Amazon Business Model

POSTED ON JULY 29, 2021  BY DANIEL PEREIRA

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.

To give you an idea of the size of the business we’re talking about, in the
time it takes you to read this simple article, Amazon may have added about a
million dollars more to its revenue.

Contents
 A brief history of Amazon
 Amazon mission statement
 How Amazon makes money
 Amazon Business Model Canvas
o Customer Segments of Amazon
o Value Proposition of Amazon
o Channels of Amazon
o Customer Relationships of Amazon
o Key Activities of Amazon
o Key Resources of Amazon
o Key Partners of Amazon
o Cost Structure of Amazon
o Revenue Stream of Amazon
 Amazon competitors
 Amazon swot analysis
o Amazon’s Strengths
 o Amazon’s Weaknesses
o Amazon’s Opportunities
o Amazon’s Threats
 In Conclusion

A brief history of Amazon

Back to 1994, Jeff Bezos, former Wall Street hedge fund executive and a
visionary who was already aware of the potential of the Internet and the e-
commerce, took the decision to give the first step on creating an “online
everything store” – yes, he knew from the beginning that was Amazon’s
objective.

At first, he thought about naming the company “Cadabra”

(from abracadabra). However, his lawyer, Todd Tarbert, advised him that
the name could be seen as kind of obscure. Besides, it sounded like
“cadaver”, especially over the phone.

Name decided, the next decision should be about the product to be sold on
the e-commerce. Bezos found the most logical option would be books.

And, going against financial journalists and analysts who couldn’t see the
growth of the Internet as Bezos did, Amazon.com reached 180,000
accounts in its first year. In May 1997, Amazon.com became a public
company, with $54 million on NASDAQ. At the end of the same year, there
were 1 million accounts and $148 million in revenues (what would become
$610 million the following year).

The company expanded rapidly and began selling music, videos,

electronics, video games, software, houseware, toys, games, and more.
Moreover, what attracted customers were its personalized recommendation
tools and customers reviews, thus developing a community of consumers.

In 2000, Amazon opened room for small companies and individuals to sell
their goods through the platform. Two years later, Amazon Web Services
(AWS) was launched, confirming what Bezos claimed from the start:
Amazon was not a retailer, but a technology company. From that year on,
AWS has encompassed statistics on the Internet for developers and
marketers, its Elastic Compute Cloud that rents out computer processing
power, and its Simple Storage Service, for renting data storage.

Kindle e-readers appeared in 2007, fostering the e-book market. In 2009,

the company launched Amazon Encore, its first publishing line, which
would also allow individuals to publish their own e-books. Two years later, it
would become Amazon Publishing, aiming to develop its own titles.

Well, Amazon went from a bookstore to an “everything store” and then to a

worldwide e-commerce giant. But the brand definitely didn’t stop there –
and its potential never seems to end. Perhaps what keeps its audience so
close is its profit margin, which remains low on any product/service offered
by the company.

For the buyer, it is comfortable to know that Amazon will always bring a
reasonable and competitive price in all fields and products. And for sellers
who use the multisided platform, it’s convenient to be sure they can easily
display their products on the website and make sales on all continents on
Earth.

Nowadays, Amazon is recognized as the largest retailer on the planet, a

brand for which not even the sky seems to be the limit.
Amazon mission statement
Amazon is guided by four principles: customer obsession rather than competitor
focus, passion for invention, commitment to operational excellence, and long-term
thinking. Amazon strives to be Earth’s most customer-centric company, Earth’s best
employer, and Earth’s safest place to work.
How Amazon makes money
For that, we need to take a look at each of the different operations that are
under this big corporate umbrella.

 Amazon Marketplace: the company’s first revenue stream, Amazon.com

accounts for more than 50% of the income. Basically, Amazon asks for a
fee from its sellers to promote and advertise their products.
 Amazon Prime: it is Amazon’s subscription business model and has been
vital to the brand’s growth. In exchange for a monthly fee, subscribers have
access to the platform’s video and music streaming catalog, free two-day
shipping, unlimited photo storage, etc. Prime currently has more than 150
million members.
 Amazon Web Services: it is a low-cost complete IT structure platform,
whose services are contracted by companies, organizations, and
institutions around the world. It’s not the main source of revenue, but it is
certainly the most profitable one.
 Amazon Kindle: it is Amazon’s e-reading service. Users can buy, browse
and download books, magazines, and newspapers, available at Kindle
Store. Amazon doesn’t make much money from Kindle itself, but by
attracting traffic to the Prime membership plan. Besides, the platform
allows independent authors to publish their info-products and e-books,
charging something between 30-70% of royalty fees from the sales.
 Amazon Patents: the company has more than 1,000 patents, several of
which are licensed by other companies.
 Amazon Advertising: Amazon Ad platform offers sponsored ads and
video. It is a very efficient marketing channel, since the audience that
accesses the platform is already there with the intention of buying

