Since its foundation in 1994, Amazon’s journey into the retail sector has been a remarkable one. Rising from a small marketplace that sold books to one of the big five companies in the US, there’s no doubt Amazon runs an efficient business.
Because of Amazon’s success, you might be asking yourself, what is Amazon’s business model? I was curious about the same thing and researched the matter thoroughly. Here’s what I found out!
What Is Amazon’s Business Model In 2022?
Amazon’s business model operates on an eCommerce market platform that offers online retail operations, digital advertising, and cloud services as of 2022. Amazon incorporates several business units, including a two-sided marketplace, Prime video, Kindle marketplace, game studio, web services, and even retail stores to offer customers a range of products and services.
If you want more information about Amazon’s business model, strategies, main characteristics, and much more, keep reading!
How Does Amazon’s Business Model Work?
Amazon’s eCommerce business model works by the combination of different business units.
For example, Amazon’s business model falls into several different categories and is further supported by the following operations:
Amazon’s Marketplace is the company’s primary revenue stream, accounting for more than 50% of the gross profit.
That said, Marketplace is a two-sided eCommerce platform where the company and third parties sell a wide range of consumer products from different categories.
Moreover, it’s a platform where third-party sellers and buyers can interact and trade safely.
Ideally, for sellers to showcase their products on the Amazon Marketplace, they have to pay a small fee to Amazon to promote and advertise their products.
As such, Amazon expands its online presence, whereas the third-party sellers gain direct access to Amazon’s customer base.
Amazon Prime is a subscription program by Amazon that gives consumers additional services only available for premium users.
Further, the program operates on a subscription business model and has been the company’s vital tool for brand growth.
Once a customer pays the monthly subscription fee, they gain access to the platform’s video and music streaming catalog, e-books, one or two-day delivery, unlimited photo storage, and much more.
Currently, Amazon Prime has over 150 million subscription members from different parts of the world.
Amazon Web Services
The Amazon Web Service platform offers reliable, scalable, and affordable cloud computing services.
Additionally, the platform provides customers with a cheap IT structure platform that can be used by start-ups, large enterprises, institutions, and organizations worldwide.
Amazon Kindle provides Amazon’s customer base with an e-reading service.
That said, customers can browse and download various e-books, magazines, and newspapers through this platform.
Thus, the Kindle store provides a platform where authors and publishers can trade and safely interact with readers.
However, it’s important to note that Amazon does not generate much revenue from Kindle as a stand-alone, but Kindle attracts traffic to the Prime membership plans.
In addition, Amazon Kindle allows authors and publishers to publish e-books and info-products in exchange for a royalty fee of about 30-70% of the total sales.
Amazon Fire Products
Amazon offers customers a wide range of Fire products, including tablets, phones, mobile OS, and TVs.
Amazon Advertising offers entrepreneurs a marketing platform to grow their business and increase sales through online advertising solutions.
Ideally, Amazon Advertising increases the visibility of businesses through sponsored ads and videos.
Then, these advertising solutions help business owners find, attract and engage customers.
As a giant online retailer of diverse consumer products and services, Amazon owns more than 1,000 patents, some owned by other companies.
Amazon also owns subsidiaries and brands that offer different types of products. A few examples of the subsidiaries and brands include:
- Zappos.com: An online apparel and shoe retailer that runs independent warehouses and inventories. However, the online retailer has handed two warehouses to Amazon and retained other warehouses, including the main store in Nevada.
- Whole Foods Market: Recently, Amazon acquired Whole Foods Markets, which operates about 300 brick-and-mortar stores.
- Other subsidiaries: Other subsidiaries acquired by Amazon have been integrated into Amazon’s system after acquisition. For instance, when your search for diaper.com, you’ll get redirected to its storefront within Amazon.com.
- Amazon brands: Amazon elements (nutrition and vitamins), Amazon essentials (clothing), Amazon Basics (everyday items), and other brands are a few examples of Amazon-sourced products.
- Amazon fashion brands: Amazon has recently launched seven fashion brands likely to suggest that the company might get into a large-scale apparel business.
- Amazon devices: Amazon incorporates new devices and developed products such as Alexa, Echo, and much more.
How Would You Describe Amazon’s Business Model?
Amazon’s business model can be described as an eCommerce model that integrates acquisitions and diversification in creating a portfolio of different business models and revenue streams.
Therefore, the Amazon business model can be likened to a portfolio of business models.
Initially founded as an eCommerce business, the company has progressed to incorporate cloud computing, meal deliveries, music, and entertainment.
That said, Amazon has quickly taken advantage of the growing use of the internet and has grown into a complex digital ecosystem that’s rapidly changing, adapting, and establishing itself as a successful company.
Also, Amazon has harnessed its technology to create innovations into the in-store retail experiences by introducing Amazon Go stores.
With that, Amazon Go stores appeal to more customers due to the cashier-less model that allows customers to pick items and walk out without queueing at the checkout area.
What Are The Key Strategies Of Amazon’s Business Model?
To achieve success, Amazon’s business models maintain strategies such as secluding its customer segments, creating a value proposition, key activities, among other techniques discussed below:
Ideally, Amazon serves three groups of customers: buyers, sellers, and developers.
