Amazon Business Model and How it Makes Money

Amazon
Source: Amazon.com

Amazon is the world’s largest e-commerce business expanding around several countries. In the US, the company is among the top five tech companies. The company earns money from its online store and some physical stores. However, it also participates in various other businesses. These include cloud computing, digital streaming, and artificial intelligence services.

Amazon, through its online services, has changed the world of e-commerce. The influence it has had in shaping the industry and inspiring various other businesses has been undeniable. The company first started as an online book store in 1994. However, it soon moved to be an online e-commerce website that offered products from several categories.

Ever since then, the company has spearheaded the world of online retail shopping. Amazon has expanded its business across various other countries, such as the UK, Canada, Germany, China, India, and many more. One of the reasons why the company has been so successful is because of its business model. Amazon’s business model, in short, represents the way the company makes money.

What is Amazon’s Business Model?

Amazon’s business model has allowed the company to increase its revenues steadily ever since its inception. The company has experienced a yearly increase in revenues. Amazon generated revenues of $469.82 billion in 2021, which is the company’s highest annual revenue to date.

Amazon generated revenues of $386.06 billion in 2020. In 2021, the company experienced an increase of 22% over the past year. The company also made a net income of $33.36 billion in 2021. It was a 56% increase over the $21.33 billion net income that is made in 2020.

Overall, Amazon is a highly profitable company, as apparent from its historical performances. Given below is a summary of its net sales and income over the past decade.

YearNet Sales (billions)Net Income (billions)
2008 $19.17 $0.645
2009 $24.51 $0.902
2010 $34.20 $1.152
2011 $48.08 $0.631
2012 $61.09 $(0.039)
2013 $74.45 $0.274
2014 $88.99 $(0.241)
2015 $107.01 $0.596
2016 $135.99 $2.371
2017 $177.87 $3.033
2018 $232.89 $10.073
2019 $280.52 $11.588
2020$386.06$21.33
2021$469.82$33.36

The above revenues justify Amazon’s business model as highly successful. While the company saw some losses during some years, overall, it has been profitable. Despite the general belief that Amazon only generates money from its stores, it also offers other money-making services. The sales that Amazon makes through its stores account for 56% of its total net sales. Therefore, it is crucial to look at how the company makes money.

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How does Amazon Make Money?

As mentioned, Amazon generates money from various services. Apart from store sales, it also includes digital streaming, subscription, and cloud services. These services make up 43%-44% of the company’s total net sales. Given below are the primary segments that generate the most money for Amazon.

Amazon Business Segments

Amazon categorizes its business into three primary segments. Firstly, the principal segment, through which the company has made a name for itself, is its North America segment. Secondly, the International segment is for all of Amazon’s businesses outside North America. Lastly, the company categorizes its cloud services like the AWS segment.

The primary sources of revenue from North America and International segments are retail sales and subscription services. The company also divides its products into several categories, a description of which will come later. However, given below is a description of each segment and how it helps Amazon make money.

North America

Amazon’s North America segment has always been its highest money-making segment. The company generated revenues of $170.77 billion in 2019 from the North America segment. It was an increase of 21% from the $141.37 billion revenues this segment generated in 2018. Similarly, the segment experienced an increase of 33.23% in 2018 from the $106.11 revenues generated in 2017.

In 2019, the North America segment accounted for 61% of the company’s total revenues. While most of these net sales included retail sales, they also consisted of subscription services, including Amazon Prime. The North America segment has been the backbone of the company’s business over the years.

International

The company’s International segment isn’t as popular as its North America segment despite expanding over several countries. There are various reasons why it isn’t as successful. The primary source of revenue from the International segment is similar to the North America segment. The company offers retail sales and subscription services there. In addition to those, the company also makes export sales in the International segment.

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The International segment generated net sales of $74.72 billion in 2019, which increased by 13.44% over the $65.87 billion net sales in 2018. These sales accounted for 26.64% and 23.48% of the company’s total net sales in both years, respectively. Despite generating billions in revenues, the company’s International segment has been loss-making.

