Amazon is one of the most well-known and successful companies in the world. Founded by Jeff Bezos in 1994, the company started as an online bookstore before expanding into a vast array of products and services.
Now, Amazon is a global leader in e-commerce, digital media, and technology with vast interests outside of e-commerce acquiring startups with a market cap of $1 trillion (NASDAQ: AMZN).
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What does Amazon do?
Amazon’s core business functions include the following:
- E-commerce: Amazon operates a vast online marketplace, offering millions of products to customers worldwide.
- Digital media: Amazon offers a variety of digital media products and services, such as streaming music and video, as well as its tablet and e-reader devices.
- Cloud computing: Amazon Web Services (AWS) is a highly successful cloud computing platform that provides various services to businesses and individuals.
- Logistics: Amazon has a sophisticated logistics network, including its fleet of delivery vehicles, to ensure fast and efficient delivery of its products.
How does Amazon work?
At a high level, Amazon’s business model is built around the use of technology to drive efficiency and scalability.
The company uses data and analytics to optimize its operations, and its investments in technology have enabled it to offer a wide range of products and services at competitive prices.
Also, Amazon’s logistics and delivery network allows the company to deliver products quickly and efficiently, differentiating it from its competitors.
How Amazon makes money
Amazon makes money through its retail sales, advertising space sales, monthly or annual streaming subscription services, cloud computing services, and merchant and fulfillment services.
Retail sales
“Even if you believe as some — I believe incorrectly — do, that “retail is a loser” for Amazon, retailing is at the core of all of Amazon’s profit engine.” CEO and founder of Black Monk Consulting
Amazon generates immense revenue by selling an unlimited range of products through its online marketplace. It has no overheads or inventory and receives a fat fee on the nearly $400 billion in gross merchandise value it facilitates sales of. Is there anyone on earth who hasn’t heard of Amazon? Merchants clamor to feature their products on Amazon because it has a stellar reputation for service and delivery of quality goods.
Advertising
Amazon also generates revenue by selling advertising space on its website and through its digital media properties. At over $31 billion, the revenue generated through merchant advertising on its platforms is its now likely most profitable line of business. But which came first, the chicken or the egg, because Amazon does not exist without retail. The size and growth of retail enable the massive profitability of advertising.
Subscriptions
Amazon Prime Video is, after Netflix, the most searched video and music streaming service. Amazon invests an enormous amount in online content, paid back in spades via its through-the-roof growth in subscription fees to its customers, who pay a monthly or annual fee to watch or listen to the latest quality content. And that’s not all, as it claims the second spot in the burgeoning subscription video-on-demand industry.
AWS
This probably will come as a surprise to many. Still, every year since at least 2014, more than half of Amazon’s operating profit has come from the online retailer’s cloud division, Amazon Web Services (AWS), which provides online services and tools that software developers can stitch together to run websites and applications. It’s an impressive business in absolute dollar terms, not just percentages: AWS ended 2020 with $13 billion in operating income, which helped Amazon report a total net income of $21 billion for the year.
Processing fee for transactions
Amazon Payments allows its customers to pay on merchant websites outside of Amazon using the information already stored in their accounts. This offers customers the convenience of shopping at other sites using a single Amazon login, and more than 50% of customers using this service are Amazon Prime members. The company charges merchants a nearly 3% processing fee for each transaction using “Pay with Amazon” and a 3.9% processing fee for inter-country transactions.
Future growth engine
Amazon is constantly looking for new ways to grow its business. Some potential growth engines for the company include:
- International expansion: Amazon has already expanded into many countries worldwide, but there are still many opportunities for growth in new markets.
- New product categories: Amazon has already ventured into new product categories, such as groceries and fashion, but there may be other areas where the company could expand.
- Mergers and acquisitions: Amazon has made several strategic acquisitions over the years, which could be a potential growth engine for the company.
Risks
- Competition: Amazon faces intense competition from other companies in e-commerce, digital media, and technology.
- Regulation: Amazon’s growing size and influence have led to increased scrutiny from regulators worldwide.
- Dependence on technology: Amazon’s business model relies heavily on technology, and any disruptions or failures in these systems could negatively impact the company.
Competitors
Some of Amazon’s biggest competitors include:
- Walmart. One of the largest retailers in the world, Walmart has a strong online and offline presence.
- Alibaba. A Chinese e-commerce giant that operates various businesses, including retail and wholesale.
- Target. A retail company that operates both online and offline.
- Costco. A wholesale club that operates both online and offline.
- Home Depot. A retail company specializing in home improvement that operates online and offline.
