amazon-distribution-strategy

Amazon Distribution Strategy

Amazon’s business model follows both a B2C and B2-B distribution strategy. Indeed, on the one hand, its e-commerce platform is consumer-facing, providing millions of products to billions of users around the world. At the same time, its e-commerce platform is also used by other businesses, called third-party stores, to sell their own products on top of Amazon.

Amazon Hybrid Distribution Model Explained

What does it mean that Amazon follows a hybrid distribution model?

Well, when looking at Amazon, it’s critical to understand the company ranges from D2C to B2B and enterprise, with its various business units.

On the direct-to-consumer side, Amazon is one of the most successful e-commerce companies worldwide. It enables billions of consumers worldwide to buy anything from its vast selection of items.

While Amazon is one of the most successful e-commerce companies on earth. That is also a B2B platform, which hosts, through its third-party seller services, millions of third-party (independent, not owned by Amazon) e-commerce stores.

The third-party stores leverage Amazon’s infrastructure (online store, seller analytics, inventories, and delivery) to outsource part of their business to Amazon. This is the B2B side, which empowers millions of independent entrepreneurs and small businesses on top of Amazon.

The third head of Amazon’s business model is represented by Amazon AWS. A cloud juggernaut that empowers millions of businesses out there. AWS enables other companies to host part of their infrastructure on the cloud, making it possible to substantially lower the cost of doing business as AWS becomes underlying and outsources web infrastructure for this small, medium, and large enterprises. Also, very large companies, like Netflix, host their services on top of AWS!

Amazon e-commerce first-party business

Amazon e-commerce is a B2C business that targets billions of consumers worldwide.

The B2C e-commerce is run for scale.

In short, it has tight profit margins, yet it generates cash in the short term (see cash conversion cycle), which Amazon re-uses to scale up its operations quickly.

This side of the business is all about a wide variety of products, low prices, and very fast delivery.

On top of it, over the years, Amazon has added Prime to enable consumers to get free delivery.

Amazon third-party platform

Amazon’s third-party platform is part of e-commerce which hosts other sellers.

And it enables them to sell on top of Amazon.

This side of the business comprises an ecosystem of entrepreneurs joining the Amazon platform to amplify their sales.

Third-party sellers can choose to sell on Amazon and take care of the fulfillment. In this case, Amazon will take only a revenue cut as a distribution fee.

Or they can decide to leverage Amazon’s inventories. In this case, the seller won’t have to store any inventory, which will be sent directly to Amazon, which takes care of the fulfillment.

In this case, the seller takes only a tiny cut of the overall revenues, as Amazon takes care of the inventory, distribution, and fulfillment.

Amazon AWS

amazon-aws-business-model
Amazon AWS follows a platform business model, that gains traction by tapping into network effects. Born as an infrastructure built on top of Amazon’s infrastructure, AWS has become a company offering cloud services to thousands of clients from the enterprise level, to startups. And its marketplace enables companies to connect to other service providers to build integrated solutions for their organizations.

Amazon AWS is the cloud infrastructure that powers up a good chunk of the web.

Amazon AWS is primarily a B2B and enterprise platform, which has become a company within Amazon.

Born, as a way for Amazon to offer third-party sellers the ability to host their e-commerce on top of Amazon, AWS is now a company with its own business logic.

Indeed, AWS contributes to most of Amazon’s profits!

is-amazon-profitable-without-aws
While Amazon is still profitable without AWS, AWS contributes to most of Amazon’s operating profits. In 2021, Amazon generated almost $25 billion in operating profits. However, if you removed AWS, Amazon would have reported an operating profit of just over $6 billion.

In this side of the business, the distribution approach is quite different.

On the one hand, it’s about offering a set of AI-ML tools, which are used by developers to build cloud tools on top of Amazon AWS.

On the other side, it’s about a qualified sales force that can sell those services to other businesses or potentially enterprise clients.

Two souls, a single-tech giant

As we saw, Amazon has two souls.

On the one hand, it’s a strong consumer brand that leverages a powerful flywheel to enable low prices, wide variety, and speedy delivery.

That is how Amazon defines customer obsession.

On the other hand, it’s also a B2B or enterprise platform.

AWS sells its cloud services to other businesses or enterprises, thus making it possible to use Amazon’s cloud infrastructure as the backbone of their business.

Connected to Amazon Business Model

Amazon Business Model

amazon-business-model
Amazon has a diversified business model. In 2021 Amazon posted over $469 billion in revenues and over $33 billion in net profits. Online stores contributed to over 47% of Amazon revenues, Third-party Seller Services,  Amazon AWS, Subscription Services, Advertising revenues, and Physical Stores.

Amazon Mission Statement

amazon-vision-statement-mission-statement (1)
Amazon’s mission statement is to “serve consumers through online and physical stores and focus on selection, price, and convenience.” Amazon’s vision statement is “to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices.” 

Customer Obsession

customer-obsession
In the Amazon Shareholders’ Letter for 2018, Jeff Bezos analyzed the Amazon business model, and it also focused on a few key lessons that Amazon as a company has learned over the years. These lessons are fundamental for any entrepreneur, of small or large organization to understand the pitfalls to avoid to run a successful company!

Amazon Revenues

amazon-revenue-model
Amazon has a business model with many moving parts. With the e-commerce platform which generated over $222 billion in 2021, followed by third-party stores services which generated over $103 billion, Amazon AWS, which generated over $62 billion, Amazon advertising which generated over $31 billion and Amazon Prime which also generated over $31 billion, and physical stores which generated over $17 billion.

AWS Business Model

amazon-aws-business-model
Amazon AWS follows a platform business model, that gains traction by tapping into network effects. Born as an infrastructure built on top of Amazon’s infrastructure, AWS has become a company offering cloud services to thousands of clients from the enterprise level, to startups. And its marketplace enables companies to connect to other service providers to build integrated solutions for their organizations.

Amazon Cash Conversion

cash-conversion-cycle-amazon

Working Backwards

working-backwards
The Amazon Working Backwards Method is a product development methodology that advocates building a product based on customer needs. The Amazon Working Backwards Method gained traction after notable Amazon employee Ian McAllister shared the company’s product development approach on Quora. McAllister noted that the method seeks “to work backwards from the customer, rather than starting with an idea for a product and trying to bolt customers onto it.”

Amazon Flywheel

amazon-flywheel
The Amazon Flywheel or Amazon Virtuous Cycle is a strategy that leverages on customer experience to drive traffic to the platform and third-party sellers. That improves the selections of goods, and Amazon further improves its cost structure so it can decrease prices which spins the flywheel.

Jeff Bezos Day One

jeff-bezos-day-1
In the letter to shareholders in 2016, Jeff Bezos addressed a topic he had been thinking quite profoundly in the last decades as he led Amazon: Day 1. As Jeff Bezos put it “Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.”

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