AMAZON SUBSCRIPTION MODEL

Introduction

Amazon.com, Inc.is an Americanmultinational(Links to an external site.)

technology company(Links to an external site.)

which focuses one-commerce(Links to an external site.)

,cloud computing(Links to an external site.)

,digital streaming(Links to an external site.)

, andartificial intelligence(Links to an external site.)

.Jeff Bezos(Links to an external site.)

founded Amazon from his garage inBellevue(Links to an external site.)

, Washington,on July 5, 1994. It is one of theBig Five(Links to an external site.)

companies in the U.S.information technology(Links to an external site.)

industry, along withGoogle(Links to an external site.)

,Apple(Links to an external site.)

,Microsoft(Links to an external site.)

, andFacebook(Links to an external site.)

.The company has been referred to as "one of the most influential economic and cultural forces in the world", as well as the world's most valuable brand. It started as an online marketplace for books but expanded to sell electronics, software, video games, apparel, furniture, food, toys, and jewellery. Amazon is known for its disruption of well-established industries through technological innovation and mass scale.It is the world's largestonline marketplace(Links to an external site.)

,AI assistant(Links to an external site.)

provider,live-streaming(Links to an external site.)

platform andcloud computing(Links to an external site.)

platform[22](Links to an external site.)

as measured byrevenue(Links to an external site.)

andmarket capitalization(Links to an external site.)

.Amazon is thelargest Internet company by revenue(Links to an external site.)

in the world.It is the secondlargest private employer in the United States(Links to an external site.)

and one of theworld's most valuable companies(Links to an external site.)

. As of 2020, Amazon has the highest globalbrand valuation(Links to an external site.)

.

Amazon distributes downloads and streaming ofvideo(Links to an external site.)

, music, andaudiobooks(Links to an external site.)

through itsAmazon Prime Video(Links to an external site.)

,Amazon Music(Links to an external site.)

,Twitch(Links to an external site.)

, andAudible(Links to an external site.)

subsidiaries. Amazon also has a publishing arm,Amazon Publishing(Links to an external site.)

, film and television studioAmazon Studios(Links to an external site.)

, and a cloud computing subsidiary,Amazon Web Services(Links to an external site.)

. It producesconsumer electronics(Links to an external site.)

includingKindle(Links to an external site.)

e-readers(Links to an external site.)

,Fire(Links to an external site.)

tablets(Links to an external site.)

,Fire TV(Links to an external site.)

, andEcho(Links to an external site.)

devices. Its acquisitions over the years includeRing(Links to an external site.)

,Twitch(Links to an external site.)

, Whole Foods Market, andIMDb(Links to an external site.)

. Amazon is currently in the process of purchasing film and television studio,Metro-Goldwyn-Mayer(Links to an external site.)

.

Amazon business model

While the company core business model is based on its online store. Amazon launched its physical stores, which generated already over five billion dollars in revenues in 2017.Amazon Prime (a subscription service) also plays a crucial role in Amazon's overall business model, as it makes customers spend more and being more loyal to the platform. Besides, the company also has its cloud infrastructure called AWS, which is a world leader and a business with high margins. Amazon also has an advertising business worth a few billion dollars. Thus, the Amazon business model mix looks like many companies in one. Amazon measures its success via a customer experience obsession, lowering prices, stable tech infrastructure, and free cash flow generation.

Amazon business model explained

Amazon is the largest marketplace on earth. Even though the United States represented the primary source of income for Amazon. It is expanding globally. Indeed, net sales have increased since 2014. In 2016 products represented almost 70% of total sales. Services sales have been growing at a fast pace. In terms of Operating Income, the growth has been mainly driven by the high margins deriving from the services sales. By looking more in-depth at the revenue sources, subscription and AWS services have been growing. That denotes how Amazon is expanding globally by moving more and more toward services (like Prime subscription and AWS)

Amazon according to Jeff Bezos' vision: Amazon fundamental principles that drive the company are:

• Customer Obsession
• Ownership
• Invent and Simplify
• Are Right, A Lot
• Learn and Be Curious
• Hire and Develop the Best
• Insist on the Highest Standards
• Think Big
• Bias for Action
• Frugality
• Earn Trust
• Dive Deep
• Have Backbone; Disagree and Commit
• Deliver Results

He has four main metrics to assess whether his company is on Day One, or is falling toward Day Two:

1. 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.

2. A skeptical view of proxies,

As companies get larger and more complex, there is a tendency to manage to proxies.

What does that mean?

A common example isprocessas proxy. Goodprocessserves you so you can serve customers. But if you are not watchful, theprocesscan become the thing.

