sale. It also keeps track of inventory on its end, handles shipping, deals with customer complaints about defective or late-arriving merchandise, etc.

In return, Amazon collects a small fee from every seller on the site, ranging from 4% on items that cost less than $10 to 15% of the price of more expensive items.

During the second quarter of 2021, Amazon Marketplace generated $110,157 billion in revenue out of $386 billion in revenue generated by Amazon. 

Amazon Marketplace provides a platform for third-party sellers and handles payments, customer service, and everything a retailer has to do.

Physical Stores

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Photo by Bryan Angelo on Unsplash

Amazon has 593 physical stores, including Whole Foods, Amazon Fresh, Amazon Go Grocery, Amazon Book stores, and several pop-up location stores. 

Amazon's physical-store sales come mainly from its Whole Foods Market unit, excluding orders placed by its online brands, such as Prime Now.

The sales from Amazon's physical stores, including Whole Foods Market and brick and mortar stores, decreased for the first time in years due to COVID-19. However, the generated revenue was $3.92 billion as of 2020.  

Amazon is soon expected to open a series of department stores, selling physical products and allowing in-person shoppers. The company plans to expand into clothing, electronics, and household items.

Amazon Web Services

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Source: Amazon

Amazon Web Services (AWS) is the best-known cloud computing platform that offers on-demand storage and computation to other companies. 

To provide these services, it offers a set of online tools that make computing easier for its users, like software developers, system administrators, and enterprise clients. 

The most popular services offered through AWS are Simple Storage Service (S3), Relational Database Service (RDS), and Elastic Compute Cloud (EC2).  

Amazon dominates the cloud computing market with a third of the global share, more than its competitors, Microsoft Azure and Google Cloud. After the COVID-19 pandemic, many businesses partnered with AWS and moved their technology infrastructure to the cloud, providing better cost, greater capability, and faster innovation. 

It is estimated that 50% of AWS revenue comes from its EC2 computing service, while 20% comes from its data storage services and data transfer fees. 

Revenue generated for the third quarter of 2021 was $16.1 billion.

Subscription Services

Amazon's subscription service, Prime, has been a vital element in the company's success. 

The subscription model, first introduced in 2005, makes it easy for customers who want free two-day shipping on their purchases and access to streaming videos. 

Its predictable schedule operation ensures that Prime continues to offer a stable income through time as more people join, whether they're new members or renew yearly. 

Amazon’s subscription services include monthly and annual Prime fees, as well as audiobooks, digital videos, digital music, e-books, and other services. 

According to the market research firm Consumer Intelligence Research Partners, Amazon Prime has over 200 million Prime subscribers worldwide, with Prime Video and Amazon Music having the most users. 

Amazon's Q2 2021 financial statements show that 28% of its revenue comes from subscriptions.

Amazon Prime is an annual subscription service that includes free two-day shipping on many items, plus other benefits. It costs $119 per year or $12.99 per month.

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Source: Twitter

Being an Amazon Prime member, you get to enjoy several perks like:

  • Free fresh deliveries costing over $35 and above
  • Discounts on digital services
  • Special deals and coupons for college students
  • Same day delivery in select physical stores
  • Get savings on Prime ebooks, video games, and photos

Amazon Advertising

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Source: Amazon Advertising logo

Brain Olsavsky

“Advertising is part of our flywheel.”

Amazon is one of the fastest-growing digital advertising providers in the United States. Due to its server network and commerce capabilities, Amazon has an unmatched opportunity for providing advertising services. 

Amazon's ad platform also offers superior service to companies worldwide at affordable prices, along with real-time analytics reports that help customers take their marketing and branding to the next level.

Amazon's ad revenues are estimated to have reached $7.9 billion last quarter of 2021. 

The company's global ad market share increased from 3.8% in 2019 to 5.2% in 2020 - and could reach 7.1% by 2023.

Fulfillment By Amazon

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Source: Geekwire

Fulfillment by Amazon (FBA) is an Amazon Business Model that allows you to store your products in Amazon's warehouses. They will pick, pack, ship, and provide customer service for these items.

A standard fulfillment arrangement would be that the seller ships the products to Amazon. They then store them in their fulfillment center (FC), and when an order comes in for those items, they will pick the products, package them, notify the seller of the order, and ship it out to the buyer. 

The difference between the normal retailing process and FBA is that with FBA, you are paying extra for Amazon to do this for you. The cost of this service is included in the seller's purchase price of the goods.

Kindle Direct Publishing

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Source: Amazon Kindle

Kindle Direct Publishing is a fast and easy way for authors and publishers to keep control and publish their books worldwide on the Kindle and Kindle apps. 

KDP uses the same technology that Amazon uses to enable publishers to increase sales of their print books, now with the added opportunity to earn up to 70% royalties on sales to customers in India, Japan, Brazil, Mexico, Italy, France, Germany, UK, Spain, and Canada.

Different Business Models On Amazon

Amazon has become the go-to platform for entrepreneurs, manufacturers, and sellers alike. 

Marketers are using it as a way to test their product ideas before investing time into building physical inventory or even launching an entire eCommerce store online.

