How does Amazon make money? An analysis of Amazon’s Business Model.
Amazon’s (NASDAQ: AMZN) growth over the past several years has been nothing less than amazing. The e-commerce giant continues to grow its customer base and revenue every year apart from adding more and more sellers to its marketplace. The company’s competitive position in the retail and technology industry has also continued to strengthen and that is reflecting clearly in the growing market cap of the brand. Despite the spread of Covid-19, Amazon is among the richest companies in the United States and the world with a market cap that is nearing 1.6 trillion ($1.58 trillion as of August 2020). Founder Jeff Bezos himself is the richest man on the planet with a net worth of around $117 billion. The superior growth of Amazon is also a result of its focus on technological innovation and customer experience. Apart from being the most loved e-commerce brand, Amazon is also a leading cloud technology player.
Amazon has a strong competitive edge even against its nearest competitor in retail and its mobile customer base was almost double that of Walmart in 2019. The growth and success of Amazon from being an online bookseller to the largest online retailer is one of the biggest success stories of the twenty-first century. However, its business model and its distribution network have played a key role in driving rapid growth for the company.
In this post, we will discuss the business model of Amazon, how it makes money and the factors that make Amazon one of the largest and most successful companies. In this post, we will also discuss the operating model of Amazon and the sources from which the company generates revenue.
Amazon’s Business Segments:
Amazon has divided its business into three main segments that include North America, International, and AWS. North America is the largest reportable operating segment of Amazon followed by International and AWS. All three segments experienced impressive growth in 2019.
The North America segment of Amazon mainly includes the money earned from the retail sales of consumer products and subscription services in North America through focused online and physical stores. This segment includes export sales from North America online stores.
North American operations of Amazon are its largest reportable segment. It has consistently accounted for the largest portion of Amazon’s annual net revenue. During both 2018 and 2019, Amazon North America accounted for 61% of the net sales of the company. Amazon generated around $170.8 billion in net sales from the North America segment (21% y-o-y growth). Compared to the last fiscal, Amazon’s North America segment experienced a growth of 21%. During fiscal 2018, Amazon’s net sales in North America equaled $141.4 billion. The growth in net sales of the North America segment was mainly a result of the growth in unit sales of products on Amazon’s online marketplace. Growth in sales was driven mainly by Amazon’s continued efforts to optimize its pricing mix as well as attractive shipping offers, availability of a larger variety of products as well as growth in the availability of in-stock inventory.
The net sales of Amazon International segment mainly include the money Amazon earns from the sales of consumer products as well as subscription-based services through the internationally-focused online stores. Amazon includes the export sales from these internationally-focused online stores in this segment (including sales to the customers based in the US, Canada, and Mexico) but excludes the sales from its North America focused online stores.
The second-largest reportable segment of Amazon is the international segment that accounted for around 27% of net sales of the company during 2019. This segment experienced 21% year on year growth in 2019. Net sales on Amazon’s international segment during 2019 grew to $74.7 billion compared to $65.9 billion during fiscal 2018.
The growth in net sales is mainly a result of the growth in unit sales on Amazon’s international platform. Apart from Amazon’s pricing strategy, shipping offers, as well as an increased variety of products available on Amazon marketplace, higher in-stock inventory availability also played a leading role in the growth of Amazon International’s net sales.
AWS (Amazon Web Services):
The net sales of AWS include the money Amazon generates from global sales of compute, storage, database, and other service offerings for startups, enterprises, government agencies, and academic institutions.
Amazon web services (AWS) is the cloud segment of Amazon’s business. This segment has also achieved impressive growth during recent years. In 2019, this segment achieved a growth of 22% compared to the previous fiscal year and represented 12% of the company’s net sales. The net sales of AWS grew to $35 billion in 2019 compared to $25.7 billion in 2018. Increased usage of Amazon Web Services products by customers worldwide mainly led to the growth in AWS net sales during 2019. The growth in AWS net sales was partially offset by the pricing changes across the AWS platform during 2019 as Amazon continued to make efforts to reduce prices for its customers worldwide. The users of AWS products include both large and small enterprises as well as individual users. According to a 2017 case study by Amazon,
“Netflix uses AWS for nearly all its computing and storage needs, including databases, analytics, recommendation engines, video transcoding, and more—hundreds of functions that in total use more than 100,000 server instances on AWS.”
