How Big Online Retail Companies Make Money: A Case Study of Amazon.com

Amazon.com is the world’s largest online retail company, with over 170 million active customers globally. It also operates an open-box store and Whole Foods Market, all of which are represented on its books as revenue streams.

Unlike most tech companies, which benefit from the explosive growth of the smartphone market, Amazon has seen its sales grow faster in the presence of traditional retail.

The company’s earnings call with analysts this week was a must-watch, as Amazon demonstrated how it makes money and inspires confidence in investors (and potential customers). Here’s a closer look at how Amazon’s strategy has worked for it.

Wholesale Generates Sales

Amazon’s strategy has focused on driving traffic to its websites rather than developing apps or online stores focused on mobile users. As a result, its sales have grown significantly, fueled by a combination of organic search traffic and SEO efforts as well as paid marketing campaigns. In addition to its retail website, Amazon also sells merchandise directly to consumers through its Amazon Marketplace platform, which it opened in 2005.

The company doesn’t break out revenue numbers by channel, but it’s clear that the bulk of its sales come from online and mobile commerce, with the physical store operating as a complementary channel that fuels growth in the digital realm. Its biggest acquisition to support this strategy was Whole Foods Market for $13.7 billion in May 2018.

Redefining the Nature of E-commerce

Traditional e-commerce has largely consisted of retail sales with online marketplaces acting as a platform for transactions. Amazon’s strategy has been to redefine what e-commerce means, combining brick-and-mortar and online stores while also taking advantage of the mobile shopping trend.

The company is not alone in seeing the potential: Over the past two years, physical retailers’ E-commerce market share grew from 7% to 11% in the U.S., according to the Global Retail E-commerce Market Share Report Q3 2021 from DMA International. While this is a small slice of the overall market, it’s a promising sign that traditional retailers see the value in combining online and physical stores. In the future, more and more sales could be impacted by the intersection of online retail and physical store shopping.

That brick-and-mortar strategy has helped Amazon gain market share from a number of competitors, including Walmart and Target, which now account for only 4% and 3% of retail e-commerce sales in the U.S., respectively. More impressively, Amazon now accounts for nearly 40% of retail e-commerce sales globally. These figures should come as no surprise; the company has been successful in part due to its focus on integrating online and offline stores, which allows it to maximize the shopping experience for customers and minimize losses due to underperforming stores.

Paid Advertising, Merchandising, and Online Shopping

To attract and retain customers, Amazon relies on a combination of paid advertising, product merchandising, and e-commerce. The company doesn’t break out its digital revenue in detail, but its overall strategy and financial performance are closely tied to the strength of its digital channels.

Paid advertising on social media and search engines drives traffic to Amazon sites, where it can then be converted into a sale through product placements, merchandising, and e-commerce. In 2020, Amazon spent over $13 billion on ads, making it the 2nd largest digital advertiser in the U.S. alone.

The company’s reliance on paid advertising is a double-edged sword. While it allows it to gain significant market share, it also exposes the company to the risks of over-utilization, which can lead to advertising performance being adversely affected. Further, paid advertising is not an exact science; if a company over-spends on advertising, it could jeopardize its financial viability.

The Bottom Line

Overall, Amazon has been able to redefine the nature of e-commerce through its emphasis on digital marketing, brick-and-mortar retail, and a business model focused on maximizing profit, not just sales.

The company’s focus on combining online and offline stores has enabled it to gain significant market share in a highly competitive industry, and its leadership has been rewarded with massive stock price appreciation.