The Business Model of Amazon

Investors just can’t seem to get enough of Amazon. Even though Amazon is already the world’s fifth-largest company, investors believe that it is only just getting started! It already has revenues of $125 billion per annum. It is targeting revenues of more than $500 billion in the next few years. Startups have grown at this astounding pace earlier. However, Amazon is no longer a startup. It is a fledgling company with a multi-billion dollar business. If Amazon can grow even at half the speed that it aims it, it will be the world’s most valuable company in no time! As students of good business practice, it, therefore, makes sense to study the business model being used by this very innovative company.

Value Proposition

The value proposition provided by Amazon is simple. They offer the most convenience, widest range and the lowest prices. Their prices are so low that they have displaced Wal-Mart as being the leader is low price category! The amazing part about Amazon is that it provides goods and services at extremely low cost without compromising on quality by any means. 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.

It is a mix of a retail company as well as a technology company. Unlike, retail companies, Amazon seldom hires stock clerks and floor managers. Their employees have high technological skills like data mining etc

Revenue Model

Amazon has a diverse revenue model.

• The primary source of revenue for Amazon is the commissions and fees that it obtains by making the borrowers 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.

• 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 their sales.

• Amazon also sells advertising space on its website. The Amazon site is one of the most visited pages in any region. Hence, sellers can expect to boost sales by advertising on it. This is a miniscule portion of the revenue that is generated by this company but is nonetheless significant.

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

• Lastly, Amazon has also developed subscription based business models via its Amazon Prime service. For a fixed subscription users get two benefits. 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.

The revenue model of Amazon is therefore dynamic. It has been repeatedly venturing into newer areas. Also, technology is the backbone of these newer sources of revenue which many retailers had not thought about earlier.

Scalable

The business model of Amazon is not very capital or human intensive. This makes it scalable. Amazon can easily enter another country and start selling products. Very little groundwork has to be done. This is the reason that Amazon went from being an American company to being a multinational very soon. This asset light business model is also preferred by investors who have pumped in billions of dollars for Amazon to beat its competition with its deep pockets.

Competition

Amazon faces a wide variety of competition from different types of companies. There are brick and mortar stores. Then there are other e-commerce sites and also video streaming sites like Netflix. However, none of these competitors seem to be formidable. Amazon is the aggressor is almost all lines of business and is snatching business away from others rather than defending its own turf.

Technology

Amazon has always been at the center of several technological advancements since its inception in 1994. In 2016, they have pioneered a new technology called contactless stores. These stores have been branded as “Amazon Go” stores. The unique selling point of these stores is that there are no humans involved. Amazon has achieved such high levels of automation, that they can run an entire departmental store without having any employees! It is technological advancements like these that will allow Amazon to reach its ambitious revenue targets. Although at first, the revenue targets seem ludicrous, Amazon seems to have a plan!

To sum it up, Amazon has a unique business model. The hybrid tech cum retail model was pioneered by Amazon in 1994. Ever since it has not let go of the first mover advantage. Even today, Jeff Bezos pays no dividends and reinvests all the extra profits back into the operations signaling that Amazon is still not a mature company and that it still preparing to grow rapidly.

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.