Amazon's net sales, operating expenses, and operating income/loss by business segment in 2019. (in billions of US dollars)
|Segment||Net Sales||Operating Expenses||Operating Income|
Amazon’s Geographical segments:
Geographically, Amazon has divided its business into five geographical segments, four of which are Amazon’s leading markets and the fifth includes all the other remaining markets of Amazon. The United States is the leading market of the company followed by Germany, the United Kingdom, and Japan. These are the four leading geographical segments of Amazon and the rest geographical markets count as one segment - the rest of the world.
During fiscal 2019, the United States generated around 69% of the net sales of Amazon. Amazon’s net sales in the United States reached $193.64 billion in 2019 compared to $160.15 billion in 2018 (y-o-y growth of around 21%). Germany, which is the second-largest geographical market of Amazon, accounted for $22.23 in net sales in 2019 compared to $19.9 in net sales in 2018. The United Kingdom is the third-largest geographical market of Amazon based on net sales and accounted for $17.53 billion net sales in 2019 compared to $14.5 billion in 2018. Japan generated $16 billion in net sales in 2019 compared to $13.8 billion in 2018. The rest of the world, which is one geographical segment of Amazon, generated $31.1 billion in net sales in 2019 compared to $24.5 billion in 2018. (data from Amazon form 10K 2019- ir.aboutamazon.com)
How Amazon makes money (main revenue generating activities)?
While retail sales are the main source of revenue for Amazon there are other sources of revenue for the company as well. Here is a description of the main channels from which Amazon makes money.
Amazon offers consumer products through its online and physical stores. It recognizes revenue when the ownership of the product has been transferred to the customer. The ownership of the product is considered transferred to the customer when the product is delivered to a third party carrier or if Amazon is the main delivery agent, the product has been handed to the customer. During 2019, Amazon generated $158.4 billion in net sales from retail sales. Of the total retail sales, the company generated $141.25 billion from online stores and $17.2 billion from physical stores.
Third party sellers:
Third-party sellers sell their products and fulfill orders to customers through Amazon’s online and physical stores. In this case, Amazon is not the seller on record. Amazon receives commissions and related fulfillment or shipping fees. These commissions and fees are recognized when the services have been rendered through Amazon’s platform. This occurs when the product has been handed over to a third-party carrier or in the case of Amazon to the customer. Third-party seller services are also a major source of revenue for the company from which it generated $53.8 billion during 2019 compared to $42.75 billion in 2018.
Amazon also makes money from subscription services. The subscription sales of Amazon include fees associated with Amazon Prime memberships as well as the fees it charges for access to content like audiobooks, digital audio, and video, e-books as well as other non-AWS subscription services. With Prime memberships, the customers can have access to a large and evolving suite of benefits Customers pay the subscription fees in advance or at the time the services are delivered. Amazon recognizes the revenue from such subscriptions over the subscription period. During 2019, Amazon generated $19.2 billion in revenue from subscription services compared to $14.2 billion in 2018.
AWS (Amazon Web Services):
Amazon Web Services also generates a significant portion of Amazon’s revenue. AWS portfolio includes compute, storage, database, and other services. Amazon uses standalone pricing to allocate revenues to services. Revenue is recognized mainly when the customers use these services on the basis of the volume of services utilized like compute or storage services delivered on-demand. Amazon also offers certain services like compute or database for a fixed quantity for a specified term. Revenue for such services is recognized ratably. Sales commissions paid by Amazon related to the contract exceeding one year are capitalized and amortized over the contract term. The contribution of AWS to Amazon’s net sales has grown substantially in recent years. During 2019, AWS generated $35 billion in net sales compared to $25.7 billion in 2018.
