11.07-11.08 Amazon Business Model

Amazon Introduction

It is undoubtedly the largest online marketplace in the world, it caters to about 8M retailers/businesses and ships out 1.6M packages every day. It is referred to as the ‘everything store’, and evolving from being a retail company into a platform with the same business model as Google/Facebook/Apple/Microsoft. They are collectively referred to by the acronym GAFAM, the profits of the top five have shaped and molded the world as a whole, while subsequently shaking the foundations of the business sector.

Amazon (formerly called Cadabra) focuses on e-commerce, cloud computing, online ads, digital streaming, and AI.

Four Distinct Waves History

1994-2005

Amazon went public in May 1997, the company had long since branched out from only selling books and, as of 1998, had begun selling music/videos/video games/consumer electronics, home improvement items, software, games, and toys. In 2002, it launched Amazon Web Services (AWS), which focused on providing APIs for Web developers. In 2004, AWS expanded to provide website popularity statistics and web crawler data from the Alexa Web IT service.

2005-2015

As the mid-2000s came into play, Amazon made a total change in its business model. Amazon streaming platform Amazon Prime Video, AWS, and its advertisement sector turned out to be a great success.

2015-2020

The company focused on expansion in places of interest, such as Europe, Mexico, and India, even China. Its most outstanding achievement was from the AWS cloud computing and its technology.

2020-Forward

Due to the pandemic, Amazon became one of the companies that made its mark on the world. It created a customer-obsessed business that focused on bettering itself. It spent a large amount of money in order to scale its services further and make them even more compelling to customers.

Amazon Business Model

It is a mix of multiple independent sectors working as a whole. Amazon measures its success via a customer experience obsession, lowering prices, stable tech infrastructure, and free cash flow generation. Following are the different revenue resources for reference.

[Selling goods to its customers directly] [Act as an online market platform that allows 3rd party to sell their products through its platform] [Collect a small commission from the sales made by the retailers] [Selling e-books through its online store] [Electronics products selling online] [Amazon Prime Service subscription-based business] [Amazon cloud AWS get high margins as well as the ads business]

Amazon v.s. Alibaba

First: Amazon retains a portion of the sales made as a commission, for acting as a middleman between the buyer and seller. Alibaba does not charge any commission on sales/listings, it charges sellers a specific amount to rank higher on their platform which generates advertising revenue.

Second: both Amazon and Alibaba offer goods to the public on their own platform. However, Alibaba has Taobao, the largest market that caters to small retailers to sell their goods.

Other Models of Amazon

Besides the primary business model of Amazon, there are six overarching business models that 3rd party markets/retailers can use to generate revenue for themselves.

[Retail Arbitrage]: it focuses on hunting for goods at lower prices or collector’s editions of goods in physical stores and selling online at a higher price than initially purchased. Pros: Budget Independence, Easy Growth, Easy Business Governance. Cons: Low Profit and Gains, Time-Consuming.

[Online Arbitrage]: it involves sourcing the internet, buying reduced or cheap products from e-commerce marketplaces, and selling them for a higher price on Amazon.

[Wholesale]: it entails retailers purchasing low-cost or discounted bulk quantities of goods from suppliers and reselling them on Amazon at a higher price. This model allows retailers and 3rd party markets to buy high-valued goods cheaply from suppliers as they are purchased in bulk, which translates to a higher profit margin in every sale. However, it requires deep research for individuals who are new to it, because there is a MOQ order you have to place with suppliers.

[Private Label]: it involves purchasing, rebranding, and repackaging unbranded manufactured goods from a separate manufacturer. The rebranded goods are then sold at a higher price by the businesses as their own. It is most suitable for popular businesses or brands.

[Drop-Shipping]: it is done by connecting the customer to a manufacturer or producer, once a consumer has bought a product from you, it is passed onto the supplier, who drop-ship it to the customer on your behalf.

[Handmade]: it involves the retailer making the products themselves, the products may include jewelry, accessories, home decor, and more. It is the most exhausting business model.

Amazon’s Business Model Canvas

Customer Segments

Sellers: it comprises all the businesses, individuals, and companies that sell their goods to the company’s large customer base.

Developers: it consists of all the communities, companies, and businesses that use Amazon’s cloud computing platform, AWS.

