Amazon Business Model:

eCommerce
Focus on: Amazon’s eCommerce segment
June 2023

Insights into:
Business Model Canvas elements

© Murat Uenlue | DigitalBizModels.com

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Overview

Amazon Business Model Canvas 4

Revenue 5

Key Partners 7

Key Assets & Resources 8

Value Propositions 10

Key Activities 21

Channels 24

Customer Relationships 25

Customer Segments 27

Cost Structure 28

Click any of the links above to jump to the respective section

© Murat Uenlue | DigitalBizModels.com

Amazon Business Model Canvas

Ecommerce is a trillion dollar vertical with different strategies reaching from

owned inventory to platform business models. Approaches include (pure) online
marketplaces, fully vertically integrated ecommerce, classifieds platforms,
shopfront hosting, supply side aggregators, deals platforms, review pages, B2B
marketplaces, payment providers and more.

Today, we are covering Amazon's Business Model Canvas. The key focus will be on
the major revenue generating business segments being ecommerce.

Amazon leverages two types of business models for their ecommerce businesses:

1. The linear business model for those parts that are directly sourced ("online
stores" and "physical stores" in their terminology) and

2. The platform business model for Amazon Marketplace ("Retail third-party

seller Services")

© Murat Uenlue | DigitalBizModels.com

Revenue

Amazon Revenue 2009-2022 [source: statista, annual report]

Let's start with the revenues to see which segments contribute most to their
business results.

Amazon has long surpassed the competition in terms of online sales revenue. As
of mid 2023, they are still trailing Walmart in terms of total revenue but the gap is
now ~$100b (or 20% of Amazon’s revenue).

​ Amazon revenue 2022: $514b

​ Walmart revenue 2022: $611b

© Murat Uenlue | DigitalBizModels.com

Amazon's revenue by segment:

​ Online stores: $220b (43%)

​ Physical stores: $19b (4%)

​ Retail third-party seller services: $118b (23%)

​ Subscription services: $35b (7%)

​ Advertising services $38b (7%)

​ Amazon Web Services (AWS): $80b (15%)

​ Other: $4b (1%)

Source: Amazon Annual report (2022, pdf)

In this resource we will focus on their eCommerce segments which spans a

number of the above-shown areas.

© Murat Uenlue | DigitalBizModels.com

Key Partners

A behemoth like Amazon of course has dozens of types of key partners (and of
course thousands of wider "partners").

Let's look at some key types within their ecommerce segment:

- Suppliers: For starters they have many suppliers. As we will see shortly,
these could be distinguished further into various types. There are those that
are mere suppliers that Amazon buys from. There are the larger ones that
Amazon has more elaborate contracts with (think of major brands like Dell,
Nike, etc who may have a presence on Amazon). There are many authors
and many more types of suppliers

- Then there are the "junior" partners of Amazon-owned brands

- Others are just manufacturers of Amazon goods (more on this shortly)

- Transport partners: Amazon is insourcing an increasing amount of transport

as it becomes more economical with scale but there are still a whole range
of transport and logistics partners who are quite crucial in the value
proposition of fast delivery

- Marketplace sellers: A separate type of "suppliers" are all the 3rd party
sellers on Amazon Marketplace

- Tech partners: Similar to the transport infrastructure, Amazon is also

insourcing a lot of their technology (and then selling services based to it,
such as Amazon Web Services)

These are the most crucial and specific ones. We have also elaborated in great
detail on the key partners in our other resources. Check them out as many of the
broader comments are relevant for Amazon as well.

© Murat Uenlue | DigitalBizModels.com

Key Assets & Resources

Amazon's key assets & resources (by a long shot) are:

- Their Delivery and fulfilment network

- Brand

- Retail (Sales) IT assets including website, app(s) and the entire backend to it
(incl the logistics IT backend)

- Value delivery IT assets (incl for, Amazon Prime video, Kindle / KDP, Audible,
AWS, etc) including all the backend to it

Delivery and fulfilment network

At the heart of Amazon's retail business model success is its delivery and
fulfilment network.

Amazon Fulfilment & Delivery Network

A simplified view of how a product travels from manufacturer to the consumer

through various layers of the fulfilment network. Depending on the product and
the customer's location, there are different delivery pathways through the system.