Other sources from which Amazon makes money:
The other sources from which Amazon makes money mainly include advertising services. The revenue from advertising on Amazon’s platforms is recognized when ads are delivered and on the basis of clicks and impressions. In 2019, Amazon’s earnings from other sources grew to $14.1 billion from $10.1 billion during the previous fiscal year.
Financial performance over the past two years
Amazon has experienced impressive financial growth over the past three years. From $177.9 billion in 2017, the net sales of Amazon have grown to $280.5 billion in 2019. Its market cap is also higher than $1.3 trillion despite the coronavirus pandemic. While Amazon’s North America segment experienced more than 50% growth from 2017 to 2019, the AWS segment saw its revenue double during the same period. The international segment also experienced around 40% growth in net sales. However, due to high operating expenses, the international segment of Amazon has been generating negative operating income (operating loss) over the last three fiscal years.
The consolidated net income of Amazon Inc grew to $280.5 billion in 2019 which was 20% higher than the previous fiscal when the company generated $232.9 billion in revenue. The operating income of the company grew to $14.5 billion in 2019 compared to $12.4 billion in 2018. Amazon uses operating income as a measure of profitability since the company believes that considering its vast selection of products operating income is a more meaningful measure as compared to gross profit or gross margin. However, Amazon’s operating income during 2019 mainly grew across the AWS segment. While the North America segment experienced a decline in operating income, the International segment again generated an operating loss. Net operating income from the North America segment fell by around $230 million in 2019 compared to 2018 mainly due to increased shipping costs and marketing expenses. There was also a negative impact of foreign exchange rates on the operating income of the Amazon North America segment of around $23 million.
Operating loss from the international segment decreased in 2019 compared to the previous fiscal year. This mainly happened due to the increased unit sales as well as growth in sales by third-party sellers as well as higher sales of advertising on Amazon’s international platforms. Apart from that certain operating expenses of the Amazon international segment also grew slower compared to the last year while marketing expenses grew.
Free cash flow of Amazon grew to $25.8 billion in 2019 compared to $19.4 billion in 2018.
During the first quarter of 2020, the net sales of Amazon grew to $75.5 billion compared to $59.7 billion during the same period last year (YoY growth of 26%). On the other hand, the operating income and net income of Amazon Inc decreased during the first quarter compared to the same period last year. The operating income of the company declined to $4 billion in Q1 2019 from $4.4 billion during the same period last year. Compared to $3.6 billion in Q1 2019, the net income of Amazon Inc came down to $2.5 billion during the same period last year. The company expects an operating profit of $4 billion during Q2 2020.
Analysis of Amazon's Operations based on the 4Vs model:
Operations and operational processes are like the fundamental building blocks of organizations that decide the productivity of the organization and the quality of their output as well. Focusing on operational efficiency has helped businesses find faster international growth as well as maximize output. Many times, if the efficiency of processes is low then it is because of poor operational design. Processes across business organizations and industries can differ significantly and that is why all processes need to be managed differently. Some of the leading differences between various processes are due to the technologies and know-how involved. Different processes require different production equipment as well as different skills and know-how. However, apart from these things, the difference also lies in the nature of the demand for the products and services these processes produce. There are four particular characteristics of demand that have a significant impact on process management and which are as follows:
- The volume of the products and services produced
- Variety of products and services produced
- Variation in the demand for products and services.
- Degree of visibility that customers have of the production of products and services
Volume of products and services:
Does the business being discussed produce a large amount of the same products and services or only a few special items? If the volume of output is high, it indicates repeatability or high-level familiarity of the process. Many times since a large business produces more and more of the same thing, it helps the business gain a significant competitive advantage compared to the smaller ones.
