Business Model Of Amazon | How Amazon Makes Money
Business Model Of Amazon!!!
There are a number of successful entrepreneurs running their business and inspiring others at the same time on a daily basis. Then, why do you want to read only about the business model of Amazon and not of any other company??
Ever, thought about it like this?? obviously, because it is more popular but then again a question arises that
“Why is it so popular?? Why people prefer Amazon over any other company??”, never thought about it??
Well, don’t worry I did that work on your behalf. There are a number of points that makes Amazon different and unique from all the other businesses, here is a list of few such points.
- Amazon focuses on driving innovations and stays one step ahead by planning things that might stay in demand in the upcoming five to ten years.
- Amazon uses data to find out the latest trends in demand.
- Regardless of it’s industry, Amazon fearlessly works on different projects with diversified categories.
- Amazon gives their customers a VIP treatment by working hard to execute the orders of the customers in the best ways possible.
Well, these are just some basic points of the business model of Amazon, let’s get deep into the topic to know more about How Amazon Earns Money.
The Perspective Of Jeff Bezos For Doing Business
The world’s richest man Jeff Bezos is also known as the king of e-commerce and he has been working regularly to make Amazon an all-rounder.
He has a very different perspective of doing business and not every entrepreneur can become like him. He created such a big empire of e-commerce that too all by himself and ended up being an inspiration for all the budding entrepreneurs.
He started Amazon as an online bookstore in 1994 and surprisingly did not succeed and kept struggling for the next 20 years especially in the international markets, these 20 years of struggling made Bezos learn a lot of lessons.
Almost everyone criticised the revenue model of Amazon and predicted that it would collapse soon but Bezos never gave up and his attitude of experimenting and taking risks helped him making the business model of Amazon successful in the latter times.
So, how did he made Amazon a hit and how did he expand his empire beating all the other companies working in the e-commerce world??
Well, he did a lot of research and made a number of strategies to make Amazon the best e-commerce site in the history of the Indian e-commerce world. So, do you want to know what those strategies were??
While doing the research work for the business model of Amazon I came across a number of strategies and theories made by Bezos and I have tried to cover almost every strategy made by him to help you give a better and detailed knowledge of Bezos perspective for doing business.
1. Block the grip on Consumers: The prime key of success according to Jeff Bezos is to block Amazon’s grip on the customers and to do the same he launched Prime Membership Subscription with an annual fee of $79.
Since this membership offers free 2-day delivery and also gives e-book renting along with music and video streaming facilities therefore about half of the Amazon customers got converted into prime users.
This was considered to be an immediate success on paper because on an average the prime members spent more than twice the money spent by non-prime members.
A former member of Prime Development Team revealed that “It was never about the $79. It was really about changing people’s mentality so they wouldn’t shop anywhere else.”
This strategy of changing people’s mentality worked and when Amazon raised the prime subscription fee to $99, 95% of the users remained loyal and renewed their subscriptions.
2. Sacrifice short-term profit: Bezos believes in sacrificing short-term profits to achieve aggressive long-term expansions and this vision of his helps him persuade the investors to keep investing in his company even if the company stays in a loss.
This strategy was used in e-books when Amazon started selling the Kindle devices below it’s manufacturing prices, similar to the prime strategy here the strategy was to lock book readers in the Kindle ecosystem. Amazon used digital rights management (DRM) to lock it’s e-book formats to kindle so it couldn’t be read outside of kindle.
By using this strategy Amazon succeeded in dominating the e-book market as well claiming around 83% of ebook sales in the US. Undercutting the competition with below-cost prices and locking the customers in it’s ecosystem has been a classic strategy of Amazon’s success.
This is also a classic strategy of predatory monopolization, this gives monopolies the opportunities to raise their prices firmly and enjoy the profits in the market with only those competitions which they can contain or control, and Bezos certainly has the expertise of using this strategy.
Every new survey that is conducted by Amazon allows them to track user behaviour and collect the personal and usage data of the customers, and then it uses the algorithms to personalize the prices of the products on an individual scale. It even uses bots to keep a check on the prices of it’s competition so as to match them with Amazon prices in real-time.
This process manipulates the baseline so it couldn’t be possible to observe the price fluctuation across the board hiding the rise or fall in prices of their products.
3. Prey To Play: Bezos has been using this strategy to know his user intent and provide them with the products they need easily on a regular basis.
Jeff Bezos believes in integrating into the markets on which it’s competitors were completely dependent otherwise it is not a coincidence that Amazon expanded itself not only in the e-commerce industry but started dominating in the logistics and delivery, book publishing, hardware manufacturing, fashion designing, film and TV production, payment services, and cloud services industries as well.
Every industry domination is a stamp in the Bezos plan and he expands into these markets either by acquiring key businesses or by undercutting their competitions with below-cost prices in case anyone refuses to sell.
Once there was a company called Quidsi, it was one of the fastest-growing e-commerce companies in the world handling a number of domains in different niches. In 2009 Bezos offered to buy the whole company first and when Quidsi refused to sell the company then Amazon started tracking the domains of the company and cut their own prices for those products by 30% approx.
Unlike Amazon, Quidsi was a new startup and didn’t have investors to back their losses and so the only option left with them was to sell the company, making Amazon the dominating one again.
4. Sabotaging Competitions: Amazon doesn’t just compete with it’s competitors it forces itself into their business, as a dominant online retailer, Amazon has enough bargaining power to secure discounts of up to 70% on deliveries from fulfilment companies like UPS and FedEx and then it uses these discounted deliveries to pack them in it’s own delivery service called fulfilment by Amazon.