Buyers: the millions of customers who buy goods from Amazon.

Value Propositions

Amazon’s based on customer-focused VP: Low price, fast delivery, and a wide selection of products.

Low Price: it is done through the use of automated pricing. It works by constantly adjusting the cost of goods, depending on competitor’s price, demand and supply, and market trends.

Fast Delivery: Amazon has its own network of warehouses and external shipping and delivery services.

Wide Selection: Amazon caters to the needs of millions of customers as ‘the everything store’ has diversified and added almost every conceivable good to its library.

Amazon’s Channels

Its biggest channel is an e-commerce website, generating about $470B in 2021. Besides, it has other channels like Amazon Prime, Amazon Web Services, Kindle Direct Publishing, Amazon Service, and Audible, etc.

Customer Relationships

Amazon takes customers’ comments, suggestions, and opinions as seriously as possible. The company aims to create a healthy and long-lasting relationship with its customers.

Revenue Streams

On-Time Sales: from the sale of products that are delivered only once, not a period of time.

Physical Store: A owns a few physical stores that sell goods to customers.

Commission on Sales/Retail 3rd Party Seller Service: commission-based.

Advertising: Amazon advertising products for other companies.

Subscriptions (Amazon Prime): A charges a specific amount on subscription-based payment.

Others: Amazon Web Services, Licenses, Patents, Pay-Per-Use & Support Subscriptions.

Amazon’s Key Resources

The key is technological infrastructure, which consists of websites and apps (Prime Video, Kindle, Audible, AWS, etc.) including all the backends to them (including the logistics IT backend).

Another resource is the company’s delivery and fulfillment network, which comprises all the methods and parts involved in transporting goods from the manufacturer/retailer to the customers.

Amazon’s Key Activities

One key activity is to improve its value propositions. Amazon is constantly and consciously focused on creating a better experience for the customer, focusing mainly on maintaining low prices, improving the speed of deliveries, and widening the scope of its extensive product inventory.

A invests in website, app development, and management. It also focuses on producing films, series, and other products for its video platform and on marketing all of its products and services. A manages its low prices through a pricing strategy known as dynamic pricing/repricing.

Amazon’s Key Partners

Sellers: companies, individuals, businesses, and groups that sell their goods/services on Amazon. They make up about half of the company’s revenue, with about 8B sellers worldwide using the platform.

Affiliates: the section of customers consists of content creators, bloggers, and other individuals and groups who gain a commission for directing traffic/customers to the platform.

Developers: it comprises the developers/integrators who specialize in AWS services and the independent software vendors (ISVs) who adapt their tech to work on AWS.

Content Creators: it consists of authors/writers/artists/movie producers who publish or release their creations on Kindle, Audible, Music, Prime, etc.

Subsidiaries: these include companies that provide storage spaces, stores, and systems. As well as transportation and delivery systems, etc.

Amazon’s Cost Structure

It consists of IT structure, customer service center, software development and maintenance, IT security, and marketing. Cost breakdown: sales 58%, fulfillment 16%, IT 12%, Marketing 7%, G&A 1.8%.

How Does Amazon’s Business Work?

Consumers: they are the company’s number one focus, as its entire business model revolves around increasing the convenience of consumers.

Sellers: it is also a strong pillar for the company and its business model, as they provide the most significant source of revenue and are the driving force behind the e-commerce platform.

Developers and Enterprises: it comprises developers/programmers/enterprises such as startups, government agencies, and academic institutions. They are the backbones of Amazon’s technologically advanced cloud computing system (AMS).

Content Creators: consists of authors and independent writers willing to publish their works on Kindle Direct Publishing. The company also has separate platforms for musicians/movie producers to release their products to patronize.

How Amazon Makes Money

Its operations include the Amazon Marketplace, Amazon Prime, Amazon Web Services, Amazon Patents, Amazon Advertising, and Amazon Kindle. The online store is the biggest revenue generator and is backed up by many other business segments, which work in tandem to achieve the business goal.

Amazon Marketplace

Through fees garnered from the promotion and ads for goods, as well as the sales of products on the e-commerce platform, Amazon.com accounts for more than 50% of the total income. The sales include both physical and digital products (e-books, videos, games, music, and software).