- Buyers: With millions of customers purchasing products and services from Amazon platforms, buyers constitute Amazon’s largest customer segment. Further, Amazon tracks its customers through diverse platforms based on various characteristics such as engagement, interest, and personal information.
- Sellers: Amazon’s customer segment sellers include companies, businesses, and organizations that use Amazon’s eCommerce platforms to market and sell their products to Amazon’s customer base.
- Developers: This customer segment includes organizations and individuals using Amazon’s cloud computing platform, Amazon Web Services (AWS).
The Value Proposition Of Amazon’s Business Model
The primary value proposition of Amazon’s business model is to create convenience for buyers, sellers, and developers utilizing Amazon’s different units.
So, through a wide selection of products and services, low prices, and fast deliveries, Amazon creates convenience for all of its customers.
Thus, more customers are attracted to shop at Amazon since they get access to a wide range of products and services at affordable prices, guaranteeing fast, reliable, and efficient delivery service.
Even though Amazon’s website is the company’s primary channel, other significant channels include Amazon’s brand app, Amazon Prime, and other affiliate programs.
Since the company is based online, it utilizes digital platforms such as sponsored publications, advertisements, and email marketing.
Customer Relationships Of Amazon
Amazon is a company that’s primarily known for devising customer-centric strategies that promote customer loyalty and retention.
That said, the company maintains several communication channels such as reviews, telephones, online chats, and emails to respond quickly to customer inquiries.
Key Activities Of Amazon’s Business Model
The critical activities of Amazon’s business model include research, development, expansion, and maintenance of the giant platform.
As such, the company invests in research, development, and the management of the company’s website and apps, supply chain management, storage, and logistics.
Additionally, the company invests in information security of all its business platforms, the production of series, film, and other products in the video platform and the marketing of products and services.
Key Resources Of Amazon’s Business Model
The critical resource to Amazon’s business model is the technological infrastructure.
Since Amazon is based on online platforms, the technological infrastructure should be broad and secure to keep the whole chain running without interruptions and losses.
Also, other secondary resources of Amazon include the company’s physical space, including offices, supply chain structure, warehouses, automation, and much more.
Furthermore, financial and human resources are equally essential in running Amazon’s diverse operations.
On top of that, the human resource team must guarantee professional engineers, designers, and developers to sustain Amazon’s operations.
The Key Partner’s In Amazon’s Business Model
To maintain the continuous activities and program on Amazon’s platform, Amazon has to engage the following key partners:
- Sellers: the sellers that build up Amazon’s Marketplace are the company’s most important partners since they constitute Amazon’s primary source of revenue. Currently, there are approximately eight million sellers, a number that guarantees Amazon more than half of the company’s revenue.
- Subsidiaries: Subsidiaries of Amazon include entities that provide the brand with stores, storage spaces, and systems.
- Content creators: Groups or individuals who publish their work through Amazon’s Kindle are also part and parcel of Amazon’s key partners.
- Affiliates: Amazon’s affiliates include bloggers who promote traffic to the company’s website and promote sales in the long run. Typically, the bloggers earn commissions for referrals that result in sales.
- Developers: Developers include all enterprises, organizations, companies, and individuals engaged in Amazon Web Service (AWS).
The Cost Structure Of Amazon’s Business Model
The cost structure of Amazon’s business model refers to the expenses of completing its IT structure, software development and maintenance, customer service center, marketing, and information security.
In addition to this, the cost structure includes all expenses involved in maintaining physical spaces such as sortation centers, fulfillment centers, and delivery stations.
What Are The Main Characteristics Of Amazon’s Business Model?
The main characteristics of Amazon’s business model include a wide selection of products and goods, fast delivery of items, and a low pricing strategy.
Further, these primary characteristics link to the model value proposition of customer convenience.
As such, most customers have come to recognize Amazon as a one-stop-shop that offers products and services at affordable prices, with fast and efficient delivery.
How Many Business Models Does Amazon Have?
Amazon uses six integrated business models used by third parties to generate company revenues.
That said, the different business models include online arbitrage, retail arbitrages, wholesales, private labels, handmade and drop shipping.
Therefore, third parties must consider their budget, time, personal experience, and flexibility when selecting the most suitable business model for them.
How Does Amazon’s Business Model Make A Profit?
Amazon’s business model makes profits through diverse revenue sources, including sales, listing fees from third parties, commission or closing fees, subscriptions, and direct publishing.
Further, here’s how these revenue sources make profits for Amazon:
- Sales on the website: Since Amazon uses its eCommerce platform to sell products and services, a significant amount of its revenue comes from these sales.
- Listing fees: Amazon charges third-party sellers listing fees of about 2% of the product price and may differ depending on the category of the product.
- Commission/Closing fees: Amazon charges closing fees or commissions for every item sold on its website by third-party sellers.
- Subscriptions: Amazon receives subscription fees from Prime subscriptions.
- Direct publishing: Amazon earns about 30-70% of royalty fees from independent authors and publishers using Amazon’s publishing services.
In conclusion, Amazon uses the eCommerce business model to sell products and services such as digital advertising, cloud services, and music and video streaming platforms.
Further, the company integrates several business segments, such as forming a portfolio of business models to achieve continuous success in the competitive retail market.