"Hello, friends!" "In the year 1994," "Jeff Bezos left his cushy investment banking job," to work on his startup. Internet was blowing up at the time. So he got the idea of doing something internet-related. "Of creating an online store," to sell books! What should he call this online store? He thinks of the name Cadabra. From Abra-Cadabra. 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 recognise 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 BookMall." "In fact, 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. And 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 is the largest online store for buying just about anything. "And Amazon Prime Blog,"
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. "At one
point, Amazon had tried to launch their phone," called Amazon Fire. Though that turned out to be a flop idea. "But today, Amazon has become so
successful" "not only as an
online store," rather as a company
spread over soo many sectors. How was it
possible? What is the Business Model of
Amazon? "Come, let's understand in
today's Blog." """Jeff Bezos has become the
first human being on the planet" "to
be worth $200 billion."""
I was a good student."
I always worked really hard. I
was nerdy. It doesn't matter to me
whether we're a pure internet play "what
matter's to me is do we provide the best customer service?""" 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. "At this point in time," 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
was offering a huge convenience to the customers."
"And at the time, there were next to no companies" that was offering the same service as a
competitor. And the second is something
that's called the Flywheel Effect. "A
flywheel is basically 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 of 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 their website and
to improve the customer experience as
well as in keeping 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. "In 1998, Bezos thought" "of using the same strategy to sell not
only books," but to sell computer
games and music also. "In 1998,
Amazon expanded their 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." Driving forward the growth of the company. "One of these ideas was," the 1-Click button. "When you shop on Amazon, you would've
seen," "there's an option
""Add to Cart"""
"and below it, there's the option" 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 of 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 targetted 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 really 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. Several
companies tried to copy this idea. "There's
a company called Barnes & Noble,"
"they tried to incorporate a one-click button too," "but since Amazon held the patent, they
lost the lawsuit." And Amazon was
the only one that could use this. Amazon
had a huge advantage because of this. "But
fortunately, for the other companies,"
this patent expired in 2017. "And
presently, any company can use it."
"For starting any type of a business or job," you need creativity and innovation but before that you need to have the basic skills in your
field. How Jeff Bezos had the knowledge
of computer science beforehand. It was
his field of study. "While working
at the investment bank," he had an
idea of the potential of the internet. "In
his job, he was assessing the growth of the internet," and whether they should be investing in
internet-based companies or not.
"In 2000, the Amazon Marketplace was launched." 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 selling
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. Jeff then decided to invest more in technology and to create their own 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,
Facebook," use Amazon Web Services to store their data. "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 on 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. 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 really 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 that Amazon could not get the first-mover
advantage," "where there was a
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.
"But on the other hand, for e-Readers, Amazon was one
of the first companies" to make
e-Readers. They made a good quality
product "at a low cost and with
zero profits," so Amazon is the
Number 1 for e-Readers. A similar thing
was seen in the Indian market. "In Amazon's business field," Flipkart was launched in 2007. Amazon hadn't entered the Indian market in
2007. Flipkart got the first-mover
advantage here. And this advantage
remained for years. "In 2013," Amazon entered India with Amazon India. "But because of Flipkart's
advantage," "even now," Flipkart is giving strong competition to
Amazon. The two companies have an almost
Duopoly in the eCommerce market. "A monopoly is when one company rules
the market," A duopoly is when two
companies rule. "Each of the two
companies has a market share of around 30%," and all the other companies share the
remaining part. "If we look at the
data from Financial Year 2020," the
number of users of Flipkart is more than three times of that of Amazon India. And the revenue earned by Flipkart is more than thrice of that of Amazon India. The simple reason behind this is that Amazon is spending a lot of money in the
Indian market so that it could increase
its market share. So it is willing to
work at a low profit too. It is
sacrificing a part of its profit to build a better market share. "Because as we can see," "the company that can get the biggest
share of the market," gets this
Flywheel advantage.
There'd be more customers and more sellers. So it is very important to do this. To be successful in this market. So even if one doesn't earn as much profit in
the beginning it's alright. When Flipkart got its advantage they made full use of it by quickly
diversifying. "Presently, Myntra
is owned by Flipkart," "Flipkart
Wholesale, Flipkart Health+," "Cleatrip,
Shopsy," and even the payment app
PhonePe. Flipkart has a majority stake
in it. "Similar to the horizontal
expansion of Amazon in the USA and other countries," "of its business areas," Flipkart did the same thing in India. "But overall, the growth of
Amazon," has still been exponential
across the world. "You can see it
on this chart," their revenue
growth in the last 20 years. "From
2005 to 2021," they have crossed a
quarterly revenue of $100 billion and
this chart is rising exponentially. "Due
to the coronavirus pandemic," "it
increased further," "because
everything was closed during the lockdown," "so everyone was ordering goods on
Amazon," while other shops were
closed. Amazon got a huge advantage from
it. "Due to this, Jeff Bezos became
the richest man in the world." Amazon's
eCommerce 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. "In this chart, you can
see," the proportion of usage of 1P
versus 3P. "With time," the percentage of 3P kept increasing. "By 2018," "58% of things that were being sold on
Amazon," were sold under this 3P
model. Meaning that Amazon wasn't going
into the hassles anymore. And was
earning more profit. The revenue sources
of Amazon and the money it earns from
its various businesses can be seen in
this chart. "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. This chart shows you the
revenue only 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 wasn't stopped." Amazon Logistics saw good growth. "Here, they are giving competition to
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. "If you liked this Blog,"
you can go check out this playlist
of other Blogs on business models "on Tesla, WhatsApp, and the business
models of several other companies" have
been discussed in detail like this. And
you can comment below and tell me which
other company's model breakdown would you like to watch? Let's meet in the next blog. Thank you very much!