Amazon Prime

This subscription-based business model offers subscribers access to the platform’s video and streaming catalogs, free 2-day shipping, unlimited photo storage, etc, in exchange for a monthly fee. This model has been instrumental in the company’s growth. It not only lures new customers with exciting content and movies but also leads them into the marketplace with the lure of free shipping.

Amazon Web Services

It is done by providing companies with relatively cheap on-demand services like computing, storage, networking, security, databases, etc.

Amazon Kindle

It not only allows authors and independent writers to publish their books for 70% of their royalties, it also allows customers to buy, browse, download, and read published books, magazines, and newspaper articles available at the Kindle store.

Amazon Patents

The patents are used by many technological giants like IBM/Google/Apple/eBay/Intel, etc., and in order to use those patents, the company must pay a fee to Amazon (under Amazon Technlogies Inc.)

Amazon Advertising

It gains revenue by promoting sponsored ads and videos for individuals, and companies. The company is only paid when customers click on the ad, regardless of whether the product is bought. This channel is highly effective since the customers direct the ads with the intention of purchasing.

Amazon’s Revenue Model

Its highest revenue generator is the sale of the products. Due to high sales costs, the margin is thin. Other businesses like Advertising Services, Price, and Amazon AWS, run with much higher margins. Thus, the online store is the foundation for those other businesses that make the company more profitable in the long run.

Amazon’s Cash Machine

It is the cornerstone of Amazon’s ability to expand rapidly and compete with other industries. The online store functions on a tight profit margin. This creates the facade that Amazon does not have a viable cash flow since Amazon collects payments from buyers quickly but pays its vendors with significantly longer payments. This system provides short-term liquidity that can be used to invest in different company sections, it increases the company’s progress and ability to disrupt other companies in any industry.

Through the Amazon cash machine system, it has access to an endless supply of short-term liquidity. As such, the limitations to the other sectors’ growth are the company’s imagination.

Advertising Business

It is the 3rd largest digital advertising company in the world, behind Google and Facebook. It can be traced back to the sheer number of retailers and entrepreneurs who use e-commerce. This revenue is expected to grow since marketers are willing to pay for Amazon’s advertising services. It has much higher margins than online stores’ tight margins.

In 2022, Amazon successfully expanded the availability of its sponsored content to its platform, paving the way for unprecedented growth in the digital advertising sector.

Amazon Prime

It is a subscription-based payment system, and the inclusion of Amazon Prime into the company’s arsenal was a pivotal moment. The logic was the more people join the Prime Memberships, the more products they purchase in the online stores. It also creates a more stable and predictable income over time.

Amazon AWS

AMS has enjoyed higher profit margins and network effects. Amazon has worked in cooperative competition with many companies that utilize AWS.

As technology advances and competition toward cloud computing gets more challenging, and as AI gets commoditized, a margin decrease is expected. It is working as the underlying infrastructure for the Web and as the underlying platform for the AI-powered Web, popularly known as the Metaverse.

FBA Model of Amazon

It is a streamlined way of handling commerce. As a seller, you must get a supplier (located in China) to provide the products and transport them to the Amazon Warehouse. Amazon then handles storage, shipping, customer service, and tracking. The model removes the added costs and hassle of storage and logistics. Though some upfront capital is needed, it provides a higher level of ease, exposure, and profit in the long run.

What is FBA?

It means ‘Fulfilled By Amazon’, it is a business solution that exploits Amazon’s resources, giving online sellers the freedom to make money without raising capital for storage and handling. It smooths out the backend processes for the seller and the frontend processes for the buyer, a fairy godmother.

How Does FBA Work?

Benefits from Amazon Prime: one of the best ways to boost sales is through free shipping. Amazon Prime awards users free shipping on their purchases, ultimately saving money for them.

Benefits from Amazon Affiliates: it drive traffic to your listing and promotes your products once your products are listed. It comes at no cost/effort from you. Everybody wins with affiliates.

Not limited to listing on Amazon: You can sell your products and secure your income through multiple channels, FOB allows sellers to have their products listed elsewhere, even in their own stores.

