6 Surprising Things to Know About the Amazon Business Model
Today, we’re looking at the business models of one of the most successful corporations of the 21st century – Amazon. If you think that we can’t possibly distill Amazon’s business model into a short article, then you’d be right. Instead, we’re taking a general look at the overall strategy and focusing on several interesting facts about Amazon itself.
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The Amazon Business Model – A Story of Diversification
Before we start analyzing individual sections of Amazon’s business model, it helps to present a general outline of the business overall. Of course, Amazon’s business model is extremely complex, so this will be a highly generalized version of reality.
Essentially, Amazon’s business model and growth strategy rest on diversification. Amazon is a global brand, which is primarily known for its massive online marketplace (the largest in the world). However, Amazon continues to quickly diversify its business activities into other areas as well.
We can split Amazon’s diverse business activities into two groups: products and services. Products are its online and physical marketplaces and those products that Amazon develops and sells under its private label. Services include Amazon Web Service (AWS), subscription services, seller services, and more.
Products make up most of Amazon’s revenue, but services continue to gain ground in this area (especially given their high margins). Below, we’ll dive into some of these product categories and give you several interesting facts about the Amazon Business Model.
Top Things to Know About Amazon
1. Jeff Bezos’ Vision Controls Much of Their Direction
Jeff Bezos has become one of the most notorious billionaires in the world. Bezos, the founder of Amazon, still has a great deal of influence over the company’s direction. His original vision still plays a large role in how Amazon creates and pursues business opportunities.
The entire extent of Bezos’ vision is too complicated to explain in detail here (and quite secretive). Bezos’ business strategy was complex, but much of it was focused on customer obsession, maintaining a startup mentality, staying on top of external trends, and delivering results.
It’s all very complicated, but if we were to sum it up generally, it would be this: Amazon’s core value is to create cost savings with its sourcing and logistics and to pass these savings onto the customer.
Entire books have been written on Bezos’ approach to growing the Amazon ecosystem. It’s important to know that his original principles continue to influence the company today, and his vision continues to innovate as the company grows.
2. Amazon Has Three Customer Value Propositions
Understanding Amazon’s business model becomes easier when looking at Amazon’s core customer value propositions. Bezos has stated these value propositions himself, and they continue to guide much of Amazon’s direction. These propositions are:
- Low prices
- Fast delivery
- Vast Selection
Sounds simple right? Essentially, it is. But Amazon is laser-focused on pulling this off better than any business on Earth. These three principles are Amazon’s entire appeal to most people, but achieving it at its scale is quite a monumental achievement. Within each category, there are thousands of business practices that help Amazon retain the top spot. From effective sourcing to efficient operations and logistics to rigorous quality control to seller partnering and verification, the list goes on and on.
These three value propositions continue to drive Amazon forward and are crucial to understanding its business model as a whole.
3. Amazon Sells Three Main Product Categories
You can buy just about anything on Amazon from thousands of different product categories. However, Amazon’s business model breaks down into three main product categories that drive their business forward. These categories are Amazon products, Things, media, food, and services.
Amazon products are the products and services that Amazon makes and sells under its private label, including popular products such as Prime Video, Amazon Alexa, Kindle, Fire TV, and more.
Things, media, and food encompass all the product categories found on the Amazon marketplace. As you can imagine, this list is extensive and a huge competitive advantage.
Services are the various services offered by Amazon. They broadly break down into home services and credit and payment products.
4. Amazon Prime is Crucial To Driving Loyalty
Many people see Amazon Prime as a video streaming service that competes with Netflix, but this is a small part of the role that Prime plays in the Amazon business model.
Amazon Prime was a response to the popular trend of the “subscription” business model. With many companies finding success with this model, Amazon shifted to adapt to the trend. Amazon’s logic is that, as people subscribe to Prime, they will buy more products to take advantage of the cost savings that come with a membership. Additionally, they’ll want to keep their access to Prime Video streaming. All of this creates loyalty to Amazon, which drives future sales. Purchases are no longer a one-time deal, as the customer is committed to Amazon with a subscription.
5. Amazon Buys Many Companies
Part of Amazon’s aggressive expansion has included substantial acquisition, including acquiring competitors and companies outside Amazon’s primary focus. Amazon is an extremely diverse company and much of this diversity is because of its aggressive acquisition practices.
Amazon has aggressively purchased online retailers. Some of their famous acquisitions include zappos.com, diapers.com, fabric.com, and many more. Amazon often purchases retailers and redirects its homepage to Amazon’s storefront.
Amazon has also purchased outside the online retail space. For example, Amazon purchased Whole Foods Market for $13.7 billion in 2017. They also purchased Twitch Interactive for $937 million in 2014.
Amazon will either integrate acquisitions into their platform/product umbrella or will allow subsidiaries to resume operation under their own branding. Either way, Amazon’s aggressive expansion will not stop any time soon.
6. Amazon Uses Three Main Types of Sourcing to Meet Demand
Sourcing products is a key component of Amazon’s business. It’s one of the ways that it keeps relative costs low, and passes the savings onto the customer.
Sourcing inventory for a business as vast as Amazon is no simple task. Amazon utilizes three main types of sourcing. Once again, entire books could (and have!) be written on how Amazon sources inventory.
Amazon’s Inventory: Amazon holds certain products in its own fulfilment centers. Fulfilment centers are located in popular hubs so that they can reach customers quickly and efficiently. Typically, Amazon reserves this for its most popular products, so the inventory turnover is rapid and efficient.
JIT Inventory: JIT inventory (or just-in-time inventory) is the inventory shipped directly to Amazon once a sale is made. Amazon utilizes arrangements with partners to source this inventory, ensuring that the inventory doesn’t occupy space in a warehouse until necessary and that Amazon won’t have to store this inventory themselves. Alternatively, Amazon might have an arrangement for the publisher to ship this inventory directly to the customer.
Third-Party Sellers: Amazon’s marketplace is full of third-party sellers that sell products through the platform. Often, these sellers will be responsible for sourcing their inventory (following Amazon’s requirements). This isn’t always the case, as customers can also use Fulfilment by Amazon or Amazon’s various shipping services for sellers.
Conclusion – The List Goes On!
We picked several useful tidbits to help you understand the Amazon business model. But, as has been a running theme throughout this article, it’s a whole lot more complicated than this!
As you can see, Amazon has built a hugely complex and diverse business but stayed mostly true to its core principles. These principles have helped it become the most successful online retailer worldwide, and it shows no signs of slowing anytime soon.