© Murat Uenlue | DigitalBizModels.com

As of May 2023, Amazon has over 1,200 facilities in the US alone and >2,300
globally. This is obviously a massive footprint. The facilities fall into a number of
categories:

1. Inbound cross dock centre

2. Airport hub

3. Fulfilment centres (with various subtypes / those storing certain types of

goods)

4. Sortation centres

5. Delivery stations

6. Prime now hubs

7. Amazon Fresh (which also has a pick-up option)

8. And physical stores, e..g. Amazon Go, Whole Foods Market

Each of these fulfilment facilities has its distinct characteristics and functions. If
you want to understand Amazon, you need to understand this infrastructure.
Amazon is an amazing example for a digital company with a huge tangible asset
base.

© Murat Uenlue | DigitalBizModels.com

 Amazon Business Model on A Page (B-MAP)

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Value Propositions

Value Propositions for Consumers

“I very frequently get the question: What’s going to change in the next 10 years?
And that is a very interesting question; it’s a very common one. I almost never get
the question: What’s not going to change in the next 10 years? And I submit to you
that that second question is actually the more important of the two — because
you can build a business strategy around the things that are stable in time.

… [I]n our retail business, we know that customers want low prices, and I know
that’s going to be true 10 years from now. They want fast delivery; they want vast
selection. It’s impossible to imagine a future 10 years from now where a customer
comes up and says, ‘Jeff I love Amazon, I just wish the prices were a little higher;’ ‘I
love Amazon, I just wish you’d deliver a little more slowly.’ Impossible. And so the
effort we put into those things, spinning those things up, we know the energy we
put into it today will still be paying off dividends for our customers 10 years from
now. When you have something that you know is true, even over the long term,
you can afford to put a lot of energy into it.”

Jeff Bezos, Founder Amazon Inc.

In summary, Jeff Bezos called out Amazon's 3 crucial value propositions:

1. Low Prices

2. Fast Delivery

3. Large Choice of products (and services)

While there are other value propositions, we will be focusing on these three most
crucial ones in this section.

© Murat Uenlue | DigitalBizModels.com

(1) Low Prices

We will look at the dynamic pricing strategies in the Key Activities section in a
moment.

(2) Fast Delivery

Amazon offers "free" shipping on millions of eligible items for an annual (or
monthly) subscription fee for Amazon Prime. Amazon’s fulfilment cost makes a
staggering $84b per annum or 16% or their revenue. Amazon recovers these
through delivery costs, Amazon Prime subscriptions and fulfilment by Amazon (to
3rd party sellers).

"Free" shipping was at the core of Amazon Prime and is still being valued highly
within the overall Prime package. We have covered Prime in great detail in a
separate resource.

This value proposition becomes more valuable as Amazon adds more and more
choice (see next value proposition) in that consumers can make more use of their
free shipping option for more of their purchases (and therefore also shift more of
their purchase needs to Amazon).

Being able to deliver ordered items fast and to do so in an economical fashion (i.e.
shipping cost to remain low for the customer and Amazon) is a huge challenge. For
starters it requires scale which in the earlier days meant that Amazon had to use
3rd party providers (and in part still does).

Most importantly, there are trade-offs to be made between how much inventory
to be held, replicated and located where, facility costs and other costs. We have
covered the economics in the Fulfilment & Delivery Network resource (as well as
in the course videos) in more detail. It is hugely important to understand this
aspect of their business model.

© Murat Uenlue | DigitalBizModels.com

(3) Large Choice of products (and services)

Amazon started with books and then quickly expanded into media through
(physical) discs and DVDs. By now most of this is available in different digital
formats.

- Books are available via Kindle either by purchasing books or via Kindle
Unlimited

- Books can also be consumed via Audible in the form of audio books

- Music via Amazon Music (which also includes Podcasts)

- Videos via Amazon Prime Video

- Then there is Amazon Prime which includes a slice of each of the above

Our eCommerce premium resources also cover Amazon Prime and their other
consumer subscription models. Learn more here

In addition, consumers can buy anything under the sun from Amazon, from
consumer electronics to car tyres as we all know.

More interesting are their growth areas. These add to the growing choice for
consumers and growing revenues for Amazon. Let's look at some of their growth
bets in terms of product categories.

© Murat Uenlue | DigitalBizModels.com

Potential growth areas (product categories)

Amazon is growing in many directions at the same time and with that their value
proposition in terms of choice (and of course their potential revenue sources).

Everything is moving to online retail but at a different pace. The items that are
lagging may be some of the biggest opportunities of the future [source: statista]

While only a fraction of food/groceries are sold online, it is one of the largest
forecasted growth areas for online sales. It's clear that Amazon will want to
participate (or be the main player - and will face Walmart as a major competitor)
in this lucrative category (esp. fresh food).