Cons of FBA

1. Upfront Capital: you must raise upfront capital before launching a business using the FBA model.
2. Choosing a Supplier: most suppliers are located in China, so it’s challenging to find a good one.
3. Dealing with Suppliers: you cannot bank on the reliability of a supplier 100%, certain situations might arise that you would have no control over.
4. Amazon only Promotes Successful Products: A’s algorithm promotes products that are already gaining traction and selling well. This begets the need for you to jumpstart your page traffic before you can use Amazon’s exposure.
5. Reliant On Amazon: the platform still belongs to Amazon, you are subject to whatever decision they make regarding the FBA/Prime, and even your product. Your sales could suffer significant hits, and you would have no opportunity for redress.
6. Own Online Store Could Be More Profitable: while FBA promises higher profit margins than its counterparts, owning your online store could ultimately make you more money.

What Buyer Persona Fits FBA?

1. Portfolio Paul: For someone who has numerous income streams, the FBA model is primarily stress-free and can be made by hiring agencies that handle everything involved. If you’re like Paul, you can create space for yourself and time on your hands, while still diversifying. FBA is pefect.
2. DIY Dave: Dave loves to focus on the details of it all. Using the FBA, Dave will likely use every trick, strategy, and utility at his disposal to smooth every ragged edge. There are numerous ways to decrease costs, increase margins, and facilitate growth for a listing. Dave is perfect.
3. Flipper Fred: those who buy a business not to own it, but to raise the revenue and sell it for a higher price than he got it. FBA is a goldmine for Flipper Fred.
4. Strategic Sally: who has a profitable Amazon affiliate website, the FBA fits a persona like Sally, who wants to expand her business into other interrelated ventures.
5. Growth Strategies: many growth strategies that you can employ to make FBA more profitable.
6. Paid Traffic: it is an easy and accessible option for directing customers to your page, optimizing your campaigns, and paying close attention to the feedback to get the most out of your money.
7. Build a Brand: when it comes to diversification, building a brand for your product makes it easier.
8. Build an Email List: It might not the the preferred strategy for everyone, but if you own a brand with an established offering of products, an email list will help you create a niche around your business. You can easily communicate with your buyers, facilitate frequent purchases by updating them about your offers, and continuously market your products with little to no cost.
9. Social Media: like the email list, SNS brings you sizable returns if you decide to take the build-a-brand route. This organic traffic raised from different SNSs can make you a whole lot of money.

Amazon’s Business Strategy

Long-Term Approach

‘We’re confident in planting seeds and watching them grow into trees’ – Jeff Bezos. AWS was established in 2002 and provides APIs to web developers.

Key Features of Business Strategy:

1. Strengthening Amazon Ecosystem: the cornerstone of business strategy is its cooperative strategy, the ecosystem provides low operating costs/ease of use for customers. The ecosystem comprises authors/commentators/merchants/developers, who collaborate with Amazon to offer their clients valuable services
2. Uncompromised Focus on Customer Service: Amazon prioritizes long-term profits over short-term profits. Its cooperation is unaffected by competition. They are solely concerned with ensuring that every customer with satisfied with the services they provide
3. Focusing on Leadership Values: Amazon’s culture, helps them relentlessly pursue the mission of being Earth’s most customer-centric company, the best employer, and the safest place to work
4. Focus on the long-term, not the short-term: we don’t focus on the optics of the next quarter, we focus on what will be good for customers. I think this aspect of our culture is rare.
5. Strategy on Things that don’t change
6. Opportunities and Not Failures: Jeff has always focused on opportunities, he sees setbacks as opportunities and solutions
7. Strong Values and Culture: customer obsession, ownership, inventing and simplifying, being curious, hiring and developing the best, high standards, thinking big, bias for action, frugality, earning trust, diving deep, disagreeing and committing, delivering results
8. Competitive Prices: Amazon maintains its management by means of developing various product selections by lowering the prices.
9. Trains Employees to understand the customer: Jeff ensures that managers and all staff understand the customer’s experience and make sure they understand what the customer goes through and to ensure humility.
10. Focusing on SEO & PPC: it is known for being successful with SEO and PPC services. That’s why over 50% of clients visit Amazon when searching for the desired product or wanting to make a purchase.
11. Diversified Patent Portfolio: Amazon’s preferred long-term profits have made it a dominant online retailer and arguably the largest online retailer. The Seattle-based behemoth is also shown for the variety of technology patents it has accumulated over time.
12. Investment in Different Technologies: Amazon has committed $1B to a new venture investment fund that aims to invest in companies developing tech to support e-commerce business processes.
13. Entertainment Sector: it is aggressively competing in the entertainment sector, the biggest competitor of Netflix.
14. Becoming a Logistics Powerhouse: Amazon is on the verge of starting a small warehouse to support Prime Now and Amazon Fresh, its grocery delivery service.