There are six different Amazon business models available on this marketplace, detailed below:

  • Online Arbitrage
  • Retail Arbitrage
  • Private Label
  • Wholesale
  • Dropshipping
  • Handmade

Online Arbitrage

Online Arbitrage is an Amazon business model used by many e-commerce companies to buy products at a lower price from one place and sell them at a higher price somewhere else. 

In the online retail world, this term is used to describe buying from any location offering a product at a lower price than another seller and reselling it on Amazon for a higher price.

Profits are calculated similarly for bulk buying. However, you will need to consider the shipping costs charged by each marketplace to make sure each product you buy will be profitable.

The best way to go about it is by comparing prices online. It is faster and easier than visiting various brick-and-mortar stores. Amazon allows you to directly compare prices to determine potential opportunities and ensure that each prospective product offers value for money.

Ecommerce sites offer a wide variety of opportunities for sourcing products. The number of eCommerce stores continues to grow every day, so it's easy to find smaller or emerging retailers who may sell their products at lower prices than bigger competitors since they're not as established.

Retail Arbitrage

Retail arbitrage is an Amazon business model that allows sellers to find and sell things at a lower price. People who do this might buy items in stores and then sell them on Amazon for more money.

You can take advantage of panic buyers and products in high demand by bulk-buying items at a reduced price and then raising your prices later. You can use this concept to build up inventory for specific product lines to learn which ones provide the best opportunities over time.

Retail arbitrage profits are calculated by subtracting the Amazon fees from the original price of your product and the price you are selling it for. Make sure to research the prices of your competitors to ensure you do not overcharge or undercharge. 

You may be tempted to raise your prices and increase your profit margins, but you will lose sales if your competitors offer the same products for significantly less on Amazon.

Private Label

The term "private label" refers to rebranding products that a third party produces and sells under a different brand name. Many brandishing trademarks, such as Walmart's Great Value or Target Mainstay, are both examples of private-label goods on the market today.

Amazon also offers a line called “Amazon Essentials," in which you can find everything you need for your household at a low price. 

To succeed with Private Label, you need to choose a profitable product, the right manufacturer, and invest in quality design and branding. You also need to create killer listings. The best way to increase the chances of your products being seen by customers on Amazon search pages is to optimize your listings. Use Fulfillment by Amazon to ensure that you fulfill your customers' orders and to increase customer trust in your brand.

Wholesale

The idea behind this Amazon business model is to buy large quantities of goods directly from the manufacturer at wholesale price, then sell them on Amazon at a higher price. 

When you buy in bulk, you can get high-value items at low prices, allowing you to maintain a high-profit margin on every sale you make.

However, there is a minimum order that you must place with suppliers, so if you’re brand new to selling, you'll need to examine your sales history and look into the demand for each product you intend to sell.

Understanding the wholesale process when selling on Amazon can leave you with a significant amount of profit in the long run. If you get it wrong, however, even if your sales are in the tens of thousands, you may still end up with a lot of stock that no longer sells and your money going down the drain.

Dropshipping

Dropshipping is a popular Amazon business model whereby the seller does not keep the stock of the product they sell. When a customer buys something, the seller passes the order to a third-party supplier, who ships the goods directly to the customer.

It is similar to affiliate marketing, where a website owner gets a commission for referring customers to a third party's products. The main difference is that with drop-shipping, you are referring customers to other people's products.

Amazon dropshipping suppliers can be located anywhere in the world as long as they provide fast shipping services. In most cases, dropshippers will find suppliers with warehouses near their location, which reduces shipping times and costs.

In return for providing storage space and holding an inventory of products for sale, drop shippers receive a commission on each sale that they make.

Handmade

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Source: Amazon

Handmade products are a great way to provide quality goods for your customers without sacrificing profits. 

As a manufacturer, you are in complete control of the quality and value of your product. You know how much time and effort goes into the production process.

Amazon Handmade is a subset of Amazon's eCommerce market platform, allowing sellers to sell items they design, make, or otherwise create. 

Handmade shops may be run by artisans creating traditional crafts like pottery, woodworking, glassblowing, etc., or by entrepreneurs creating new products often inspired by their hobbies.

Is Amazon Handmade better than other business models?  There are pros and cons to this. Not every seller can make their products from scratch. 

However, if you’re able to do so, there is the potential for huge success that comes with having the right amount of dedication.

Conclusion

Amazon is the largest e-commerce company in the world. 

In this article, we’ve discussed how they make money and what their different business models look like. If you’re thinking about starting any type of business on Amazon, there are a few things to keep in mind.

Firstly, you need to understand what type of business best suits your needs and goals as an entrepreneur or small business owner. Secondly, make sure you have a clear understanding of the pricing strategy before deciding how much inventory or product variations will be available for purchase on your account at any given time. 

Finally, use tools that can help you monitor supply chain costs. These help you to always know where all of your margins are coming from after expenses are deducted.

By keeping these three points in mind, you’ll increase your chances of succeeding on Amazon.

About the author 

Mike Vestil

Mike Vestil is an author, investor, and speaker known for building a business from zero to $1.5 million in 12 months while traveling the world.

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