© Murat Uenlue | DigitalBizModels.com

Online grocery sale revenue grew ahead of expectations during the pandemic.
Source: S&P Global Market Intelligence

Here are some of Amazon's endeavours in the categories that are trailing have yet
to meaningfully shift to online retail.

Food/groceries:

​ Amazon Prime Pantry: Groceries (dry goods) and household goods

​ Amazon Fresh: Includes also perishables and produce and stored &
delivered in a cooled infrastructure chain

​ Amazon Prime Now: The essentials (range of 15,000 products and

restaurant orders, etc) that can be delivered within 2 hours for free (or 1
hour with surcharge)

© Murat Uenlue | DigitalBizModels.com

 ​ Whole Foods Markets (WFM): Amazon acquired WFM with their over 350
(over 500 as of mid-2023) physical stores. WFM produce is starting to be
delivered through Amazon's network

​ Amazon Go: Automated check-out and a range of popular products

Furniture:

​ Extensive range of Amazon and 3rd party furniture and appliances choices

​ Dedicated fulfilment facilities specialising on large items, such as furniture,

sports equipment and more (Redsland, CA)

​ In the US, Amazon is already the largest online retailer of furniture and
appliances with almost double the revenue of runner-up Homedepot

​ Online furniture sales has a projected compound annual growth rate of

11.9% (CAGR) between 2018-2022

Apparel:

​ "Amazon currently claims about 6.6% of the apparel market. That share is
expected to increase to 8.2% by next year and further expand to 16.2%
within five years" by the estimates of one analyst

​ Amazon fashion brands: Amazon launched seven fashion brands with some
observers wondering if Amazon wants to get into the high margin apparel
business at large scale

​ Zappos.com: the famous online shoe and apparel retailer has been acquired
by Amazon in their first foray into apparel but still running under their own
brand (while having moved operations of 2 of their warehouses to Amazon)

​ Prime Wardrobe: accessible to Prime members only. It allows apparel

choices to be sent home for trying them on. Unwanted items can be
returned for free (within one week)

​ Several fulfilment centres dedicated to apparel, like the massive one in

Jeffersonville, IN

© Murat Uenlue | DigitalBizModels.com

​ Amazon has patented clothing manufacturing-as-a-service

​ And they have opened a clothing manufacturing plant in Norristown, PA

​ On the other hand, clothing is the leading product category that people
prefer to buy offline.

© Murat Uenlue | DigitalBizModels.com

Pharmacy/medication:

​ Amazon has already a large set of products in health and personal care

​ They also have a large assortment of medical, prescription-free products,

supplements as well as over-the-counter medication

​ Amazon has acquired PillPack in 2017, an online pharmacy that provides

consumers with prescription medication in prepackaged doses

​ Prescription medication has its own set of regulatory requirements (that

includes transport requirements), with PillPack being licensed to ship
prescription medication to most US states

​ They are also looking into expanding into entering the medical device
market

​ Compared to other categories, Amazon is only in the early stages within the
medical / health care sector and there are a range of scenarios for their
long-term plans

​ Amazon, JPMorgan Chase and Berkshire Hathaway have created a

non-profit health-care venture for their combined 1.1m employees that
aims to introduce technology solutions to simplify the health-care system

© Murat Uenlue | DigitalBizModels.com

The playbook

These are a few examples of retail categories that Amazon is expanding into. Each
category would deserve their own article. But it gives some insights into how
Amazon enters/grows new product categories:

​ Large choice of product offerings on their pages composed of

Amazon-owned and 3rd party inventory

​ Acquisitions of suitable companies, mostly smaller ones (Whole Foods

Market is the notable exception)

​ Starting a number of "secret" (Amazon-owned) brands within the category

​ Establishing a fulfilment and delivery structure with respective warehouses

and other infrastructure (e.g. temperature-controlled delivery chain, bulk
item handling, prescription drug management)

​ For some of the categories: integrating a subset of the overall choice as part
of the Prime membership or dedicated subscription models, etc

© Murat Uenlue | DigitalBizModels.com

Value Propositions for Sellers

Amazon has also value propositions for 3rd party sellers which is the second
largest business segment by revenue as we have seen with over $118b in 2022
(23% of revenue).

Amazon Marketplace

More than 50% of items (in terms of units, not revenues) sold through the
Amazon pages are from 3rd party sellers. One prominent seller is Nike after
resisting for a long time. But most 3rd party sellers are much smaller. Amazon
opened their pages to 3rd party sellers in 2002 and the share of those sales
become a significant part of their total revenue (currently the second biggest
business segment).