In the case of Amazon, its main business is e-commerce and apart from that it also sells cloud-based services as well as Amazon Prime. However, Amazon's e-commerce platform sells products by millions of sellers from across the entire world. It means Amazon offers its platform basically to other sellers who sell their products to customers all over the world from the US to UK, Asia-Pacific and Europe. The sales volume is also generally very high and larger than other e-commerce players including Alibaba, Flipkart, and Walmart. Amazon has established a global distribution system that includes its warehouses through which it distributes the products to the final customers. Amazon also sells a large volume of Alexa enabled as well as several other products that are produced inhouse by Amazon. The volume of overall services that it delivers through its e-commerce platform is very large and the company has uniquely designed its global distribution system for the highest efficiency and maximum reach through which it can deliver products to customers within the shortest time span.
Amazon Prime membership offers its customers access to a large range of entertainment products as well as free delivery of a large range of products bought from Amazon's e-commerce platform. Overall, the large volume of sales and delivery through its online platform allows Amazon a huge competitive advantage when compared to the other players. Amazon's network is the best in the entire world. Due to the large volume of sales that Amazon achieves each year from its e-commerce platform, the brand is able to offer huge discounts and deals on products. Since millions of shoppers shop each day from Amazon's website, it has helped Amazon achieve economies of scale and the company is continuously expanding its range of inhouse products to grow its volume of sales. However, this was only the e-commerce part of Amazon's story.
Amazon also offers cloud-based services including a large variety of cloud computing products under the AWS brand. All of its cloud-based services are delivered online and the volume of sales is also very large since Amazon is among the largest cloud players in the entire world. Some of the leading competitors of Amazon in the cloud industry include Microsoft, Google, Salesforce, and Oracle. Overall, the large volume of sales that Amazon achieves from its AWS platform by offering cloud technology products has allowed Amazon to control prices, gain a competitive advantage, and keep prices low for its customers. In this area too, just like its e-commerce platform, Amazon has achieved a significant competitive advantage.
Variety of products and services produced:
Amazon basically offers its e-commerce platforms to millions of sellers from around the world from where millions of shoppers buy products each day. So, the company offers standardized platform services and receives a small cut in exchange for letting other sellers sell from its platform. There are several algorithms behind each search and customers can search for millions of products as well as their reviews from Amazon's e-commerce platform.
Amazon continues to update the algorithms to make the platform more and more customer-friendly. However, that's all on Amazon's part since most of the products sold on its platform are sold by the millions of sellers from all around the globe that use its platform and distribution network for the sales of their products. Amazon also produces several products inhouse including Alexa enabled products as well as several more that also include electronics and other products of household use. However, these products together constitute only a small portion of all the products and services sold by Amazon. The company is slowly increasing the number of in-house brands sold on its e-commerce platform in order to compete with brands like Walmart that sell a large range of private label brands. However, despite that in terms of its e-commerce platform, Amazon mainly plays the role of the technology and distribution services provider for the millions of sellers located globally.
In terms of its AWS platform as well, Amazon owns the entire infrastructure that is rented to customers all around the world online. Customers can buy and use these services, and the role of Amazon is again limited to being the technology provider. In this way, Amazon's processes are not marked by a high degree of variety and through economies of scale as well as high-level sales, the company has achieved a significant competitive advantage. Since Amazon has to focus mainly on the technology part, its processes are marked by a low degree of complexity since it does not need to produce different products for different customers. However, even as a cloud technology provider, it offers a large range of products that suit different needs of the customers but then it has to only manage the infrastructure and security of apps running on its platform.
Variation if demand of products and services:
In fact this is one of the most challenging aspects of business operations. It is easier for businesses to manage the processes when the level of demand is predictably constant. However, when demand can fluctuate significantly then managing processes becomes somewhat complex. If demand is predictably constant, it is easier to gear resources to efficiently cater to the existing demand, Moreover, businesses can plan operational activities including marketing and sales or after sales services in advance.