Amazon Business Model Canvas
The Amazon Business Model can be seen in the business model canvas
below

DOWNLOAD HIGH-RESOLUTION PDF OF THE AMAZON BUSINESS

MODEL CANVAS
Customer Segments of Amazon
The customer segments of Amazon can be divided into basically three
groups: sellers, buyers, and developers.

Sellers are all the companies that use Amazon’s e-commerce platform to

sell their products to its wide audience.

Developers are all the community involved with Amazon Web

Services (AWS) – Amazon’s cloud computing platform. As its own website
states, they are customers and partners “across virtually every industry and
of every size, including startups, enterprises, and public sector
organizations”.

And the buyers are the millions of people across the world who acquire
products and services through Amazon’s channels. Amazon tracks its
customers based on some characteristics, such as interest, engagement
and personal information (age, gender, geographical space, language,
among others).
Value Proposition of Amazon
Jeff Bezos defines that Amazon’s business model is based on three value
propositions: low price, fast delivery, and a wide selection of products.

However, looking at these three consumer benefits, we can say that

Amazon’s greatest value proposition is convenience.

Because the audience understands that, with just the help of a device
connected to the internet, they have access to the product catalog of the
largest retailer in the world, with a reasonable price and an agile, safe and
reliable delivery service.

Channels of Amazon
Certainly, the Amazon website is its largest and most important channel.
But important channels also include the brand’s app, Amazon Prime (its
streaming, entertainment, and subscription platform), and its affiliate
program.

As an internet-based company, its marketing is basically digital, including

advertisements, sponsored publications, and e-mail marketing. Overall, the
company invested more than ten billion dollars in media in the year 2019.

Customer Relationships of Amazon

Amazon’s focus, no doubt, is to have a healthy and long-lasting relationship
with its customers. For this reason, they maintain several communication
channels open with their consumers – such as reviews and comments on
the platform, telephone, online chat and email contact. And they don’t
usually take a lot of days to give feedback.

Key Activities of Amazon

Amazon’s key activities are all about the development, maintenance, and
expansion of its gigantic platform.

Therefore, the brand invests in website and app development and

management, management of the entire supply chain, storage and
logistics, information security on all platforms (including e-commerce,
streaming, cloud computing, etc.), production of films, series, and other
products from its video platform, as well as marketing all of its products and
services.
Key Resources of Amazon
“The one” Key Resource of Amazon is, with no doubt, its technological
infrastructure, which needs to be broad and very secure, in order to keep
the whole chain running without interruption and without losses (in 2013,
Amazon was down for about 40 minutes, and that meant a loss of more than $ 5
million in sales).

Aside from that, other key resources include physical spaces of the
company, such as offices, warehouses, supply chain structure, and
automation, among others.

And, of course, human resources are essential for Amazon, which needs to
guarantee A-players among its designers, engineers, developers, etc.

Key Partners of Amazon

 Sellers: certainly the most important partners of the brand, since they are
the generators of Amazon’s first source of revenue. There are
approximately 8 million worldwide, which guarantees more than half of the
company’s revenue.
 Affiliates: bloggers who earn a commission for any referrals that lead to a
sale. In addition to helping with sales, they promote traffic to the platform.
 Developers: are the partners of the AWS segment, or, as Amazon itself
defines, “thousands of systems integrators who specialize in AWS services
and tens of thousands of independent software vendors (ISVs) who adapt
their technology to work on AWS”.
 Content creators: independent authors who can publish their works
through Kindle Direct Publishing.
 Subsidiaries: include companies that provide storage spaces, stores, and
systems, in addition to brands and products developed by Amazon itself,
such as Amazon Essentials, Amazon Elements, Kindle, Alexa, etc.
Cost Structure of Amazon
The cost structure of Amazon includes its complete IT structure, customer
service center, software development and maintenance, information
security, marketing, as well as all expenses involved in maintaining its
physical spaces, such as fulfillment centers, sortation centers, and delivery
stations.