What Has Amazon Been Successful In?

It grew from being a local bookstore to being one of the biggest business industries to grace the planet Earth. Its excellent user interface makes customers shop conveniently, even from the comforts of their homes. It provides customers with free shipping, making it hard for others to compete.

How Amazon Responds to Competition?

It doesn’t focus solely on competition, it is more concerned about customers’ well-being. Amazon does not have to deal with competition directly, its cost leadership strategy has them covered, and a huge advantage they also has in hand is its customer obsession strategy.

How Amazon Positions Its Brand?

It is known for putting its customers first.

How Does Amazon Maintain Leadership?

Leaders develop leaders: It is famous for its high standards and how they must be met by themselves and all the employees. They hire and develop the best and most exceptional talents. Leaders think uniquely and differently in ways they can serve their customers rightly and profitably.

Product Selection: Amazon maintains leadership by creating a diverse product selection. They have moved from the arts to online groceries, cloud computing, and film/TV production. It is known as the ‘everything store’, even some odd selections of products can be found on Amazon.

Offering Various Features and Services: Prime, Video, Cloud Drive, Cloud Player, Web Services, Dash, Kindle, Fresh and Prime Pantry, Echo, Fire TV, etc.

Continually Improves the Customer Experience: it is always on the move to improve and provide a user-friendly interface for its customer service. They use drones to deliver their goods.

How Amazon Responds to Failures and Setbacks?

Innovation needs failure, taking risks is an important factor, as you will never know what works for you unless you try. Amazon embraces its failures and tries to learn from them.

What Pricing Strategies Make It Unique?

Dynamic Pricing: it involves setting the costs of products/services in a flexible manner. It is done through the use of pricing bots, the bots utilize data from price algorithms to adjust pricing based on various factors. Factors such as customer’s location and activity, inventory of a product, order history, product preference, expected margin of the product, the level of demand, and competitors’ pricing. It is a prevalent technique used in online marketing through the collection and analysis of customer data.

Psychological Pricing: customers who buy products will most likely gravitate toward a cheaper product. Psychological pricing takes advantage of this choice. By placing retail prices below whole numbers, customers will read the price as lower than it is and treat it as a viable option ($9.99/$99.99). The strategy influences the customers’ buying decisions, their prices are hailed as lower than competitors’, which makes it more attractive to customers.

Competition Monitoring and Repricing: monitoring the prices of competitors gives a good understanding of competitors’ strategies. Automated tech of pricing optimization that suggests competitive prices when doing a competitive product analysis keeps a company ahead of competitors.

Amazon’s Virtuous Cycle

It is also called Flywheel/Victoria Cycle, the strategy that improves the customer experience as the primary way to attract customers and 3rd party sellers to the platform. In addition, Amazon improves the selection of products & cost structure to decrease prices, which further helps keep the flywheel moving.

It focuses on these elements: Low Prices, Large Selection, and a great delivery experience. Due to the good customer experience, the site gets a lot of traffic. Instead of monetizing the traffic, the company focuses on allowing 3rd parties to sell their products on Amazon. Then further increases the customer experience, allowing the cycle to reinforce itself.

It is also known for its cash machine strategy, which means the company can operate efficiently at very tight profit margins. Amazon turns it into lower prices to customers, which encourages customers to buy more.

Amazon’s Digital Distribution

Business-to-Customer

The e-commerce platform is consumer-facing, providing millions of products to billions of users worldwide. Aside from selling its own products, it allows 3rd party stores to reach customers. Amazon’s platform operates on tight profit margins but generates cash in a short time. Amazon re-uses this cash to scale up its operation, which calls back to the virtuous cycle. The company focuses on having a wide variety of products, low prices, and speedy delivery, all in a bid to increase customer satisfaction – the primary goal. To top it all off, Amazon added Prime to enable consumers to get FREE DELIVERY.

