The Capital
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The Capital

How Amazon Makes most of its Profit?

It’s probably not what you expect.

Josh in a Box (South Park)

Have you ever wondered how the world’s largest online retailer (AMZN), with a market cap of $1.5 trillion, makes the majority of its revenue?

Its cloud services, digital advertising, physical products, subscriptions (Estimated whopping 126 Million Prime Members), retail, and web services.

  • Amazon's annual revenue for 2020 was $386.064B, a 37.62% increase from 2019.
  • Amazon revenue for the quarter ending December 31, 2020, was $125.555B, a 43.59% increase year-over-year.
Amazon Segment Breakdown FY 2020 by Investopedia

As expected, Amazon’s businesses continued to benefit tremendously from the pandemic. EPS grew 118% YOY, and Operating Cash Flow increased by 72%. Q1 2021 is expected to grow by 33–40%.

Amazon’s profit comes majorly from Amazon Web Services (AWS) and their Third-party marketplace

Amazon Web Services (AWS):

AWS is Amazon’s largest source of operating profits and is growing fast. AWS provides an “Infrastructure platform in the cloud” for hosting applications and websites. Currently, AMZN controls a third of the global cloud market, competing with Microsoft’s Azure and Google Cloud.

The North American division of the business generates more revenue, but the cloud services generate nearly 60% of the company’s operating income.

Third-Party Marketplace:

Amazon's third-party marketplace is where third-party sellers sell new or used products on a fixed-price online marketplace alongside Amazon’s regular offerings. Using Amazon Marketplace, third-party sellers gain access to Amazon’s customer base, and Amazon expands the offerings on its site without having to invest in additional inventory.

Amazon charges its third-party merchants a referral fee for each sale which is a percentage of the sales price. Additionally, sellers using FBA must pay additional fees which include a pick, pack, and weight charge.

“The Amazon seller is the most profitable customer to AMZN.”

While the consumers profit greatly from Amazon’s low prices and added services, sellers pay the price. Estimated seller fees are 15%, fulfillment by Amazon is 10%, and Ads are 15%. Not a surprise, but 53% of every product search by a US Adult is on Amazon.

A deep faked Alien Jeff Bezos

“Amazon is what it is because of the invention. We do crazy things together and then make them normal. We pioneered customer reviews, 1-Click, personalized recommendations, Prime’s insanely-fast shipping, Just Walk Out shopping, the Climate Pledge, Kindle, Alexa, marketplace, infrastructure cloud computing, Career Choice, and much more,”

- Jeff Bezos, Amazon founder, and CEO.

Amazon's success can be attributed to its four guiding principles: customer obsession rather than competitor focus, passion for invention, commitment to operational excellence, and long-term thinking.

Here’s a Beginner’s guide on How to Sell on Amazon.

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