Amazon Business Model in 2020

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Amazon’s core business model is based on its online store. Amazon also launched its physical stores in 2017. It has a diversified business model. The majority of Amazon revenues come from online stores followed by Amazon Web Service (AWS), Physical Stores, third-party Seller Services, and Advertising services.

Amazon Prime is another business model that is entirely focused on subscription service. It plays a crucial role in Amazon’s overall business model, as it makes customers spend more and be more loyal to the platform.

The company also has businesses operating with high margins. Amazon Web Service is a world leader in cloud infrastructure. It is also successfully running advertising businesses. Practically, the Amazon business model mix is like many companies functioning under one name.

How does Amazon Business work?

Amazon runs a platform business as its core business with several other businesses alongside. Prime helps enhancement of platform business by rewarding repeated customers. Other units, like AWS, improve Amazon’s tech infrastructure.

Each day, over 2.7 billion people from the United States visit Amazon. On average these people spend more than six minutes on the site and look at almost nine pages purchasing what they’re looking for. The Amazon business revolves around four main players: Consumers, Sellers, developers, and content creators.

Amazon has developed itself into a complex digital ecosystem from a relatively single-sided e-commerce platform. At present-day, the Amazon business model is a portfolio of business models rather than a single entity.

The operating income is fueled by the services that comprise seller services, AWS, and subscription services. By looking at the revenue streams anyone can be easily fooled to think that its main source of income is from selling products.

About Amazon Revenue

Amazon primarily generates its revenue from product sales. The Sale of products represented about 70% of total sales in the year 2016. However after 2017 in terms of operating income, the growth has been mainly because of the service sales.

This clearly denotes that Amazon is shifting its focus from physical to service business.

In the first quarter of 2020, Amazon’s net sales increased by 26.3%. However, due to the higher cost of sales(increased by 30%) caused by increased shipping and fulfillment costs and marketing expenses because of COVID, its operating income decreased by 9.7%.

Amazon recorded a substantial increase in revenues throughout the COVID pandemic. It also resulted in a significant increase in cash flow from operational activities (Amazon has positive cash conversion cycles). However, the generated cash was well spent from operational activities to expanding shipping and fulfillment. And from investing activities in increasing the capability of the Amazon tech platform i.e. AWS.

The Customer Value Proposition on Amazon Business

The value proposition was Amazon’s number one feature from day one. Jeff Bezos, the founder, and CEO of Amazon has drawn a virtuous cycle that focuses on better customer experience though lower price and selection.

But by that time, Amazon’s competitors already had a highly scaled business and low unit costs as Amazon was just stepping in. While Amazon had no scale but they had a low-cost structure mainly driven by the fact that they saved on the costs of brick-and-mortar retailers.

From the very first day, Amazon’s vision is to be the most customer-centric company and build a marketplace where people can find anything they might want to buy online.

Amazon translates its lower costs into higher profits and passes the benefit to the customer via sustained lower price and reinvests the rest of the surpluses into growth.

Some of the key customer value propositions are:

  • Low Price.
  • Fast delivery service.
  • Vast selection of products: Amazon has started its business with books. Now it has come a long way and you will be delighted to know what product it hasn’t sold. Amazon sells everything from diapers to jewelry to antiques to everything you can think of.
    The large selection of products is the greatest plus point of the value proposition. And Amazon has a different way. It makes it possible to offer selection without inflation costs or having inventory to sit in the warehouse for ages and block the working capital.

Amazon Kindle Direct Publishing (KDP) platform allows thousands of independent authors to publish their books. The plan enriches the author with around 30-70% of the sales as a royalty.

Due to competitive technology, pre-designed business models lose their values. But a well-managed business model can capture value for a long period of time.

Elements of Customer Experience

There are various elements of customer experience. Let’s discuss some of the important elements:

  • 1 Click

This is an amazing feature where you can complete your purchase in just one click. This is a patented solution by Amazon. It was licensed to Apple for use in the iTunes store. The patent has expired in 2017.

1 Click feature allows the shopper to use the Amazon marketplace to buy any item without using shopping cart software. There is no need to manually input billing address and shipping information while purchasing items. You can use one-click buying to use a preset address and payment options to buy one or more items with simply one click.

  • Buy Box

In the product detail page where the customer begins the buying process, you can find a box like this

A single product is sold by different Amazon sellers, and all of them compete to be in the buy box.

Based on a secret algorithm with prices, reviews, and ratings, Amazon determines a “default seller” where one product is offered by several 3rd party sellers. The default seller will “win” the Buy Box. 82% of the sales go through the buy box. That is why winning this position is very important to all the 3rd party sellers. There is a  price war among sellers to get into this featured spot.

