Amazon is valued at $888 billion. What’s the driving force behind the accelerated growth of this company?
Amazon is the world’s largest marketplace. In 2017, it generated $5 billion in revenue. However, its complete revenue doesn’t come from the market place. Since starting as a bookstore in 1994, it has expanded into – a market place which brings the majority of its revenue, owns a large cloud infrastructure (AWS), subscription-based video streaming service, and advertising business which bring a few dollars in revenue. Amazon also has physical stores.
Amazon’s business model
In a nutshell, Amazon’s source of revenue comprises of multiple assets, not just one. About 52 percent of revenue comes from e-commerce, the rest comes from other assets. In simple words, Amazon has a diversified business model. Its major share of revenue comes from --
1. E-commerce – From a bookstore, started in 1994, Amazon turned into a marketplace, selling everything from bestselling books to anything imaginable. To further add value to its already humongous marketplace, Amazon launched physical stores, which bring a few billion dollars. In 2017, the physical stores generated $5 billion in revenue.
2. Amazon Prime subscription – Amazon Prime contributes a major share in Amazon’s total revenue. It makes customers buy more and stay loyal.
3. AWS (Amazon Web Services) – Amazon Web Services is the world leader in cloud infrastructure. This arm of Amazon generates high-margin.
Amazon’s ecommerce arm represented 70 percent of product sales in 2017, while both Amazon Prime and AWS represent service sales, which contribute to high-margin sales. Both have been growing at a significant pace.
From above it would look like, Amazon’s business model is a mix of companies. Indeed, it is, but a mix of product offerings supporting and growing revenue – a hybrid business model, instead of a simple one.
What is a business model?
A business model is a key to success for a business. It makes companies move in the forward direction and thrive. Besides product and service offered, to a large extent, the success of a business is dependent on business models. It is essentially a means to derive value from the product or service offered by a company. At global companies, business strategists are tasked to build business models.
There are essentially seven prominent business models which companies have today --
1. Commission – Every time a product or service is sold, a duly calculated commission (a percentage of the sales price) is awarded to the seller. Typically, a percentage of the selling price is a commission.
2. Asset Sale – Actual sales of the product. For instance, products sold on Amazon’s website.
3. Usage Fee – The pricing of a product is based on the usage of service or product. AWS’ pricing is based on the usage of its cloud servers.
4. Subscription Plan – Revenue is based on sales of subscription plans. Newspaper subscriptions, video streaming service subscription, etc.
5. Advertising – revenue is generated by showing ads.
6. Licensing – Sell license to use your products.
7. Rent/ Lease – Renting out products for some time.
How does the Amazon business model work?
Trying to understand a business model can be difficult if you look at the model without substantiating proof. Not there’s can’t be a more robust way than revenue to recognize a company’s business model.
Just by looking at the numbers or more specifically, revenue, one can tell where the majority of money is coming from. Amazon’s online store is the major contributor to revenue, while Amazon advertising services, AWS, and Amazon Prime thrive on the back of the online store.
The online store is the backbone of Amazon’s other emerging businesses. The online store sells high volume, but thin margin products. While AWS, Prime, and other services are sold at high margins. Thus, Amazon online store is the backbone for other businesses, which make Amazon profitable in the long run.
Amazon may have started with an online book store with a straight forward business model, to sell books and drive revenue. However, today, it’s no longer the same. As Amazon grows, launches new and innovate services and drive its revenue, its business model will keep getting complex. Amazon’s hybrid business model serves as a lesson for business strategy professionals to understand how to make business strategies which leverage existing profitable business and build another profitable business on top of it.
Online store is a front for Amazon’s hybrid business model. Several other multinational conglomerates, companies, and unicorns operate the same way. To understand the business model clearly, dissecting the major sources of revenue for the concerned company will help you understand it.