Notes

Known best as the largest internet retailer in the world, Amazon.com is not a simple case study in terms of business model analysis. Even if we begin by looking at it's consumer retail business, it quickly becomes clear that the company is anything but a traditional retailer. While Amazon does sell products at a standard mark-up, it has also pioneered alternate retail strategies by acting as the gateway for other retailers and a very robust marketplace for used goods. But retail is only part of the picture when it comes to Amazon.com.

Lines of Business
The company itself defines its lines of business in terms of product sales, service sales, AWS, fulfillment, publishing, digital content subscriptions, advertising, and co-branded credit cards. For our purposes, I'll define Amazon's lines of businesses as 1) online retail, 2) internet services, and 3) the Kindle ecosystem.

Online Retail
The online retail line of business includes those products sold by Amazon as a traditional retailer, most commonly as a low-cost retailer. Amazon claims to have "Earth's Biggest Selection" of products available through its family of websites, sold at the lowest cost at a small profit. The company started as an online book seller, rapidly expanding into music and movies, and ultimately into electronics and household goods.

But Amazon doesn't stock everything that is sold through its website. Another part of its retail strategy is to serve as the channel for other retailers to sell their products and taking a cut of every purchase. Amazon maintains its status as a destination website, but does not have to maintain inventory on slower-selling products. This strategy has made Amazon a leading long-tail retailer, expanding its available selection without a corresponding increase in overhead costs.

Extending this long tail retail model further, Amazon introduced the sale of used products through its seller marketplace. Originally developed to compete with eBay, the seller marketplace provides another retail revenue stream for the company without the need to stock products in its warehouses. Advertising and shipping are handled exclusively by sellers, with Amazon taking a cut of every sale simply for providing the channel.

Internet Services
Amazon's internet services cannot easily be discussed as a standalone line of business because it is deeply intertwined with both its retail business and the Kindle ecosystem. From the consumer perspective, Amazon has begun to provide services like Amazon Prime, which provides free two-day shipping on retail purchases, on-demand video streaming, and free access to the Kindle library, all for an annual fee. Amazon Prime overlays the subscription and all you can eat business models with the retail model to provide additional customer value.

Unknown to most Amazon customers, however, are the other internet services provided by Amazon, referred to as AWS (Amazon Web Services). Originally developed as a side business, Amazon decided to lease out its own server space to other companies and individuals. While not a core part of the company's strategy, Amazon found itself managing a large number of servers and internet services, and it was a fairly small effort to manage those services for others.

Kindle Ecosystem
Amazon has expanded its business into manufacturing and distributing the family of Kindle tablets. Originally designed as an electronic book reader (supplementing its online book seller business), the Kindle has become a fully functional tablet and media device. With the Kindle, Amazon serves as both manufacturer and traditional retailer (and also wholesaler by selling the device through other retailers).

While the company does not admit as much, it is assumed that the Kindle devices are sold at a loss, which would more correctly put this line of business into the razors & blades category of business model. By selling the hardware at a loss, Amazon is betting that customers will purchase enough electronic books, games, and videos to justify the initial loss.

The Amazon Business Model Canvas
Alexander Osterwalder and Yves Pigneur, authors of Business Model Generation, have developed the popular business model canvas. The canvas is described as "a shared language for describing, visualizing, assessing, and changing business models." It’s made up of nine building blocks that help focus attention on key attributes of a business. What follows is an attempt at a business model canvas for Amazon.


What's Next for Amazon?
Notable in the canvas above is that, regardless of line of business, Amazon keeps some things consistent. Its value proposition remains price and convenience no matter the product or service, and low prices can be sustained by ensuring its customer relationships continue to be mostly automated and self-service. Expect the company to continue its expansion into new areas while continuing to focus on these two building blocks.

Amazon Publishing is one of the company's more recent ventures, providing the tools for on demand publishing and giving new (or established) authors access to the Amazon store. This extends Amazon's roots within the publishing industry, likely disrupting the industry permanently.

Another recent service that Amazon has launched is referred to as AutoRip. With AutoRip, a customer's music purchases from the past become immediately available digitally and through the cloud. Expect this service to be expanded to movies and books, allowing any purchase of the actual product to translate to digital versions automatically.

The latest rumors surrounding Amazon revolve around same day delivery in some parts of the U.S. It's a challenge that many e-commerce companies have tried and failed at, but which Amazon may be able to execute on. It's likely that the service will be limited to the largest metropolitan areas or those areas in closest proximity to its warehouses. But same day delivery would permit Amazon to conquer one more category that has yet to successfully translate to the internet: the grocery business.


The Amazon value propositions of price and convenience hold true in all of its product categories, allowing it to extend itself into new markets and deepen its customer relationships. The company has dominated online retail with a fairly standard traditional retail business model over the internet, using its buying power and financial resources to dominate the marketplace.

This dominance will continue well into the future as Amazon continues to explore new product and service categories. What we shouldn't necessarily expect out of Amazon are unique business models. The company has developed clear expertise in e-commerce innovation, which it has applied to a variety of traditional business models. The key lesson to be learned from Amazon is that to thrive in the digital era, it's often better to execute your business model well than to invent new business models from scratch.

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Posted 8th July 2013 by Eric Noren
Labels: Amazon Business Model Analysis Business Model Canvas Examples Long Tail Manufacturer Direct Razors and Blades Subscription Traditional Retailer