Amazon Web Services (AWS)

Amazon Web Services (AWS) is a segment through which Amazon provides services to businesses, government agencies, and academic institutions. These services mainly include the provision of storage and content delivery. The primary source of revenue in the AWS segment is the cloud services provided by the company. It primarily consists of hosting applications and websites.

The AWS segment generated net sales of $35.03 billion in 2019. It increased by 36.52% over the $25.66 billion net sales the segment generated in 2018. Similarly, the segment accounted for 12.5% and 9.2% of the company’s total net sales in 2019 and 2018, respectively. Amazon controls approximately a third of the global cloud market. Therefore, the company has been able to generate significant revenues from it.

Summary

Here’s a segment-wise summary of the sales that Amazon made in the last three years.

Segment201920182017
North America170.77141.37106.11
International74.7265.8754.3
AWS35.0325.6617.46
Total280.52232.9177.87

Amazon Product Groups

Amazon also categorizes its products into various groups. A description of each of these product groups is as below.

Online and Physical stores

While Amazon primarily operates online stores, it also has various physical stores. These stores generate a significant portion of the company’s total net sales. While the physical stores contribute to the overall net sales, it is the online stores that make the most money. In the online retail market, Amazon continues to dominate in the US and some other parts of the world.

The company generated $141.25 billion and $17.19 billion in sales from its online and physical stores. As a total, the company made $158.44 billion in sales from both. Similarly, it made $122.99 billion and $17.22 billion in sales from its online and physical stores in 2018, a total of $140.21 billion.

As a whole, the company experienced an increase of 13% in sales from its stores in 2019. Similarly, these proceeds accounted for 56% and 60% of the company’s total net sales in 2019 and 2018, respectively. As apparent, these make a significant amount of the company’s total sales.

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Third-party seller services

Amazon also makes money from third-party seller services. These include services that allow sellers to use Amazon’s platform to sell their products and fulfill orders. For these services, the company charges those users a commission for each item sold. It may also include shipping fees earned from these arrangements.

Amazon made $53.76 billion from third-party seller services in 2019 and $42.75 billion in 2018. Overall, it accounted for 19% and 15% of its total sales in 2019 and 2018, respectively. These third-party services are the company’s second-largest product group in terms of net sales.

Subscription services

Amazon provides subscription services to customers to generate income. These primarily include Amazon Prime memberships. In 2019, the company generated net sales of $19.21 billion from the product group. It increased by almost 36% from the $14.17 billion revenues generated from the product group in 2018. Overall, the subscription services product group is the company’s fourth-largest group accounting for almost 7% and 5% of the company’s total net sales in 2019 and 2018 respectively.

Amazon Web Services (AWS)

Amazon Web Services (AWS), as mentioned above, is a company’s segment. However, for the product group classification, the company counts subscriptions from AWS in the subscription group. Therefore, the AWS product group and AWS segment results are different.

The AWS product group made sales of $35.03 billion and $25.66 billion in 2019 and 2018, respectively. Overall, net sales increased by 36.5% in 2019. This product group is the company’s third-largest product group. It accounted for 12.5% and 9.15% of the company’s total net sales in 2019 and 2018, respectively.

Other

Amazon’s final product group is called ‘Other’. It includes all the services the company offers that don’t fit in the above product groups. These make the lowest proportion of the company’s sales. In 2019, the company generated net sales of $14.09 from this group while in 2018, it was $10.11 billion. Overall, these represented 5% and 3.6% of the company’s net sales for both years.

Summary

Given below is a summary of the company’s net sales from its product groups for each year.

Product Group2019 (billions)2018 (billions)
Online stores $141.25 $122.99
Physical stores $17.19 $17.22
Third-party seller services $53.76 $42.75
Subscription services $19.21 $14.17
AWS $35.03 $25.66
Other $14.09 $10.11
Total $280.52 $232.90

Conclusion

Amazon is one of the world’s largest tech and retail companies in the world. The company is highly successful financially with improving performances each year. The primary source of the company’s success is its business model. The company makes money through various segments and product groups, as discussed above.

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