How Amazon becomes the world’s most valuable company?
How does Amazon make money what is its real business model?
All the above questions I will try to answer in this article.
I will broadly discuss three main verticals of Amazon which make it most valuable and these three help Amazon to make a superior business model.
The “Big Data”
A simple google search will tell you that on average 35 orders are processed by Amazon each second, which is 1.1Bn a year. With this massive data in its hand, the company knows a lot way more than you think about consumer behavior and their buying habits.
For example, Amazon knows in any state which type of clothes are more popular in which season and at which price it’s being sold. With this kind of data advantage, Amazon can now launch a similar product with its own brand. Amazon’s clothing brand is “Symbol” it also has “Amazon Basics” for consumer durable products. Amazon can provide a similar product with low prices and better delivery services from its home brand cater to the need of consumers this is the advantage of its “big data”. If you want to buy cloth but it’s showing 7 days delivery time but you need it in urgent WOLA Amazon has a similar product for you at a better price with 1-2 days delivery time. This technique works better during the festive season.
This is related to big data advantage, Amazon knows what is the demand of each product in each season with customer’s previous order history. So using this data Amazon actually predicting the demand of that product and shifting that product to its nearest warehouse quickly to reduce the shipping time.
Amazon as a logistic partner
This is not currently implemented in India but in other counties what Amazon is doing is providing its own logistics solutions to small manufacturers even to those companies whose products are not listed on its site. In India due to the current FDI norm, it’s difficult to implement this.
The “Cutting edge technology”
In this first, we will discuss AWS which is Amazon web services it’s a cloud service platform that provides servers(storage) for our website. With this Amazon has website trend data which website is attracting traffic more and which particular pages of websites are being viewed more. To put this into perspective Amazon has world trend data which now they are planning to use in its Amazon GO store in developed countries so that they can only use the product which is in trend.
Third is Cost Advantage
How is Amazon able to provide such discounts and still able to make money?
This is possible because of it’s market place model, which is for a particular product there are a lot of sellers because of which product prices fall and attracts more customer which creates a network effect. With cutting-edge technology and better usage of data, it operates on a cost-efficient model with low margin and high economies of scale.
Now Let’s discuss the Amazon revenue model quickly to get things into perspective.
1. For all the orders on its website and app, Amazon is charging its commission fee. In India, it’s low and again re-employed into subsidizing that seller’s product to create a network effect.
2. Advertising fees from sellers to show their product on top searches.
3. To store website data AWS is charging fees that act as a recurring revenue source.
So this is how Amazon operates and earns where a majority of its futures earnings depend upon the data utilization it can make.
All these factors and revenue model makes Amazon the most valuable listed company in the world.