Since Amazon has already covered bigger than the whole e-commerce industry combined, therefore, UPS and FedEx started increasing it’s prices for the other independent sellers. This created a paradox and Amazon’s strategy effectively directed sellers to use Fulfilment by Amazon as it is much cheaper than UPS and FedEx.
Amazon now invests hundreds of billions of dollars to establish it’s own physical delivery capacity to completely eliminate the dependence of people on these individual fulfilment services.
Well, this is the perspective and vision of Jeff Bezos regarding Amazon and it’s expansion and he will certainly achieve all his goals if he continues working like this.
Now, let’s move forward and study more about the business model of Amazon!!!
Business Model Of Amazon In A Nutshell
Started with an online bookstore in 1994 Amazon has been through a lot of ups and downs and struggled a lot before getting validation of the people.
The first 20 years of Amazon was the toughest phase of it’s success journey, Jeff Bezos learnt a lot of things and made a number of strategies all that while and then ended up making Amazon the second company in the world to pass 1 trillion mark.
Presently Amazon is dominating not only in the e-commerce industry but fashion, delivery, publishing, TV production, payment services, cloud services industries are also a small part of it’s huge expansion.
Started as a bookstore Jeff Bezos turned Amazon into a membership platform called Amazon Prime making Amazon a dominating company in the book renting, music, and video streaming industry and also added products of different industries at a comparatively lower rate than the companies already working in those industries.
Presently Amazon also controls the e-commerce infrastructure which enables it to build a marketplace where it discriminately favours it’s own products without getting punished for it.
As a marketing platform, Amazon opened it’s door to third-party sellers to reach customers in exchange for fees ranging from 6% to 50% and wittingly takes up all the valuable data of their businesses and their customers.
Then Amazon uses these data to study the purchasing trends to undercut third-party merchants on their prices or give their own products a featured placement.
Amazon has also expanded it’s world leadership in cloud computing, it’s web services are on track to control half of the cloud infrastructure market share with Microsoft as the only strong competition currently standing in the market.
Amazon gives cloud services to most of the new startups to deliver their services without building expensive infrastructure on their own.
But sometimes easy things can be costly for your business!!!
This cloud service serves as an ultimate tool of industrial surveillance that Amazon can use to learn about the new emerging competition to acquire or undercut on the price before it endangers it’s business.
All these things give Amazon control over data that none of it’s competitors can ever have and thus Amazon can enter in new markets much more quickly and effectively than any other retailer.
It is not wrong to say that Amazon is certainly one of the world’s largest technology companies and they are also planning to introduce drone delivery and prime air services in international markets which can prove to be a turning point in the history of Amazon journey.
Well, this is how Amazon earns money and to be honest there is no real competition left for Amazon, as there is no company like it.
This was all about the business model of Amazon and How Amazon earns money now let’s talk about how you as an entrepreneur can make money by using all of this information.
Things You Can Learn As an Entrepreneur
So, this is all about Amazon but what did you learn from this Business Model Of Amazon?? Don’t know??
Then try to know, as these business models and case studies are not meant to just read but they are created for you to learn and grow yourself as an entrepreneur. So here is a list of things that you can learn from the business model of Amazon and apply in your real life to grow and gain success through entrepreneurship!!!
1. Stay Updated With The Trends: Staying updated with all the trends is the first thing that Jeff Bezos and his business model of Amazon suggests. Amazon was started as a company in the late ’90s when the Internet was less popular and rarely used, brand new platform and at that time only he started studying and making strategies about the Top mail-order business as he knew that we would soon replace the mail order. Jeff Bezos once said, “If you decide that you’re going to do only the things you know are going to work, you’re going to leave a lot of opportunity on the table”, and this attitude of Jeff Bezos certainly proves his worth of being successful and rich.
2. Futuristic Approach: Bezos not only stays updated with the new trends but also makes strategies that will make him successful in his future. He not only focuses on his present but also keeps planning about his future endeavours. He uses data to find out the things that will be in demand 5-10 years later, so as to make sure that he and his company stays on the top always in every era.
3. Be Stubborn Yet Flexible: According to the ideologies of Jeff Bezos, he follows the rule of being stubborn yet flexible. He gives his work the first priority and invests all his time doing things that he thinks are right but at the same time if also keeps himself aware of all the loses his new strategies are bringing to him and then he changes those strategies to continue getting profit.
4. Stick With The Two Pizza Rule: Jeff Bezos believes that the strength of his employees and team members should only be equivalent to the number of slices in two pizzas!! i.e. the team members should not be more than 7-8 members and this rule helps most of the startups become successful these days.
5. Never Stop Experimenting: As a growing entrepreneur, the most important lesson that you can learn from Jeff Bezos is to keep experimenting. Experiments help you get a better understanding of your business, you may fail once or twice but in the end, you will definitely succeed if you keep trying and experimenting with things on a regular basis.
Amazon’s path to becoming a global monopoly across different markets isn’t just an anomaly, it is Jeff Bezos intention from the very beginning.
The story of Amazon domination isn’t unique but it rather reflects the nature of a perfect business model, and you can make lots of profit if you learn and execute things from these little, ignorant yet impactful strategies made by Bezos.
I hope this business model of Amazon helps you in making strategies that are perfect for you and your business and you succeed in expanding your business just like Jeff Bezos did.
Best Of Luck!!