Revenue Stream of Amazon

As mentioned above, Amazon makes money through its own sales,
commissions, advertising, subscription (Prime), web service (AWS),
licenses, and patents.
Photo by: Jordan Stead. Source: https://www.aboutamazon.com/amazon-
fulfillment/our-fulfillment-centers/why-amazon-warehouses-are-called-fulfillment-
centers
Amazon competitors
Online stores: it’s estimated that there are over 24 million online stores
nowadays. Especially regarding knowledge and quality, smaller niche
shops can be “stronger” than Amazon in their fields.

Walmart: although a large percentage of its sales comes from brick-and-

mortar stores, this is another global giant with a significant presence online,
being the second most popular online store in the U.S.

Alibaba: China-based online retailer, specialized in wholesale selling

online. It splits into separate businesses. Alibaba is focused on B2B,
Taobao on B2C, and Tmall on multinational brands.

Otto: European online retailer, that sells products from other brands on its
platform. With a user-friendly interface, some top categories include
fashion, electronics, houseware, and sports.

Jingdong (JD): other Chinese e-commerce, and a direct competitor of

Tmall (from Alibaba). It also has an English language version, Joybuy.com,
which ships to more than 200 countries.

eBay: the pioneer in C2C online selling has evolved to offer B2C sales.
Regarding visits, it only loses for Amazon and stands for about 20% of the
market share.
Flipkart: the largest online retailer in India, founded in 2007. In 2018,
Walmart acquired 77% of Flipkart’s shares. Nowadays, there are more than
100 million accounts registered on the platform.

Rakuten: Japanese e-commerce company, controlling over 14% of the

total global e-commerce market. It has bought some other companies
around the globe to expand its online presence.

Newegg: global leader in selling electronics (computers, TVs, cameras,

phones, etc.), and electronics is Amazon’s most popular category.

Amazon swot analysis

Amazon’s Strengths
 Brand: being an e-commerce giant, Amazon has a strong brand image in
the market and it’s ranked as second in brand valuation, only behind Apple.
 Customer orientation: reasonable prices, personalized suggestions, and
reviews make a loyal consumer community.
 Innovation: Amazon is always developing new products and services,
while improves its regular business.
 Cost: as Amazon does not maintain physical stores and has little
inventory, it is able to keep a low-cost structure, which enables low
margins.
 Large selection: the company owns an extensive product mix, allowing
customers to buy everything on the same platform.
 Partners: there are more than 2 billion items available from third-party
sellers. Besides, Amazon makes partnerships with local supply chain
companies, to understand and meet local needs per country.
 Logistics: Amazon uses a highly efficient distribution system and it is
known for its short and reliable delivery time periods.
Amazon’s Weaknesses
 Imitable business model: online retail businesses have become more
and more common, and Amazon has been facing some strong
competitors.
 Flops and failures: Fire Phone was a big failure and Kindle Fire didn’t
grow as expected.
 Workplace conditions: there have been some negative reports regarding
employees’ treatment which have affected its reputation.
 Dependence on distributors: that exposes Amazon to a wide range of
issues, especially considering renegotiation of terms.
Amazon’s Opportunities
 Expansion: Amazon can expand its operations in developing countries.
 Physical stores: more brick-and-mortar operations may engage
customers and compete more strongly against box retailers.
 Acquisitions: Amazon has made some big purchases, such as Zappos,
and that can increase market share and reduce competition.
Amazon’s Threats
 Regulations: some government regulations can threaten Amazon
distribution inside some countries.
 Exploitative labor: Amazon faced scrutiny from the U.S. for allegedly
maintaining partnerships with sources associated with human rights
abuses.
 Cybercrime: that can threaten the security of the platform and its users.
 Competition: in addition to big retail companies, Amazon also faces strong
competitors in video streaming service, such as Netflix, HBO, Disney+, etc.
 Recession: online stores are not immune to economic recession, and
uncertainty can impact Amazon’s sales.
 Fake reviews: customers rely on reviews to make purchases and the
company has already deleted thousands of fake reviews from its platform.
In 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 it
faces competition on all its fronts,
individually, its corporate umbrella
remains unparalleled and, therefore, must
remain in the lead, years to come.