  • Review System

Reviews are one of the most important factors for customer decisions. Would you buy anything low-rated just because it is cheap? Most likely not. Reviews are considered one of the most important factors for the ranking of products on Amazon search pages. With this, there is big money at stake for sellers. And that means there are plenty of people trying to fill the system with fake reviews.

  • Speed of delivery

One of the various factors for successful Amazon business is its delivery system. The privilege of early delivery to prime members is two-way benefits to both Amazon and the customers. Real customer experience has become an integral part of Amazon’s business because it has increased customer gratification. For recent development, Amazon is relentlessly working for drone delivery service.

  • Diving a little deeper

As we can see, online stores are still a core part of the Amazon Business and core business is the foundation of other businesses with totally different logic. While the core business can run with a tight margin the other models like Amazon Advertising Services, Amazon Prime, and Amazon AWS business can generate a high margin.

One of the key factors for a successful business is it operates Cash Machine Business Strategy.

This strategy is quite a unique business strategy because it involves cash sales and payment to vendors in quite a relatively long time. This gives Amazon to use its Working Capital for a relatively long period of time. Rather than being stuck up in the inventory, it allows Amazon to invest in other things.

  • Amazon Prime

To be compatible with the digital trend, many companies have shifted to a subscription business model. To accommodate this change, Amazon has also converted part of its business.

One of the most critical elements in Amazon’s growth strategy is Amazon Prime. The more people take the membership, the more people purchase products on the online platform. There is a significant jump in the prime membership in the year 2019. As of December 2019, there were 112 million prime subscribers from the United States as compared to 95 million in June 2018. Net revenue from subscription service in 2019 amounted to 19.21 billion U.S. dollars.

Amazon Prime members can enjoy the benefits of faster delivery as well as access to Amazon’s original media content offered via streaming. The subscription model creates more sales and predictable income over time.

Amazon Advertising Business

Only a few people have an idea about Amazon’s advertising business. It provides a way to automate, scale, and optimize advertising. API provides campaign and performance data for sponsored products, brands, and display. It enables programmatic access for campaign management and reporting.

More and more entrepreneurs and marketers are interested in paying Amazon for advertising because of such infrastructure and numerous e-commerce hosted in Amazon infrastructure.

As compared to the tight margins of the online stores this part has higher margins. Amazon’s ad platform is powerful because people on the platform have a high-purchase intent. The highest risk of losing traffic and a potential customer is taking them from ad to the landing page or promotional page.

However, with Amazon, you are already in the place where you will buy plus people know and trust Amazon. There will be no clicking away to find another website, landing page, or product. Ads targets people who are Amazon customers and uses the platform.

Amazon Web Service (AWS)

Amazon has rapidly changed itself and adapted itself to the changing needs. It has established itself as one of the biggest online companies in history. Along with AWS, Amazon has a distribution capability offering both digital and physical products globally.

AWS is a secured cloud platform consisting of remote computing services that together make up a cloud computing offered over the Internet. In 2010, Amazon launched 61 new services and features. In 2011, that number was 82. In 2012, it was 159. In 2013: 280. They are also expanding their geographic footprint, with 10 current AWS regions around the world, including the East Coast of the U.S., 2 on the West Coast, Europe, Singapore, China, Tokyo, Sydney, Brazil, and a GovCloud.

AWS has grown to be the ecosystem of developers and is used by many platforms such as Uber, and Netflix. AWS includes services like storage, computation of global sales, database, Monitoring. It also provides technology for developers to build smart apps that rely on machine learning technology and complex algorithms. AWS offers a range of AI model development and delivery platforms as well as packaged AI-based applications.

Amazon virtuous cycle

The model is just a piece of paper on the strategy that Jeff Bezos wrote in the initial year of Amazon. The cycle starts from customers to drive traffic to the platform, which traffic gets monetized via Amazon selection of products and by inviting third-party sellers to join the platform.

The cycle is the manifestation of Amazon’s prime business strategy. It improves the selection of goods which in turn improves the customer experience. At the same time, Amazon uses the generated revenue to further improve its cost structure. The company passes the additional cash on to its customers instead of distributing it to shareholders.

Amazon Product Sourcing Strategy

Ever wonder where all the products selling on Amazon come from. The main factors for efficient product strategy are storage, logistics, and inventory cost. The most common product sourcing approaches are as follows:

  • Standard Inventory: The most popular products are held in one of its fulfillment centers and distributed from the centers.
  • Just in time delivery: Under this approach, there is an arrangement with the manufacturers for shipping the goods directly to customers or to Amazon.
  • 3rd party sellers: Under this approach, the inventory would be held and shipped by the third-party seller unless they use the Fulfilment center.

