How Amazon Makes Money
Amazon’s CEO Jeff Bezos has often been called the best CEO in the world. And there’s good reason for that. Bezos grew Amazon from a small little business dealing with books to a retailing behemoth that is valued at over $400 billion dollars and brought in $136 billion in revenue in 2016 alone. That’s a lot of money. But wait… how does Amazon even make that money?
- General Retail
This one is the biggest and probably the most obvious, too. Items shipped and sold by Amazon itself accounted for roughly 80% of sales in 2014. Amazon buys products from manufacturers directly or from third parties and then sells them at a slight mark up. Note that the keyword there is slight. Amazon may have brought in a ton of money through revenue, but they barely retain any as profits. In fact, despite being around for nearly 25 years, Amazon never turned a profit till the end of 2015. Instead of focusing on the profit, Amazon is trying to eat up as much market share as it can through undercutting competitor prices and offering sweet perks like free shipping. Amazon recognizes the accelerating shift from brick-and-mortar shopping to online shopping. It’s selling everything from electronics to groceries! Essentially, Amazon is making money by selling everything for low prices and worrying about profit later.
2. Third-Party Business
Now into some revenue drivers that not everyone is familiar with. Amazon recognizes that it can’t possibly sell everything and that other smaller competitors exist too. Amazon has decided to makes friends rather than enemies. Amazon signs up merchants for their third-party business and agrees to ship their items faster and cheaper- for a commision of course. Because of the ease of using Amazon Marketplace and the services Amazon provides, an increasing number of merchants are opting to use this service. And it’s really smart too. Amazon is happy because they get a fat commission from these vendors and merchants are happy because they get to utilize Amazon’s services.
3. Amazon Web Services
CEO Jeff Bezos has encouraged the growth of another division of Amazon- web services. Not exactly traditional for an online retailer but boy is it working. Amazon Web Services (AWS) is Amazon’s cloud business. AWS offers back-end computing for everyone ranging from government agencies to startups. AWS lays out the huge infrastructure needed for such a service and then charges users on a pay-as-you-go basis. This attractive payment plan coupled with Amazon’s reliability have helped the company gain a lion’s share of the computing market. Revenue from AWS grew from $4.6 billion in 2014 to $12.2 billion in 2016. With the host of productions and innovations their rolling out, Amazon seems poised to continue on their momentous AWS growth.
4. Amazon Prime
Amazon’s famous $99 prime helps user retention by offering special discounts and free 2 day shipping on a wide array of products. People who get a 30 day free trial of Prime and understand how awesome it is always come back for more. This way, Amazon is able to create a loyal customer base that continually buys almost all their stuff from Amazon. In addition to this user retention, Prime also serves as a money maker for Amazon. Despite being a public company, Amazon is very reluctant to give more information than needed. They’ve never detailed how much money they make off Prime and the consensus lies across a spectrum. Most agree that even if Prime subscriptions don’t make money (and they may as well), that the extra sales by Prime subscribers do. Because they have 2 day shipping, customers are more likely to buy a product from Amazon as opposed to driving to a local store.
5. Kindle Family
Who can forget about the much acclaimed Kindle? Jeff Bezos finally revealed that they don’t make any money off Kindles- at least not directly. The Kindle helps Amazon make money because it tempts users into buying Amazon content and products. Every Kindle Fire comes with a free 30 day Amazon Prime trial. Users get used to awesome 2 day shipping and a host of other perks and end up buying Prime. Also, Kindle users are more likely to buy books, movies, and TV shows from Amazon. It’s on these transactions that Amazon really makes money.
Well, that’s how Amazon really makes money. Who knew that there was more to it than just selling items on the internet? If all this talk about huge sums of money has gotten you thinking, check out what you could and can’t do with a billion dollars.