Understanding Amazon Business Model

Understanding Amazon Business Model

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Jaya
Jaya Sharma
Assistant Manager - Content
Updated on Jun 15, 2023 15:04 IST

In this article, you will gain an understanding of the Amazon business model. You will also learn about the reach of this business giant on a geographical and serviceable level.

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Table of Contents

To understand the Amazon business model, you will have to understand what this company does. Amazon is a multinational technology company that focuses on cloud computing, e-commerce, digital streaming and artificial intelligence. It is one of the most valuable global brands. Amazon offers its services to multiple industries. These include cloud computing, e-commerce, artificial intelligence, consumer electronics, entertainment, supermarkets and digital distribution.

Amazon’s Financials

  • The American giant has reported that its 2021 sales have grown by 21% in 2021. 
  • In 2020, the net sale was $386.1 bn which increased to $469.8bn in 2021. 
  • 127.78 billion was generated through international revenue channels. 
  • The net income of the company increased by $33.4bn from $21.3bn. It was priced at $64.81 per diluted share in 2021 as compared to $41.83 per diluted share in 2021.
  • Its earnings per share (EPS) was $64.81 compared with $41.83 in the previous year. 
  • Its operating income also rose from $22.9bn in 2020 to $24.9bn.
  • For the fourth quarter (Q4) that ended on 31 December, Amazon’s net sales grew by 9% to $137.4bn against $125.6bn in Q4 2020.
  • The company’s net income almost doubled to $14.3bn from $7.2bn from the previous year.
  • In 2021, Amazon’s largest revenue segment was sales through online retail products. It was approximately 222 billion U.S. dollars in global net sales.

Q1 2022 Guidance

  1. Expected net sales to be between $112.0 and $117.0 billion. This is an estimated growth between 3-8% in comparison with the first quarter of 2021. This anticipates an unfavorable impact of around 150 basis points from foreign exchange rates.
  2. Operating income is expected between $3.0 -$6.0 billion while it was $8.9 billion in Q1 2021. This includes $1.0 billion approximate lower depreciation expense. This is because of the increase in estimated useful lives of servers and networking equipment as on January 1, 2022.

Amazon Business Model Explained

Following is an understanding of the Amazon business model. The model is based on different principles and strategies.

1. Customer obsession

These include gathering qualitative and quantitative customer data. Customer feedback is also important to gather insights to improve the services. It is a state of creating a better customer experience from the customer’s perspective. 

The aim of this process is to develop products that are beyond customer expectations. These are the common pointers between possible products and customer insights that lead to a superior quality product. 

2. Invention and simplification

Amazon believes in creating products that are innovative and simple. Amazon fresh is one of its early whole food delivery services.  

3. Effective cash conversion cycle

Amazon has an effective cash conversion cycle strategy. It is a metric that displays how an organization converts its resources into cash. It reflects the number of days to converts investments into cash flows from sales. Amazon quickly collects payments from its customers and pays vendors in the longer run.  

4. Advertising

Amazon’s advertising business is also growing. In the first nine months of 2017, Amazon doubled its advertising revenues. The revenues increased to $6.72 billion from $2.92 billion in 2018. By 2021, its advertising revenues increased to $31 billion. Amazon is experimenting with video search ads as an attempt to attract big brands. 

5. Amazon Prime

Amazon also includes a subscription business model in the form of Amazon prime as a part of its growth strategy. As more people join the Prime membership,  more people purchase on the online store. This model creates a stable and predictable revenue source for Amazon. It also helps in bringing in repeated customers. 

Amazon lists many products with unlimited Prime shipping to its customers. It also offers exclusive deals and discounts, and digital entertainment customers. Since 2018., Amazon provides Free Same-Day Delivery to over 90 metropolitan areas in the US.

Prime free shipping applicable items have increased over 50%. Amazon has increased the prime membership cost for the first time since 2018. For new Prime members, the price change will be effective from February 2022. For existing Prime members, the price change will be applicable on their next renewal.

6. AWS

Nasdaq has entered into a multi-year partnership for migrating its markets to AWS. Its goal is to become the world’s first fully enabled, cloud-based exchange. AWS provides on-demand cloud computing platforms and APIs to its customers on a pay-as-you-go basis.  

This service follows a platform business model that is gaining traction by tapping into network effects. Amazon AWS is a significant contributor to Amazon’s profits. Its business model has scalability and marginality. AWS has incredible margins. Its operating margins have increased to 30.3% from 28.3% in Q3 2021. 

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How Amazon Makes Money?

Amazon revenue through different sources

The above-given image shows Amazon’s Global net revenue of Amazon from 2014 to 2021 for various products.

As an effective business model, Amazon works towards generating value for its stakeholders. The company offers products and services in almost every category. Amazon allows third-party sellers to sell products on its platforms. It caters to developers and startups through AWS which help them through global computing, database, storage and other services. Amazon’s seller program helps the company to earn fixed fees, per-unit activity fees, the percentage in sales. It generates most of its revenue through product sales. 

Amazon also offers the service of Kindle Direct Publishing and Amazon Publishing. According to this model, Amazon can earn between 30-70% of the royalty from sales. Amazon earns most of its profits through Amazon Prime, AWS and Amazon Advertising Services. 

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FAQs

Q1. Why is Amazon business model successful?

Ans. Amazon has a customer-focused model. It caters to its customers by offering products and services instantly. It also runs several rounds of testing for new features from production selection till checkout. 

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About the Author
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Jaya Sharma
Assistant Manager - Content

Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio