What Is Amazon’s Business Model?
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Christopher SchottCornell Consulting Club Cemex Project Comparable Companies Due Diligence  Focus: AmazonWhat is Amazon’s business model?Amazon is an online retailer, currently the largest overall retailer in the world. Amazon employs a direct to consumer business model. It operates small lean warehouses in multiple geographies from which it supplies its customers. It started as an online book seller, then expanded first into music and movies, later into electronics, household goods and beyond. Amazon now also serves as a channel for other, smaller or local retailers to sell their products and takes a commission on every purchase. It also features the sale of used products, competing with the liked of ebay. Most recently, it has adopted online services like the Kindle store or Amazon prime movies. How has Amazon incorporated data analytics?Amazon generates an additional 10%-30% revenue in response to the recommended suggestions it offers to its customers. Amazon is the pioneer in mining the big data to provide personalization to entice customers with a curated shopping experience. With more than 2 million sellers across 10 countries serving close to 200 million customers – Amazon provides personalized recommendations to its customers through its super innovative data-driven technology. Amazon’s trademark analytic is predictive analysis. Amazon uses data collected from all its users buying behavior to forecast future needs or even trigger purchases that aren’t demanded. Amazon’s predictive analysis includes personalized recommendations, price optimization and targeted marketing to name just a few. Amazon thinks of its customers in two ways Amazon-buying customersSellers on the Amazon MarketplaceAmazon recommendation algorithms incorporate various factors like- purchase history, browsing history, impact of friends, trends for a particular product, social media mentions on the popularity of a product, purchases made by customers with similar purchase history, etc. before they recommend a product to a customer. Amazon is always on the verge of refining its recommendation algorithms with a quest to better serve its customers.Dynamic pricing helped Amazon boost profits by 25% on an average and they stay competitive by monitoring the price 24×7, 365 days. Amazon increased its sales by 27.2% from 2012 to 2013 and made an entry into the list of top 10 retailers in US for the first time. Product pricing strategy at Amazon supports real-time pricing by considering data from various sources like customer activity on the website, available inventory of a product, competitor pricing for a product, order history, preferences set for a product, expected margin on the product, and more. Amazon changes the price of its products every 10 minutes.[1]
What effect has this had on amazon? While Amazon’s revenues have shown strong increase over the past years, it’s earnings have been low and even negative consistently as well. Amazon explains this through its continuous re-investment and expansion.[2]While amazon’s revenues number in the tens of billions and consistently rising, it’s net profits are frequently negative or orders of magnitude below revenues. For 2015, it’s net revenue was over 107 Billion, while it’s net profit was only 596 Million. Amazon earns most of its cash through operating and spends about half on investing, while around a quarter goes to financing. Operating cash flow near doubled from $6.842 Billion to $11.92 Billion in 2015. This coincided with the ever-increasing growth in processing power which allows for more extensive data analytics by Amazon. That amazon recently offered its Data Analytic services for sale to the public is also an indicator of the recent maturity of amazon’s services, since amazon uses many of its web services internally. For 2015, its financing cash flow was 11.92 Billion, Investing cash flow was negative 6.45 billion and negative 3.76 Billion for financing cash flows. Amazon Cash Flow