1. The eager adoption of external trends,

The outside world can push you into Day 2 if you won't or can't embrace powerful trends quickly.

1. High-velocity decision making.

Day 2 companies make high-qualitydecisions, but they make high-quality decisionsslowly. To keep the energy and dynamism of Day 1, you have to somehow make high-quality,high-velocitydecisions.

TheAmazonbusiness model(Links to an external site.)

revolves around four main players:

Consumers

Sellers

Developers and enterprises

Content creators

A deep look at the business dynamics of the Amazon business model

Beyond the look, we have given so far at the Amazon Business Model, I want to give you an in-depth look so that you can really appreciate how the Amazon business model works and what powers up its business engine. If we look at the Amazon revenue model, a few things pop up right away. As we saw the online stores are still the core part of the business. However, the core business is the foundation for other emerging businesses that run with different logic to its online stores. Where online stores run at tight margins and high volume by taking advantage ofcash conversion cycles.(Links to an external site.)

Other parts of the Amazonbusiness model(Links to an external site.)

, likeAmazon Advertising Services(Links to an external site.)

,Amazon Prime(Links to an external site.)

, andAmazon AWS(Links to an external site.)

run with much higher margins. Thus, Amazon's online stores are the foundation for those other businesses that make the overall company more profitable in the long run. Let us give a look at the Amazon cash machine, which is the foundation of its ability to expand, and disrupt other industries, while expanding in other areas.

Amazon's cash machine:

One of the key elements of the Amazon business model is itscash machine business strategy.(Links to an external site.)

In short, Amazon has operated (and still does) for years at very tight profit margins on its online store. The company has willingly done so throughout the years, as it made its prices low, convenient compared to traditional physical stores, and with a fast and efficient delivery system, whatAmazon calls fulfillment centers(Links to an external site.)

. This might give the impression that Amazon does not generate enoughcash flow(Links to an external site.)

to its business. However, that is quite the opposite. As Amazon collects payments quickly from its customers, it then pays its vendors with relatively longer payment terms. This gives Amazon short-term liquidity that can invest back to speed up growth. With this mechanism, Amazon has been able to disrupt several industries. Starting as a bookstore online, it quickly expanded in all the other industries.

One Amazon has built the most valuabletwo-sided marketplace(Links to an external site.)

on earth it has become way easier for the company to offer many other services.

Amazon advertising business

A few people realize among other businesses, Amazon has become a digital advertising provider. And not a small one, but among the very few able to compete against the duopoly Google-Facebook. Indeed, as of the first months of 2018, the Amazon advertising business netted over six billion in revenues. With such an infrastructure and many e-commerce hosted on Amazon infrastructure, more and more entrepreneurs and marketers are willing to pay for Amazon advertising services. This part of the business has higher margins compared to the tight margins of the online stores.

Amazon Prime

Many companies nowadays have shifted to thesubscription business model(Links to an external site.)

. Amazon has converted part of its business to accommodate this change.Amazon Prime(Links to an external site.)

is a critical element of Amazon's growth strategy. The logic is simple, the more people join the Prime Memberships, the more products they purchase on the online stores. Indeed, with Prime, members enjoy faster delivery services besides the access to Amazon's original content offered via streaming. This subscription model also creates a more stable and predictable income over time.

Amazon AWS

Started as an experiment back in 2000, theAmazon AWS(Links to an external site.)

has grown to become an over seventeen billion dollars business in 2017. AWS also enjoys higher margins andnetwork effects(Links to an external site.)

. Amazon is doubling down on that as this business unit will be critical to its future success.

Understanding Amazon financial mode

For years, analysts have been puzzled by Amazon's business model. They saw a lack of profitability, exponential price to earnings ration and many assumed it was all a bubble.

However, from a better look, that is how Amazon has always been structured. The company, rather than focusing on pushing profit margins, pushed to generate cash flows (we saw it in thecash machine model(Links to an external site.)

) that could reinvest as much as possible in the growth of the business, by being in a sort of continuousblizscaling-mode(Links to an external site.)

.

While today Amazon's marginality has improved substantially, that is primarily due to other segments (AWS, Prime, and other revenue streams), while online e-commerce still generates higher margins compared to the other revenue streams. That is part of Amazon's mission to keep a wide variety of things, by offering low prices.

Questions?

1. Conduct a SWOT of the business model adopted by Amazon?
2. How has Amazon managed to stay ahead of its competitors?
3. Do you think that other players in the market have an impact on the current Amazon business model?
4. What alternatives could you suggest Amazon if any?