Early Story of Amazon
In 1994, Jeff Bezos left his cushy investment banking job, to work on his startup. The Internet was blowing up at the time. so he got the idea of doing something internet-related.
In creating an online store, to sell books! what should he call this online store? he thinks of the name Cadabra. From Abracadabra.
This name was so weird that when he started using this name, his lawyers questioned the name. when they called up customers, the customers often didn’t recognize or understand the name of the company.
- They tell him that the name has to be changed. so Jeff Bezos started thinking about other names. he registered several domain names because it was supposed to be an online bookstore, he thought of Book Mall.
This is a domain name that still redirects to amazon.com when you type in this website on your browser. He finally settled on the name Amazon, because Amazon is the largest rainforest in the world. The Amazon River is the largest river in the world he wanted the Amazon company he built, to be the largest bookstore in the world.
Interestingly, if we fast forward to 25 years into the future, today, Amazon is not only the largest bookstore in the world but also the largest online store for buying just about anything.
- Amazon Prime Video, is one of the largest OTT platforms.
- Amazon Web Services is number 1 in its field.
- Amazon Alexa,
- Amazon Kindle,
- Amazon Drive,
- Amazon Music,
- Amazon’s Audible,
- Amazon Pay,
Amazon has even started delivering groceries in some countries, under the name Amazon Fresh.
How was it possible? What is the Business Model of Amazon? “Jeff Bezos has become the first human being on the planet to be worth $200 billion.”
Beginning of Amazon
The idea of Amazon was quite simple right from the start. but it was a unique idea for its time.
To create an online bookstore at the time, people had to go to physical bookstores to buy books.
Why not let people buy books online through a website on the internet?
Initially, Amazon’s website was a mere bookselling website. the advantage of selling books online was that customers could access thousands of books on a single website.
A very basic, practical, and convenient idea. One that people needed. right from the beginning, even as a startup, Amazon was a successful company the website was launched in 1995. and by December 1996,
they had amassed a customer base of 180,000. Their website looked like this then. By 1997, their revenue had reached $148 million.
Entering the Stock Market
At this point, Jeff decided that he didn’t want Amazon to remain a private company instead, he wanted to list it as a public company in the stock market. So that the company could access more funds to grow.
In 1997, Amazon became a public company. and by 1998, Amazon’s revenue had reached $600 million. There are said to be 2 main reasons behind Amazon’s success. First, Amazon offered huge conveniences to customers. at the time, there were next to no companies that were offering the same service as a competitor.
And the second is something that’s called the Flywheel Effect. A flywheel is a spinning wheel,
it keeps spinning evenly even when faced with changes in external conditions. amazon’s business model had become like a flywheel by then. They sold books at lower prices, and millions of books were available in their online store.
So the customers had a positive experience since the customers were happy, it drew more customers to their website and because more customers were joining their website, the sellers of the books, especially the third-party commission-based sellers, wanted to join Amazon to sell their books.
Because they could see the large number of customers it had. so more and more sellers listed their books on Amazon, leading to more options for books to buy on Amazon for the customers. It had become a wheel that was being pushed in the same direction twice, increasing the rotational speed.
When Amazon earned more profits, Amazon used that money to improve its website and to improve the customer experience as well as keep the costs low. Because this was a game of low costs.
When books were being sold at low prices, more customers and sellers would use their services.
And thus a nice business model was created.
Adding games and music in their portfolio
In 1998, Bezos thought of using the same strategy to sell not only books but also computer games and music. In 1998, Amazon expanded its business, in addition to books, they were also selling computer
games and music on their website. It saw unprecedented success to such an extent that in 1999, Time magazine’s Person of the Year was Jeff Bezos. his photo was printed on the front page. with time, Amazon adopted many ideas, big and small.
Introducing Buy Now with 1-click button:
Driving forward the growth of the company. One of these ideas was the 1-Click button.
When you shop on Amazon, you see, there’s an option “Add to Cart”
and below it, there’s the option to buy Now with 1-Click. With one button, you can buy the products and get them delivered.
Many people use this 1-Click button and often end up buying things that they truly don’t need.
this button was a great idea on its own. and it was so successful that in September 1999, Bezos got this technology patented.
There were 2 uses for this seemingly simple button. The first and quite obvious is that customers can buy things much more easily. It greatly improves the convenience of the customers. and the second and hidden benefit of this was that when people use this button they need to save all their information first.
Their personal information.
Name, contact details, payment details, billing address. Only then can you use this button. Amazon started tracking it. when people used this button, Amazon tracked what they bought.
and based on that, Amazon started sending out suggestions
“If this person bought this, they would like this too.” With this, they started putting up ads for the customers according to their buying preferences. With the help of these targeted ads,
it became easier for Amazon to sell products.
And their sales grew exponentially. If you have to click on multiple buttons to buy something,
it gives you the time to think. Do I need it? Should I buy it? But if one click of a button, you get to buy something, you wouldn’t even get the time to think.
So the sales of Amazon grew even more.
Entering New Field:
Jeff didn’t want to be limited to books and games. He wanted everything to be sold on Amazon.
Through this Marketplace any third-party vendor could sell anything on Amazon. The benefit was that
Amazon would take a portion of the sales as its cut, of anything sold.
And this was huge. Because normally, if Amazon had to sell something suppose, Amazon wanted to sell tables and chairs. Amazon would have to have a warehouse for making and storing the tables and chairs.
but here, a third party was making the tables and chairs, and was sold through Amazon.
So Amazon didn’t need any storage space. It didn’t need to build its warehouse. This became an important source of revenue for the company. Amazon was growing so fast with so many new customers and vendors joining them, that they faced a shortage of data storage.
Amazon Web Services.
Jeff then decided to invest more in technology and create their data storage facility.
Rather than using someone else’s storage facilities.
Friends, this was the birth of AWS. Amazon Web Services. again, this was another field, that didn’t have much competition. not many companies were doing this. and this business was so successful for Amazon, that currently, this is the highest profitable business that Amazon is involved in.
40% of the profitability of Amazon is from AWS.
Amazon Web Services. Most of the top companies in the world who have an online presence,
Netflix, Pinterest, Twitch, LinkedIn, and Facebook, use Amazon Web Services to store their data.
Launching the Kindle:
In 2007, Jeff Bezos executed another horizontal expansion of Amazon, with the launch of Kindle.
An e-Reader. since Amazon had begun as an online bookstore, launching an e-reader, so that books could now be read digitally as well as physically was a related expansion.
Interestingly, Jeff Bezos decided that Kindle would be a Zero-Profit device. The cost incurred in making the device would be the only amount recovered from the buyers and Amazon would earn zero profit from selling Kindle. You would be surprised to know this, you might wonder how it could be possible.
The simple reason for this was the books that could be read on Kindle had to be bought from Amazon’s bookstore. Though Amazon wouldn’t earn anything from Kindle, Amazon would make money by selling the books.
This business strategy was very successful too. with this Kindle could become a very low-cost device.
Many people started buying it, and today, Kindle is the world’s number 1 e-book reader. Friends, you might have noticed one thing, so far in the story, the areas that Amazon was successful in,
in most of the areas, Amazon was the first company,
to properly get into the business.
Amazon’s Fire phone:
To capture the market. There was a significant First Mover Advantage that Amazon exploited time and again.
For example, it was the first to come up with the idea of an online bookstore. to become successful with the first-mover advantage becomes very easy. Although, one has to work hard to maintain it later on. Like how Amazon had patented the new technologies and kept innovating rapidly,
so that Amazon could maintain that advantage. and it could defeat the competitors that cropped up later. in the areas where Amazon could not get the first-mover advantage, where there was tough competition already
Amazon’s failures were highlighted there. such as Amazon’s Fire phone. When Amazon tried to launch its smartphone, in 2014. But 2014 was already quite late to launch a smartphone.
The first iPhone was launched in 2007. and Android was launched a few years later.
By 2014, there was tough competition between Apple and Android. Both companies were innovating continuously and bringing in new technologies. In this case, when Amazon came up with its smartphone,
it was very difficult for Amazon to compete with the experienced players. That’s why Amazon’s Fire phone was a huge failure.
THE BUSINESS MODEL OF AMAZON:
Amazon’s e-commerce business can be divided into 2 models.
1P and 3P.
“1P means that Amazon buys a product stores it in its warehouse,
puts it up on its website, and then delivers the product to the consumers.”
“The second is the 3P model. it means that someone else makes the product, and sells their product on Amazon, while Amazon acts as a marketplace, and then the product is delivered to the consumers. In the 3P model, Amazon basically acts as a platform, that is used by the sellers and the consumers to sell or buy their goods.”
Interestingly, there isn’t a significant profit margin in the 1P model. most of the profits come from the 3P model because in 1P the goods need to be stored as well. It is filled with hassles like buying large warehouses, for storing the goods, and the duration of storage, a lot of money goes into these.
In the 3P model, there’s just the website, on which people can come to sell and buy products.
For Amazon, the benefit lies when the 3P model is used more. Initially, Amazon had used the 1P model,
when it began in the late 1990s.
Revenue of Amazon:
The revenue sources of Amazon and the money it earns from its various businesses If you look at the numbers from 2020, the online store contributes the most revenue, around $200 billion. and AWS is a major source of revenue for Amazon,
because it is the most profitable. The money that the company earns. but doesn’t show the amount spent by the company for that, we turn to the chart of profitability. Interestingly Amazon, as a company, wasn’t very profitable in its first decade. Until 2014,
The company was earning next to no profits. because all the revenue of the company
was invested back into the business by Jeff Bezos, to expand the business. But after 2016 and especially after 2018 Amazon has started earning profits.
And is now focusing on profitability too. Over the last few years, Amazon has raked in so much profit,
but the credit for that mainly goes to AWS, because AWS is one of Amazon’s businesses with the highest profit margin with a profit margin of 30%. and it kept growing with time.
Even in the last few years, Amazon’s expansion hasn’t stopped.
Amazon Logistics saw good growth. Here, they compete with the delivery service companies.
Such as UPS and FedEx. These are big in North America. and because of these reasons, friends,
today, Amazon could become a $1.6 trillion company. This was Amazon’s interesting story.
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