Business-to-Business

Amazon’s operations consist of a network of entrepreneurs who join Amazon to boost their sales. The 3rd party sellers can sell on Amazon and take care of the fulfillment. The Amazon take only a small revenue cut as a distribution fee. The 3rd party sellers could also use Amazon’s inventories and their products will be sent directly to Amazon. Amazon shoulders both the inventory, distribution, and fulfillment, and the sellers end up taking only a small cut of the overall revenues.

Amazon AWS

It is the cloud infrastructure that powers up a good chunk of the web, a way for Amazon to offer 3rd party sellers the ability to host their e-commerce on top of Amazon. AMS is now a company with its own structure, which also falls under the company’s B2B structure.

Amazon also offers a set of AI/ML tools that developers use to build cloud tools on top of Amazon AWS. AWS also operates a qualified sales force that can sell those services to other businesses or clients.

Amazon’s SWOT Analysis

Strengths

1. Brand: Amazon holds a strong position in the market and boasts a successful brand image. It has a brand value of $249 Billion.
2. Customer Orientation: It constantly works to cater to consumers’ needs. Not only does create a community of loyal customers, but also attracts new customers to the brand.
3. Innovation: Amazon is constantly bringing new innovative tech to the market, from Prime, Alexa, Kindle, and new products/services while improving its current lineup.
4. Cost: Amazon has only a small number of physical stores or little inventory, so it effectively delivers value to customers and simultaneously maintains a low-cost structure.
5. Large Selection: it truly lives up to its name of being ‘The Everything Store’ by owning an extensive mix of products, allowing customers to buy virtually everything on its platform.
6. Partners: there are more than 2B items available from 3rd party sellers on Amazon. It also partners with local supply companies to meet the needs of customers in different countries.
7. Logistics: It is known for its reliable and quick deliveries.

Weaknesses

1. Imitable Business Model: its business model is easily replicable.
2. Flops and Failures: failures such as the Fire Phone and Kindle Fire smear its success.
3. Workplace Condition: negative reports about workplace conditions and employee treatment.
4. Dependence on Distributors: it highly depends on distributors for its supply chain work, which exposes the company to the prospect of being strong-armed into unfavorable negotiations to avoid losing distributors.

Opportunities

1. Expansion: it could do well to expand its operations in developing markets.
2. Physical Stores: by expanding physical stores, Amazon can become a retail giant and improve competitiveness against big-box retailers like Walmart.
3. Acquisitions: it can increase market share and reduce the level of competition.

Threats

1. Regulations: some regulations may threaten business proceedings & distribution in some countries.
2. Exploitative Labor: it is one of the three retail moguls facing scrutiny from the US for being associated with labor sources that are linked to human rights abuses.
3. Cybercrime: it is always a problem when it comes to online operations since the platform may be hacked, and this leads to customers’ data being leaked.
4. Competition: besides the B2B competitors, there are a lot of streaming service competitors.
5. Recession: online stores are not immune to economic recession.
6. Fake Reviews: trolls or bots leave fake bad reviews on products, discouraging customers from purchasing from the platform.

Organizational Structure

1. Hierarchical Corporate Structure: it used to be flat-line, but due to the immense size of the business, the hierarchical structure has been developed. Now it has 1.3M employees worldwide.
2. Hybrid Project Groups: the corporate structure works with mixed project groups when developing new products/services. Each field has its own department, and specialists from the aforementioned departments are rewarded with projects according to their skills and the competency required for the project.
3. The flexibility of the Business: Amazon remains highly flexible in adapting to frequent changes in its external marketplace. The integration of hybrid project groups plays a key role in maintaining the flexibility of the business. The structure is broken down into multiple small teams that deal with various aspects of the business.
4. Stability in the Top Management: Amazon has kept a stable upper echelon, with many of the company’s top players having been at the company for years or decades.

Conclusion

Amazon is arguably the largest and most successful diversified company, ranking at $33B in 2021. Its flywheel, widespread business ventures, and carefully crafted e-commerce strategies keep the company ahead of its competitors. Despite its flaws and looming threats, Amazon remains flexible and keeps shelling out innovations. Amazon appears unbeatable, and the company will only continue to grow as a profitable industry.