Amazon Marketplace falls under the platform business model that we have
covered in great detail on our pages. The revenue model is often a transaction fee
as a percentage of the sales. This is often combined with other revenue sources,
e.g. advertising as well as FBA, SWA, etc.

Fulfilment by Amazon (FBA)

Fulfilment by Amazon is a service that offers merchants to store their items in

Amazon fulfilment centres and delivery infrastructure to reach the customer. It
includes checkout and payment options, management of returns and more. Items
can be used to sell through the Amazon pages or through other sales channels.

Shipping with Amazon (SWA) -- now included within FBA

Amazon has increasingly insourced elements of the delivery network and then
opened it up to external customers as a service. They have started with last-mile
delivery using Amazon Flex drivers but have increasingly expanded on this. This
used to be branded Shipping with Amazon (SWA) but is now included as an option
in Fulfilment by Amazon (FBA).

© Murat Uenlue | DigitalBizModels.com

 Digital Business Models: 11 Verticals of Disruption

Digital Tech Vertical Examples covered

Asset & Service Sharing Uber, Airbnb, Lime, WeWork
Social & Communication Facebook/Meta
Search & Vertical Search Google, Zillow, AirDNA, Rome2rio
eCommerce Amazon, Etsy, Wayfair
Content & Media Netflix, YouTube, Spotify, Apple News+
Online Travel &, Dining Booking.com, Expedia, TripAdvisor, Yelp
Software-as-a-Service Slack, ClickUp, MS Teams
HW / SW tech platforms Apple, Microsoft Google
Fintech Paypal, Afterpay, Kiva, LendingClub
Digital Health Tech Doximity, Conversa, Ro
Education Technology Udemy, Coursera, Moodle, StudentVIP

⇒ Learn more here

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Key Activities

One of the most important key activities is to constantly improve the value
propositions.

The actual value propositions and even the pages have not changed a lot (even if
you go back all the way to the early days). But within those early value
propositions, continuous improvements have been made.

Let's take a look at one survey that asked what makes consumers buy on Amazon.

The main reasons that people buy on Amazon according to one survey [source:
statista]

The value propositions combine the on-page and off-page elements that we have
talked about.

© Murat Uenlue | DigitalBizModels.com

Fast & convenient delivery: Their delivery infrastructure for example underpins
some of the other reasons people purchase on Amazon, such as fast shipping and
selection (selection requires respective special fulfilment and delivery capabilities
as mentioned above).

Product choice: We already talked in detail about how Amazon works to add more
product choice.

Another different set of key activities includes the development of completely

new value propositions and offerings. One of the most successful ones (as you can
see in the revenue section) was AWS.

So, now let's look at the third important value proposition in terms of value
propositions: prices. We have added it to the key activities because it is a hugely
dynamic process.

Pricing strategies

Prices are influenced by a number of factors. This includes sourcing prices which
then depends on a number of factors itself including (for a set product grade /
quality) on purchase prices which often can only meaningfully be negotiated
down by volume, i.e. scale.

Another crucial ingredient to sustainably lower prices is a lower cost structure. For
an online retailer, that translates into a cheaper-than-competition fulfilment and
delivery infrastructure.

In addition, Amazon has long been known to accept a lower profit margin. Some
of this was due to reinvestment but some was certainly also passed onto the
customer in order to increase volume.

Then there is the other pillar of pricing strategies.

© Murat Uenlue | DigitalBizModels.com

 Note the nice feedback loop here

Analysing many sources, we have found the following pricing strategies that
Amazon leverages. More details to each of those can be found in the course.

- Price dynamism

- Price perception strategy

- Demand/supply pricing

- Competition monitoring

- Seasonal prices

- Dynamic pricing for Marketplace

- Bundling/recommendations

- Deals/promotions

- Data network effects

- Deceptive pricing(?)
© Murat Uenlue | DigitalBizModels.com
Channels

Most notably, Amazon is a new channel for B2C retail.

The accompanying value delivery channels are:

​ Their websites and its various elements, such as product descriptions, a

simple checkout, reviews, filter, search and navigation features, etc

​ Their various apps, incl things like the Kindle (reader) app, etc

​ Their transport and delivery channels

Amazon ticks all boxes (and sets the benchmark for some of them) when it comes
to online retail experience [source: statista]

In addition, there are

​ Their different help and support channels on their website (which are
functional but probably not award-winning)

​ Various forms of acquisition channels, incl digital and offline advertising and
marketing; and a lot more more

© Murat Uenlue | DigitalBizModels.com

Customer Relationships

Customer relationships are defined by the benefits sought/provided which are

self-serving, low prices, and convenience. In addition, it is very important that
customers can safely purchase (and return if needed) the ordered items given
they can’t touch and feel the items they purchase upfront.