On the other hand, if the level of demand varies significantly or can be highly variable or even unpredictable, then resources will need to be adjusted over time. What is even worse is that if demand can soar unpredictably, extra resources need to be devoted to the process such that it provides a capacity cushion that can easily absorb the unexpected demand. Let's take a simple example of seasonal variations in e-commerce. Demand for a large range of products surges suddenly during the festive season including gifts, electronics, home decor products as well as fashion products. Businesses like Amazon need to remain ready to cater to the fast surge in demand that happens during the festive season.
It is true about Amazon's business that demand surges for certain products during the festive season. During the festive season, Amazon may have difficulty meeting the overall level of demand due to the very high demand and sales of certain products. However, Amazon's extensive sales and distribution networks have continued to grow larger with time and this has led to an improvement in its fulfillment capabilities. So, that has worked to eliminate certain barriers and also offers Amazon a strong competitive advantage that is matched by no other player in the global markets.
Even if there can be strong variations in seasonal demand, Amazon is in a very strong position and the reason is not just its smart and extensive sales and distribution network but because also Amazon owns a technologically highly advanced e-commerce platform. The advanced algorithms of Amazon allow customers to search, sort, select and buy from a vast range of products. It is equally easy for the customers to order, receive their purchases, and leave their feedback for specific products. This all makes a seamless buying experience possible for the customers of Amazon. It has also enabled Amazon's faster growth globally compared to other digital commerce platforms and at the same time, Amazon has expanded its infrastructure globally at a rate that the company does not face any significant difficulty trying to meet the high-level demand during the peak season.
Visibility of processes:
This is also a rather complex aspect of business operations to grasp. It denotes that aspect of business operations that is easily visible to the customers. The businesses that work with consumers directly may have more visible processes. For example, the healthcare and retail industry have more visible processes. However, the same is not true about an automobile business. Customers generally do not have a very clear view of the production and distribution processes of automobile brands. They cannot peep into everything that goes on before the finalized cars reach the showrooms. This is the only aspect of automobile operations that they are generally familiar with. It is also true about businesses like Apple inc. However, when it comes to businesses like Amazon or even Facebook, these are highly customer-facing businesses or customers have very high visibility into their operations. These are also some businesses for which transparency and accountability matters a lot.
Just like a courier business, customers can track and follow their orders and its position through the user interface. Many businesses include both high and low visibility operations. What is true about Amazon's e-commerce marketplace is not true about the other aspects of its operations as well. For example, the customers do not enjoy a very high degree of visibility into Amazon's warehousing and internal production operations (including the production of Alexa enabled devices). The employees that are working for delivery and customer service at Amazon are more visible to the customers compared to the technical engineers that manage the algorithms that run the website or the programmers and computer engineers working for Amazon Web Services.
Five Operational Performance Objectives
To run an organization, a well-defined set of operations performance objectives is essential. There are five basic performance objectives that are applicable to all types of business operations. These five basic operations objectives include cost, dependability, flexibility, quality,, and speed. There are both internal and external implications of these five performance objectives. All of these internal effects of these performance objectives has an impact on cost.
This is the first leading operational performance objective. It refers to consistent performance based on your customer's expectations and it also affects customer satisfaction to a large extent. However, the meaning of quality can vary across industries and businesses. Suppose there is an automobile business and there is a technology business. The same quality standards would not apply to both. quality can acquire different meanings in different settings, While in some industries, the level of staff friendliness is a leading parameter to measure quality, product efficiency is the main indicator of quality for another. However, no matter whatever industry a business belongs to, customers appreciate quality cannot be denied. Quality can, therefore, bear a direct and major influence on customer satisfaction as well as organizational performance. Nevertheless, quality is also related to a company's image and apart from making certain things easier for the business like customer acquisition, it can also increase an organization's profitability.