Amazon Pricing Strategies

It is true that Amazon provides the lowest price in the whole internet market. Amazon changes millions of prices daily and keeps the pricing strategies secret. Some other things we know about pricing are as follows:

  • Demand/ supply: factor: Inventory level and demand for the product influence the dynamic pricing.
  • Price dynamic: Amazon daily changes 15-20% of their product pricing daily.
  • Seasonal Pricing:  Sales on Black Friday and Christmas usually have lower prices relating to normal days. Woollen clothes have a higher price during the winter season. The most noteworthy thing here is that selected occasions will have their own pricing strategy.
  • Competition Pricing: You have often seen prices of popular items change several times within a day. One of the main factors for fluctuation in price is due to competitor pricing.
  • Bundling: Another tactic is bundling (sometimes with discounts) whereby Amazon suggests similar products for you to buy, e.g. under “customers who bought this item also bought”.

Amazon Partnering

There are many partners and sellers of Amazon. One of the large partners is Ingram Micro who is a large supply chain service provider themselves. Ingram Micro fulfills orders of electronic goods, computers, and other product categories partnering with Amazon.

Their businesses are complementary to each other whereas they also can take competitive advantages from each other’s business.

Amazon as a multi-tier supply chain

Amazon is a multi-tier supply chain facility provider. In the ultimate dispatch process, Amazon basically involves multiple supply chain processes.

  • Shipping directly from Amazon’s own warehouse to the customers.
  • Shipping of goods originating from wholesaler and intermediary via Amazon. It can also be shipped directly to customers depending upon various factors.
  • Now, the fourth tier consists of sending products from manufacturers to the customers directly.

Most important models sellers use to sell products on Amazon platform

There are five most popular business models that sellers use to sell products on Amazon. Let’s discuss them one by one:

Private Label: This is the most used model in the Amazon marketplace. Under the private label, sellers sell products of their choosing under their own brand. And the best part is work can be done from anywhere at any time.

Even Amazon has its own private label products with Amazon Essentials and AmazonBasics. But selling on Private Label requires a little bit of knowledge and experience. Here are some basic steps you can follow:

  1. Research Amazon’s product database for high-demand/low-competition niches.
  2. Select the best manufacturer to create the product.
  3. Create a new listing for the product.
  4. Launch and promote the product on Amazon.
  5. Amazon provides fulfillment by Amazon (Amazon FBA) service through which sellers can depend on Amazon to handle the inventory, shipping, returns, and customer service.

Retail Arbitrage on Amazon: This method is the best method in finding low cost discounted goods in brick-and-mortar retail stores to resale online. The profit which retail arbitrage sellers generate is the difference between the selling price on Amazon minus product’s cost and Amazon fees.

It is the easiest method to sell products on Amazon. All one has to do is find products to sell on brick-and-mortar stores and list them to sell on Amazon.

Online Arbitrage on Amazon: Under this method, sellers find low cost discounted products on websites or online marketplaces and sell them on another online marketplace. The profit earning procedure is similar to that of retail arbitrage.

Selling the products on online arbitrage is also a simple process. First, find products on another website like eBay, Etsy, Walmart, etc. and purchase them. Then list the product on Amazon.

Dropshipping on Amazon: Just like Dropshipping on Shopify, sellers are performing the same model on Amazon also. Sellers can place orders directly to the manufacturer or supplier whenever they get orders from customers.

The sellers need to make a little more setup than other business models  The entire topic on dropshipping can be way too long but here are some basic steps:

  1. Find a product with high demand and low competition to sell on Amazon.
  2. Create a listing for the product on Amazon.
  3. Deliver the customer’s shipping information to the manufacturer/ supplier so that they can fulfill the order

Wholesaling on Amazon: The theme of this model is to purchase in bulk and sell individual products on the retail market. This will give the benefit of wholesale purchasing.

Selling wholesale goods on Amazon is in many ways similar to arbitrage. First, find a source and purchase the products. Once the products are purchased, list the individual goods on Amazon for sale.

Conclusion

It is clear what made and makes Amazon so compelling is the business model and which generates value for several players.

Even though Amazon makes almost 70% of its revenues through product sales. In reality that part of the business is the foundation for other profitable segments to flourish. It is obvious for a company to grow into a multi-billion enterprise to create a hybrid business model at once.

Amazon teaches the value of integration, diversification, and consistency in the whole process.

It is only because of Amazon it is easier for online retailers to start a business at a relatively lower cost.

Here, is a quick video guide for those who want to leverage the Amazon marketplace and start their journey as a third party seller:

 

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