How Amazon Makes Its Money?

Amazon is by far the most successful online retailer going by its market cap of more than $1.6 trillion and still growing. The tech giant brings in more money than any other company in the e-commerce segment. Contrary to perception, the company does not generate all its revenues from online sales. The company has diversified its business empire and is now more than just an online store.

The tech giant is now the proud owner of multiple billion-dollar revenue streams thanks to robust business empires traversing some of the fastest growing sectors. Under founder Jeff Bezos, Amazon has grown rapidly and become a key player in cloud services and digital advertising.

The company also develops and sells hardware devices such as Alexa personal assistants and Fire TV. It is also engaged in the distribution of movies and television shows through the Amazon Prime video platform.

For the full 2020 Fiscal year, Amazon generated $21.3 billion in net income, an 84% increase from 2019 levels. Sales were up by more than 37% to $386 billion. Online sales brought more money than any other segment at $197.3 billion or 51% of total sales generated.

Online sales

Amazon’s online store brings in more money than any other outlet. In this segment, the company purchases goods at wholesale prices and resells them on its e-commerce platform at a profit. In this case, the company owns the inventory, warehouses. Thus, it sets pricing, fulfills orders, and handles all customer care. The fact that the company is able to control pricing explains why it makes more money on this segment than any other.

However, third-party selling continues to see the most growth in recent years. Third-party sellers on Amazon are simply independent sellers that sell a wide range of new and used products on the Amazon e-commerce platform.

Third-party resellers are usually small to medium business owners. The amount of sales generated from third-party sellers where Amazon also makes a commission has increased significantly. Currently, there are more than 2.3 million third-party re-sellers making Amazon the largest marketplace for third-party sellers in the U.S.

Third-party re-sellers account for about 20% of the total amount of money that Amazon generates from e-commerce sales, accounting for more than 50% of the total gross merchandise sales. In addition, third-party sales are more profitable, with a gross margin rate of about 60%.

Cloud Business

In addition to online sales, Amazon also makes a substantial amount of money from the sale of cloud services. Amazon Web Services is one of the fastest-growing segments generating a majority of the company’s operating income.

Companies and businesses no longer have to invest in expensive hardware in the form of servers and other IT infrastructure. Likewise, they are turning to Amazon to buy storage space that is used to hold a vast database and bandwidth for hosting websites or processing power for running complex software.

Now the largest cloud infrastructure business in the world explains why AWS is Amazon’s biggest profitable business segment accounting for over 60% of total operating income with an operating margin of more than 30%. The segment now accounts for about 12% of the total amount of money that Amazon generates.

Digital Advertising

Home to the largest e-commerce platform in the world, Amazon has also found a way to generate significant advertising revenues from the high-profile platform. Digital advertising on the platform allows Amazon to offset the narrow margins from the core retail business.

While most of the U.S advertising revenues go towards Google and Facebook, Amazon is also making a name for itself on the segment with ad spend in the e-commerce platform emerging as a bright spot for revenue generation.

With over 200 million monthly unique visitors to its website, Amazon is increasingly attracting more advertisers looking to reach out to the target market on its e-commerce platform. Thanks to the huge customer base, digital advertising now brings more than $15 billion making Amazon the third-largest digital advertiser in the U.S.

Prime Subscriptions

Amazon subscription service Amazon Prime is also turning out to be a key driver of the bottom line. With over 150 million members, the segment has helped customize Amazon’s e-commerce business. The segment brings more than $15 billion, with subscription revenue accounting for more than 6% of its total sales.

It has since emerged that Amazon Prime is one of the reasons why most people shop on Amazon, given the offerings on offer. Perks such as free shipping and content streaming are why most people are increasingly signing up for the subscription service.

Amazon Prime has allowed Amazon to expand its business empire into content streaming gaming and grocery shopping services. The paid subscription service is available in over 15 countries and now accounts for about 6.9% of the company’s total sales expected to increase as more people subscribe for the service.

Ruchi Gupta

Ruchi Gupta covers various beats from finance to technology and from lifestyle to hobbies. She has an MBA in Finance. Ruchi enjoys writing on celebrities and political news. She likes traveling and exploring places.

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