In the context of Amazon's business, which includes both e-commerce and cloud technology, quality includes product quality, customer service as well as customer experience. So, there are several aspects that together define quality for a global business like Amazon. The prices of products sold by Amazon are also an important aspect of quality for the brand and determine the level of customer loyalty that the brand gets to enjoy. However, Amazon has done its best to offer its customers a seamless experience and that includes product quality, customer service as well as prices.
In terms of pricing also Amazon follows a competitive strategy which is an important aspect of the overall customer experience that Amazon offers. Since Amazon offers several substitutes or several sellers of the same product sell on Amazon which also works to churn competition, thereby reducing prices, it manages to compete with retailers including both online and physical retailers. However, another important aspect of quality that Amazon is well known for is customer service. This is an important area of focus for Amazon and the company has continued to perform very well on this parameter right since its foundation.
Apart from selling good quality products, Amazon has also built a strong reputation in terms of customer service. Another important factor that supports quality on both Amazon's e-commerce and cloud computing platforms is its use of innovative and industry-leading technology that helps the brand offer its customers a seamless shopping experience. In fact, quality is one of the core pillars of Amazon's business strategy which has helped the company acquire a leading position in both cloud and digital commerce industries.
As the industry has evolved speed has been more and more integral to business performance and growth. In fact, you cannot imagine an operational performance without speed. Now in nearly every industry speed matters just as much as quality. Customers want that products are delivered to their doorsteps faster. In this era where a large range of services are delivered and consumed online including a large range of technology and entertainment services, speed matters a lot and can sometimes be a major differentiating factor for a company. A company that brings ideas to the table and products to the shelves faster than its competitors usually finds itself ahead of the others in the market. In some industries where services have to be consumed instantly, speed matters more than ever. Apart from that in some industries, businesses need to keep the shelf filled with the latest items in order to engage their customers and it is also a reason that speed is important.
As in the case of Amazon, whether it is the e-commerce platform or the cloud technology platform, speed is an important factor that affects customer satisfaction. However, the best thing about Amazon is in this regard is that it has created a global network that helps it deliver products and services faster. Amazon is not the leading brand in the area of entertainment, but in the other areas including digital commerce as well as cloud computing, it is either the largest or one of them. Speed has enabled both faster growth and higher customer loyalty for Amazon. Amazon Prime and Amazon's extensive international and domestic delivery network enables a seamless customer experience for the business as well as higher customer satisfaction. Apart from that Amazon's cloud platform is also dedicated to higher convenience for the customer as well as an international infrastructure that enables faster performance for apps as well as faster delivery of services to the customer whichever part of the world they are living in.
Dependability or reliability is in itself considered a sign of quality in the digital era. Dependability, reliability, or trust are synonymous with brand equity which is an important strength for any industry-leading brand including Amazon. However, there are several factors that affect dependability in each industry. For example, while the quality of raw materials and the final product will have a direct impact on the dependability of a business, in the other it is the timeliness of delivery of services that will affect dependability. Keeping the promise you made to your customers also affects dependability. There is another factor that has kept growing in importance for businesses as well as customers in the twenty-first century and which also affects dependability is the overall level of customer experience. Brands that offer a superior customer experience overall are considered to be more dependable by the customers. Apple and Amazon both are two great examples that have maintained very high-level customer loyalty because they deliver superior customer experience.
As in the case of Amazon, it is considered a highly dependable brand in most business areas where it operates. How dependable Amazon is can be understood from the fact that every day millions of shoppers purchase from its eCommerce website. It implies that billions around the planet depend on Amazon when it comes to shopping online. The dependability of the business is bolstered by the level of customer service that the company offers. Amazon apart from algorithms that offer both speed as well as better navigation helps its customers select from millions of products sold across the website. dependability also offers several advantages for a brand. For example, if your business is considered highly dependable then it can save you millions in terms of marketing, and apart from that, you will have to apply less effort to retain your customers.