There are many features on their website (and T&Cs) that help with these
properties. We have already called out many of them.

Let's add here two additional points: the review system which allows for some
transparency (though these systems are rarely perfect). They also provide the
impression of power to the consumer and a channel for “retribution”.

How true this is is another question but such systems are very important. Another
important aspect is personalisation that has various elements. Tailored
recommendations are one such element.

Review system

Apart from low prices, reviews are one of the most important factors driving
customer decisions. Would you buy something low-rated just because it's cheap?
Likely not. Reviews are also one of the most important factors for the ranking of
products on search pages. With this, there is big money at stake for sellers. And
that means there are people trying to rig the system with fake reviews.

​ The review system is one of the most important decision and ranking tools

​ It is of significant value for Amazon as well as for 3rd party sellers on

Amazon

​ Amazon has a range of community and review guidelines

​ Amazon encourages reviews, e.g. via the early reviewers program

© Murat Uenlue | DigitalBizModels.com

 ​ They allow other users to vote on the helpfulness of reviews and display
more helpful ones higher up (but this system has been used for
manipulation itself)

​ Amazon shows the list of top reviewers based on helpful votes

​ They have filters and machine learning tools to weed out fake reviews

​ Estimates of the number of fake reviews range from 1% according to

Amazon vs 30% stated by fake-review detection sites (both of which have an
incentive to over or understate the problem)

Personalisation

Recommendations are a part of Amazon's personalisation efforts. And they are

essential to more sales. A 2012 McKinsey report finds that "Already, 35 percent of
what consumers purchase on Amazon and 75 percent of what they watch on
Netflix come from product recommendations based on such algorithms." With
that, it has certainly helped a lot in their early-phase growth. Multiply the roughly
100 million products on Amazon (and hundreds of millions of users) and you can
easily see that this is a complex system to pull off.

Recommendations can come in different forms:

​ "Recommended for you"

​ "Frequently bought together"

​ "Your recently viewed items and featured recommendations"

​ "Your browsing history"

​ "Related to items you viewed"

​ "Best selling"

​ Off-site recommendations via email

​ And other ways

© Murat Uenlue | DigitalBizModels.com

Customer Segments

According to this report, Amazon segments their customers in the below-shown

way.

This is a typical way of macro segmentation. In addition, Amazon would be using

various ways of micro segmentation but little is known publicly.

© Murat Uenlue | DigitalBizModels.com

Cost Structure

Amazon's cost structure (source: annual report) is "as expected":

- Cost of sales: 56%

- Fulfilment: 16%

- Technology & content: 14%

- Marketing: 8%

- General & Admin: 2%

The biggest cost item (by far) is the cost of sales with 56% of revenue (down by 2%
from 2021). This cost item includes the cost of their inventory which undoubtedly
would be the biggest cost item. Generating ~43% of their revenue (down from
47%) through the linear merchant model means that they have to pay for the
inventory involved in this model.

Amazon cost structure 2022 (source: annual report)

© Murat Uenlue | DigitalBizModels.com

Amazon & eCommerce Business Models

Amazon is the (by far)

dominant player in
eCommerce. They apply a
majority of the winning
business models which is
why they are our key
example.

Other key examples are Etsy

and Wayfair to show
different approaches within
eCommerce.

This is complemented by a
number of other examples
to give you deep insights
into Amazon’s & other
eCommerce biz models.

Our Case Studies will give you deep insights into:

Business Model - Financials - Economics - Strategy

Get the Course + eBooks here

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 This Premium
resource Product

Number of eBooks 1 5

Total pages of eBooks ~25 pages >120 pages

Videos: eCommerce biz models x 60 mins

Latest update 2023 2023

Video: Intro & Overview x

Video: Underpinning Fundamentals x

Video: Playbook Business Model x

Video: Monetisation Business Model x

Video: Linear Subscription Business Model x

Video: Other approaches (examples) x

eBook: Amazon eCommerce Business Models

eBook: Amazon’s Fulfilment & Delivery Network x

eBook: Amazon’s 3 crucial CVPs x

eBook: Amazon Kindle Biz Models x

eBook: Amazon Subscription Models x

© Murat Uenlue | DigitalBizModels.com

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