Amazon Business Model – How does Amazon Works?

A diversified brand that needs no introduction, AMAZON, has a well-curated Amazon business model which intrigues people to know more about its business tactics and moves.

Started as a local bookstore year back, Amazon paved its journey to becoming a global trade giant. Amazon’s business model is not just a regular e-commerce model but has diversified in numerous fields and generated a bag full of revenue models.

Taking over the territories of music and entertainment, Amazon has spent a large number of its earnings on advertising its services and in fact, Amazon is now the world’s leading advertiser and that is what helps it establish customer trust and retain their attention.

Amazon’s business model is now an amalgamation of e-commerce and a lot of services and let’s dive into the details of it. 

Amazon Business Model

Amazon has established a perfect platform business model and has framed a perfect model for numerous stakeholders in the company.

Now to understand how Amazon actually generates revenue, we need to know about the major customer segments of Amazon,

Key customer segments 

Amazon broadly functions on 3 varied consumer sets, 

  • Consumers: Anybody who uses any service catered by Amazon becomes a consumer. Amazon keeps a detailed record of its client base and guides them through a hassle-free experience online on their portal.
  • Sellers:  The companies or ventures that sell their commodities online. Amazon acts as a savior for dying businesses as it provides them with a huge client base and legitimate customers.
  • Developers: These are the people utilizing the Amazon web services(AWS)-cloud computing platform

Now that we have talked about the people involved in the Amazon ecosystem, let’s address the elephant in the room i.e. how does Amazon make money? What are its revenue sources?

How does Amazon make money?

Looking at Amazon’s financial metrics, it is quite evident that Amazon pockets most of its money through product sales on its platform. Amazon charges a very minor commission on every sale that a seller makes on its platform but these thin margins make a huge amount when considering the huge audience that amazon caters to.

Now since amazon generates the majority of its income through product sales, people tend to confuse its business model with the normal product business model but that is not the case here.

Have a look at variety of income generation platforms Amazon uses:

1. Amazon Marketplace

Accounting for more than 50% of the total revenue generated, the marketplace is an indispensable part of the business model. 

Amazon collects a very thin margin on the product sales so that it can overcome the competition in the market and that is the reason for a huge shift to online shopping.

Amazon Business Model Marketplace

Low prices, great client handling mechanisms, and lightning-fast delivery options made Amazon an undisputable choice for the majority of the population. 

Now, another argument one might put forward is that how does Amazon function on such low profit margins?

Amazon works on an instant payment mechanism and although the customers pay at the checkout Amazon doesn’t pay its vendors right away, it has lengthier payment terms, which provides amazon which allows amazon to invest back in to scale up its growth and that was the catalyst in converting a local bookstore into a versatile industry.

2. Amazon advertising services

Not everybody knows that amazon has become an online advertising platform. With such a versatile ecosystem, budding businesses are all in to utilize amazon’s sponsored ads service and that leads to the generation of a large amount of revenue.

Amazon advertising services
Source: Bloomberg Opinio

This service provides display and video advertising that helps the audience with already high buying intent to choose the advertised business for shopping. There is no doubt of losing a customer’s interest when a customer is already on a shopping platform and trusts amazon due to past experiences.

Additionally, unlike Amazon marketplace, ad services have great margins and act as great revenue sources.

3. Amazon Prime

When the world was trying subscription model-based businesses, Amazon couldn’t resist but launch one of itself. Amazon Prime is a vital element of Amazon’s brand growth and its working is simple, the interested user has to pay an affordable amount as a monthly fee and in return, he has access to prime video, prime music, free shipping, fast delivery options and much more.

With a family of over 150 million members, Prime has scaled heights to compete with the best OTT platforms on the globe.

The best thing about this revenue source is that it is the most reliable revenue source amazon has because once a person subscribes and enjoys the prime membership, he/she becomes a promising revenue generator for the brand. Secondly, the revenues from this source are quite predictable as compared to other channels.

4. AWS- Amazon web services

AWS is a cloud infrastructure used by many renowned platforms, Uber uses AWS to name a few. This service is not limited to big-sized firms but can also be utilized by freelance developers. The prime quality a cloud infrastructure needs to possess is that of moving with the current terms of digitalization and AWS has been a savior for businesses motivated to transform digitally. It is a perfect example of how IoT (the internet of things) can be utilized to generate revenue as well as gain clients. Amazon isn’t shying away to invest more in AWS because of the considerably high margins and the popularity it has gained. Showing a significant growth of 36% in 2019, AWS is one of the smartest amazon services, and investing in and growing AWS will be a prerequisite for higher revenues.

5. Amazon Kindle

Whenever somebody mentions the word ‘e-reading service’, people are naturally drawn towards the name Amazon kindle. Kindle allows its users to browse their favorite reads, buy them and enjoy reading. Not just that, kindle also acts as a publisher to growing authors and allows them to publish their writings in return for some share in their sales.

In terms of revenue, Kindle isn’t a great help but in terms of generating traffic, kindle does a lot of help.

What makes Amazon’s business model different from others?

Amazon has been a staple name in the e-commerce industry but what differentiates amazon from the majority of other options is its urge to keep innovating and understanding people’s needs. The work culture instilled by the company’s CEO is beyond excellent and allows one to try and experiment with his thoughts.

Let us go through some pointers which accurately explain Amazon’s position in the market today:

Size of the brand

Amazon has spread its wings in almost every sphere of life and we cannot let go of this brand even if we try. Amazon is building new technologies, launching new enterprises, and generating more clients through that. Amazon also expands through buying over some small-scale companies, for instance,, also actively partner with other enterprises to increase brand awareness and reach, just as they did with Toys R Us.

Jeff Bezos’s mind blowing vision

A company flourishes in the hold of great leaders and Jeff Bezos has been one of the most influential faces when it comes to leaders. Many people adopt Amazon just because of its vision and its brand’s vision and that isn’t surprising.  

He always emphasizes learning and improving on their way to success and handles criticism like a pro. His risk-taking ability is to die for, imagine launching an e-commerce business when the internet is scarce and people don’t have access to resources! He still kept going and established his brand with utmost diligence.

IT is the key to growth

Amazon was well aware of the importance of information technology since its very inception and has worked in this sector through various moves. For instance: Cloud computing, did you know that Amazon is ahead of Google in terms of cloud computing services? Shocking, right?

So, all in all, Amazon makes predictions of what the future will need and works on it diligently and that is the reason for its increased popularity.

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