Flexibility means the ability to change what, how, and when operations do. There are four types of flexibility in general that are applicable to business operations. They include product/service flexibility, mix flexibility, volume flexibility, and delivery flexibility. Product/ service flexibility means the ability to introduce new or customized products or services. Mix flexibility means the ability to widen the product/services mix to cater to the customer needs better. Volume flexibility denotes the ability to change the output level to produce different quantities of products/services over time. Delivery flexibility on the other hand means the ability to change the timing of delivery. Overall, flexibility is an important aspect of operational performance and superior flexibility also denotes superior performance. Flexibility can also acquire different meanings in different industrial environments. For example, in a healthcare environment, the ability to introduce new types of treatment and to widen the range of available treatments or the ability to adjust more patients and reschedule appointments can all be a sign of flexibility. However, in the case of the automobile or retail industry, flexibility can mean different things.
As in case of Amazon, its flexibility is reflected in the large product/services mix it offers as well as its global expansion and the ability to deliver a product from one corner of the globe to another corner, the ever-increasing number of both sellers and customers on its digital commerce platform as well as its ability to deliver products to customer doors at various timings that suit its customers best. Overall, Amazon is a highly flexible company. Its flexibility is driven by several factors including its international distribution network, its technological infrastructure, a large pool of talented employees as well as its ability to understand customer needs and synchronize to deliver a seamless customer experience.
Cost in terms of operations performance mainly means the operating expenses incurred by businesses. However, the proportion of various operating costs can vary from industry to industry. For example, staffing costs may represent the largest costs for a transportation company but the costs of raw material may be the largest group of operating costs for an automobile brand. In the case of most companies, if their operating expenses are low, they can also keep the prices low for their customers. Not all companies compete in the market on the basis of price. Some companies compete on product quality, other companies compete on the basis of customer service and others on the basis of marketing. However, even the companies that do not compete on the basis of prices, they too are interested in keeping their operational costs low. If a company can save from its operating expenses it will help it increase its profits because a penny saved equals a penny gained. The way in which operations need to be managed in order to keep operating expenses low requires focusing on areas where the company incurs the highest operating expenses.
The largest operating expenses for Amazon are the cost of sales. As Amazon notes in its annual report," Cost of sales primarily consists of the purchase price of consumer products, inbound and outbound shipping costs, including costs related to sortation and delivery centers and where we are the transportation service provider, and digital media content costs where we record revenue gross, including video and music." Keeping operating expenses under control is an important objective of businesses since apart from improving the operational efficiency of businesses, it also improves the profitability of businesses. It is just as true in the context of Amazon as in the context of any other business. Amazon plans to improve its operating profits and reduce its operating expenses through focus on using its bargaining power to drive prices even lower. It will benefit both the company and its customers worldwide.
Amazon’s business model depends on several pillars and its core strength lies in its reliance on technological innovation, large product range, pricing, and international presence. While the US is the main market of the company, its international sales have also grown fast during recent years. Moreover, the contribution of Amazon AWS to the net sales of the company has grown fast in the last three years. Covid-19 has put the business models of all large and small businesses to test. However, Amazon has proved to be a tough brand and it has not just survived the challenge but the company also saw its market cap grow fast during the pandemic. During August 2020, its market cap has reached around $1.58 trillion. There are several factors behind list growth but the pandemic has shown that the dependence of the world on digital technology will only grow in the future. As the world is preparing for the post-Covid scenario, the role of leading companies like Amazon will be that of leaders in this regard.
Instead of relying solely on retail sales, Amazon has diversified its business model to add more sources of income. Cloud computing as well as subscription services also contributed significantly to the net sales of the company during 2019. While this has reduced the company’s dependence on retail sales, it has also helped it find faster growth and establish itself as the leading e-commerce and cloud brand. However, in retail also the company is focusing on growing its range of in-house products in order to grow sales and revenue and to compete against physical retailers that sell a large range of private label brands. This will strengthen Amazon's position in the international as well as its domestic market. Another factor that is driving popularity and brand recognition of Amazon is its range of Alexa enabled products.
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