Amazon Case Study - Tearing Down The Whole Business

Amazon runs a platform business model as a core model with several business units within. Some units, like Prime and the Advertising business, are highly tied to the e-commerce platform. For instance, Prime helps Amazon reward repeat customers, thus enhancing its platform business. Other units, like AWS, helped improve Amazon’s tech infrastructure.

Today Amazon is a tech giant who dominated the e-commerce business by offering a wide variety of products, at low cost, and with a delivery service propelled by its inventory management infrastructures, built over the years.

But, if Amazon is an extremely complex company, which can’t be easily labeled, how can we call its business model?

Table of Contents

A platform business model at the core

Amazon business runs on top of a platform model (to understand what makes it a platform business read this), built over the years, which takes advantage of network effects and flywheel effects.

At its core, Amazon has to keep attracting over and over billions of consumers across the globe on its platform and keep offering a broad variety of products.

As a two-sided platform, Amazon has also to keep its platform interesting to sellers, who are willing to showcase and sell their products directly on Amazon.

Indeed, over the years the company has experimented with many strategies, and among them, Amazon Prime and the seller services helped Amazon successfully transition toward a platform business.

customer-obsession — Customer obsession goes beyond quantitative and qualitative data about customers, and it moves around customers’ feedback to gather valuable insights. Those insights start by the entrepreneur’s wandering process, driven by hunch, gut, intuition, curiosity, and a builder mindset. The product discovery moves around a building, reworking, experimenting, and iterating loop.

While this platform business is the foundation of Amazon, what other key businesses exist today on top of that?

Amazon multi-layered business model

Let’s dive into the details of the different models used by Amazon for each of its segments and how some have a logic that ties them together.

For the sake of this analysis, we’ll look at four primary segments:

Prime (media platform business)
E-commerce: first-party, third-party, seller services (e-commerce/marketplace platform business)
Advertising (media platform business)
AWS (AI-ML platform business)

Those are all platforms business models, as they enjoy the network effects and scalability typical of a platform.

At the same time, they have different value propositions, customer segments, and resources to run successfully.

Prime media business in a nutshell

amazon-prime-video-revenue-model-explained

For instance, Prime is a media platform business running a subscription-based revenue generation, with recurring revenues.

Amazon Prime is a media and entertainment platform, yet its strategic business value goes way beyond that.

This platform targets content creators who have to be incentivized to feature their content on Amazon Prime.

While consumers are incentivized to join Amazon Prime to get movies, ebooks and free shipping on products that are fulfilled by Amazon.

Many see this program as an additional revenue stream that the company enjoys to enhance its revenues.

However, Amazon Prime is a program who has come up after many years of trial and errors by Amazon’s management to come up with ways to:

reduce customers’ acquisition costs and facilitate repeat purchases: one of the major issues of building a digital platform (but also any other business) are customer acquisition costs and repeat purchases. A habitual Amazon customer buys many times a year. Therefore, shipping costs can easily eat up the convenience of buying on Amazon in the first place. How to prevent that? Cutting or removing those costs is the answer. While it’s hard to justify a membership program based solely on removing the cost of shipping. By offering a broad range of services (free ebooks, free movies and shows, and free shipping) all of a sudden you have an entertaining platform together with free shipping. Which makes the whole value proposition way more compelling.
incentivize sellers to host their inventories with Amazon: so the company could guarantee fast delivery and lower prices, while also charging a service fee to those sellers. Also, by managing inventories of products from beginning to end. Those same sellers indeed can sell more as customers who have Amazon Prime might want to purchase as they won’t pay for shipping costs.
make of Amazon a global consumer brand: digital platforms like Amazon have been extremely good at scaling up in a time when they had no resources compared to established brands. As Amazon scaled and consolidated its position in the market, it also started to invest more and more on its brand (in 2019 Amazon spent $11 billion in marketing). In short, it moved from a solely practical value proposition (price and convenience) to culture-making by investing more and more on marketing and content to consolidate its global brand.

In short, the revenue stream generated by the model is the side effect of a program developed over the years to solve important issues of a business model that needed to keep providing more value to consumers as it scaled.

Advertising business in a nutshell

advertising-industry — The digital advertising industry has become a multi-billion industry dominated by a few key tech players. While the industry advertising dollars are also fragmented across several small players and publishers across the web. Most of it is consolidated within brands like Google, YouTube, Facebook, Instagram, Amazon, Bing, Twitter, and Pinterest.

The advertising business is also a media business, which runs an attention-based revenue generation, which is performance-based (actions on the platforms like clicks, and impressions which get paid by advertisers).

To gain a bit of context, Amazon is among the largest players in the digital advertising business. This makes the platform more interesting to sellers who want to feature their products on top of Amazon listing or to leverage on Amazon transactional data to sell more.

Thus, the key player is the consumer and the ability of the platform to keep attracting billion of consumers across the world. The key customer is the seller willing to pay Amazon to get better placement and more visibility of its products.

E-commerce platform business in a nutshell

The e-commerce platform has within a first-party and third-party seller business.

The first-party comprises products with Amazon brand. Third-party products are those featured on Amazon but sold from outside stores.

Amazon also gives the option to those third-party sellers to manage their inventory directly within Amazon, from an additional fee on the products who are fulfilled directly by the company.

The e-commerce platform remains the foundation of the overall Amazon business and what makes Amazon among the most interesting companies in the world.

Amazon knows it well, and indeed, the whole Amazon flywheel starts from there. This is how a strategy for a complex platform can be simplified. As a platform, you might want to focus on a core stakeholder and transaction to make it scale.

It’s interesting to notice how the fact that Amazon was looking into a way to enable sellers to (thus transition toward a more scalable/platform model) started with a random tinkering and turned into AWS.

AWS AI platform business in a nutshell

AWS is one of the Amazon massive experiment who turned into a successful business. Over the years, Amazon tested many ideas, also those ideas who were not just coming from customers’ requests, but by the vision of Amazon about what products could have passed the expectations of consumers.

AWS primarily sells computing, storage, database, and other services. Primarily a consumption-based service, Amazon AWS’s main stakeholders are developers, dev managers, ops managers, CIOs, chief digital officers, and chief information security officers.

Amazon AWS is also an AI-ML platform business whose success is the ability to attract developers to build ML tools in the cloud, which can be used by organizations and enterprises buying cloud services to scale their businesses with lower technological costs.

One example is Amazon SageMaker, a cloud machine-learning platform that makes it possible for developers to build those models, thus making the Amazon cloud services more attractive in the first place to enterprises buying cloud services.

Key takeaways from Amazon Case Study

Over the years Amazon has been able to build a complex multi-layered business model, based on several key partners, value propositions, infrastructures and revenue streams.

This is model is the fruit of a long-term vision, but not the result fo a pre-packaged design. Successful companies require tinkering and a lot of trial and error.

Many of those business units, over the years, might have grown as a side effect of figuring out a way to make Amazon a more scalable platform as it helped expand its product variety, convenience, thus align to its long-term vision in unpredictable ways: