Amazon's Business Model

Written by Erina Jain

January 15th, 2026

Table of Contents

Introduction

Amazon operates a complex business operation, that earns from many services, not just online shopping, but running ads, ecommerce, cloud marketing, publishing, and selling subscriptions like Prime. It works like a platform, connecting buyers, sellers, and service-users, all in one place. However, with numerous services like the ones stated above, we can deduce that the business ecosystem of this multinatioanl corporation, to traditional online retail. While the company reports overall profitability, its retail segment often operates on extremely low margins and, at times, incurs losses. This apparent contradiction can be explained by Amazon’s diversified revenue structure, in which different business segments perform distinct economic roles.  In this article, I explore the key ways Amazon generates revenue, key economic strategies (focusing on cost shifting and cross-subsidization), and their impact on competitors, and the economy.

Revenue Streams

Retail

 Amazon’s retail revenue encompasses both physical and online stores (like the ones most people order stuff from). The retail segment includes online stores (the largest contributor, selling anything and everything from electronics to groceries), physical stores (like Amazon Fresh, Amazon Go, and Whole Foods), and the fees it earns from other businesses selling their products on the Amazon Marketplace. This segment is still Amazon’s largest, but services like AWS and advertising are growing faster. In the third quarter of 2025, revenue from online stores hit around $61.5 billion and physical stores $5.6 billion, while overall revenue neared $180 billion, with services making up a significant portion, showing a shift in overall business composition. It’s the primary but shrinking share; it still remains the biggest piece of Amazon’s pie, but services like AWS, advertising, third-party sellers now accounts for 60% of total revenue, while retail, the sector that we usually associate Amazon with, only makes up 40% of its revenue.

Third-Party Marketplace

 A massive shift in Amazon's business model is the growth of its Third-Party (3P) Marketplace. Unlike the retail segment, Amazon does not own the products sold here; instead, it provides the platform for independent sellers. Amazon earns revenue through Third-Party Seller Services, which include referral fees, commissions, and shipping fees from the 'Fulfillment by Amazon' (FBA) program. In Q3 2025, this segment generated $42.5 billion in revenue, growing 12.2% year-over-year. By 2026, third-party sellers accounted for 62% of all physical units sold on Amazon, highlighting its transition from a simple store to a global commerce infrastructure.

AWS

 Amazon Web Services, launched in 2006, provides cloud services to businesses, government agencies, and academic institutions to store information and deliver content. AWS also provides an infrastructure platform in the cloud(online) for a plethora of solutions such as hosting applications and websites that provide businesses with information technology (IT), and content delivery. Amazon controls about a third of the global cloud market, substantially more than its next closest competitor. AWS’s biggest rivals are Microsoft Corp.’s Azure and Alphabet Inc.’s Google Cloud. In the third quarter of 2025 (Q3 2025), Amazon Web Services (AWS) generated $33 billion in revenue, a 20% increase year-over-year. This figure exceeded analysts' expectations, its strong performance driven by the demand for cloud services and increased investments in AI infrastructure, including Amazon's custom Trainium2 AI chips.

Advertising

 Amazon’s advertising sector is a massive and rapidly growing segment, its total revenue clocking in at approximately $56 billion in 2024, with strong momentum continuing into 2025, reaching around $17.7 billion in Q3 2025 (24% YoY) and projected to exceed $60 billion for the full year. Brands bid on keywords to have their products appear at the top of Amazon's search results (e.g., Sponsored Products). The reason why this works so well for Amazon is because when customers search up certain keywords and come across a brand’s product, they are already looking to buy the product, so the ad doesn’t feel forced, enabling customers to buy products easily, a practice, by which of course, Amazon earns profit. Advertisers run visual ads across Amazon's properties like Prime Video (where ads are shown to the millions of subscribers on the streaming platform), and Twitch, the popular gaming streaming service. Amazon also allows advertisers to buy ad space across many other streaming platforms like Netflix, Disney+, etc., a powerful advertising tool by the name of DSP, Demand-side platform. Amazon also uses its vast consumer data, acquired through tracking consumer searches, and consumer details. It uses this data to help advertisers reach specific audiences.

Note: Amazon also generates value through platform monetisation, though this article focuses on cost shifting and cross-subsidisation.

Business Strategies

Cross Subsidization

Amazon employs a strategy of cross-subsidization, where the losses incurred from its aggressive Amazon Retail businesses, are seamlessly covered by significant profits acquired from its other segments, such as third-party Marketplace, AWS, and advertising. These segments are less competitive, enabling Amazon to achieve huger profit margins, surpassing the losses, and helping it achieve an overall profit.

For example, in 2025, AWS only accounts for 18% of Amazons total net sales, however at the same time, AWS was responsible for 60% of the companys overall profit, a disproportionately high amount. Its retail segment might have brought in most of the revenue but didn’t create as much profit as AWS and other less competitive sectors. This proves that Amazon's high-margin cloud business effectively subsidizes lower-margin retail operations, allowing the company to invest in "loss-leading" strategies like steep Prime discounts and free shipping. This model allows Amazon to offer lower prices to attract more customers, driving up sales volume, and attracting more sellers, and introducing more products in its versatile range.

This powerful flywheel effect creates the “Red Queen” effect for third-party sellers, placing them in a difficult position. They must continuously lower their prices and introduce new deals to stay in the competiton, but they often lack the resources required to manufacture products, keeping operating cost the same but decreasing revenue, therefore depriving them of profit and resources.  This strategy also challenges traditional retailers and competitiors, by allowing Amazon to operate with razor-thin margins or even temporary losses, that is almost impossible for pure-play retailers and competitors to match without severely putting them at a risk, and draining their supply, forcing immense pricing pressure on rivals. 

Cost Shifting

Amazon's "cost shifting" strategy is a core part of its business model where it transfers significant operational costs, such as shipping, storage, and returns processing, onto third-party sellers while maintaining low prices and a high level of convenience for the end consumer.

For example, FBA (Fulfillment by Amazon) is a service provided by Amazon to sellers for storing, packaging, and shipping their products. Sellers pay a percentage of each sale (referral fee) to Amazon for the sservice. In 2026, U.S. FBA fees will increase by an average of $0.08 per unit, and Amazon states on their “Seller Central” that they will adjust their fees according to their costs, and investing varied fulfillment services, investing in improvements like enhanced forecasting, automation for faster delivery, and improved returns processing, while also reducing defects and speeding up removals processing. This will enable Amazon to deliver goods faster to their customers, and provide fees as low as they can to the satisfaction of sellers, who can then produce more (and sell more, allowing Amazon to earn more revenue); a win-win. And, these fees do not put extra costs of shipping and distributing to Amazon, earning them more profit per unit sold; a win-win-win.

Amazon is also shifting from 1P (one party, Amazon itself producing, selling, and delivering every product) to 3P (third party, where different companies make the product, supply it to Amazon, then Amazon Marketplace leads to consumers, who buy the product and Amazon ships and delivers it right to their doorstep). This strategy shifts the costs of production from Amazon to the external sellers. When selling via the 1P model (wholesale), Amazon absorbs all variable fulfillment costs; in the 3P model, these costs are allocated to the seller, maximizing Amazon's margins.

The "Amazon Effect" refers to the significant disruption traditional retail businesses face due to Amazon's innovative business model, characterized by exceptional logistics, customer-centric strategies, and aggressive pricing. As consumers increasingly expect rapid delivery, competitive pricing, and seamless shopping experiences, traditional retailers must rapidly adapt to maintain their market positions.

Economic Impact

Consumer surplus

Amazon’s competitive pricing and extensive range of products, means that consumers can find a lot of good products at an “amazing deal”, increasing the value they receive beyond what they pay. This encourages consumers to buy more, and constant “sales” and deals create a FOMO effect for consumers, motivating them to buy products, which positively affects the business. The Amazon Prime subscription model bundles services like free, fast shipping and digital media content, reducing the effective cost per transaction and giving members(consumers) substantial perceived value (surplus) for a flat annual fee.

Economies of scale

  Amazon's massive scale is a cornerstone of its microeconomic advantage, leading to significant cost efficiencies that are difficult for competitors to match. Amazon usually purchases in bulk from its suppliers, enabling it to negotiate a lower average cost per unit, which are then passed down to consumers as lower (more competitive) prices. AWS also generates profit, that subsidizes retail costs (discussed earlier) and reinforces the competitive edge and allowing it to offer lower prices to its consumers (a “better deal”)

Wage Shifts and Job Creation

  Amazon has raised its average starting wage for fulfillment and transportation roles to over $20.50–$23.00 per hour as of 2026, which is more than triple the federal minimum wage. This often forces local competitors to increase their own wages to attract talent. Since 2010, Amazon has contributed to the creation of an estimated 2 million indirect jobs and nearly 1 million direct U.S. employees. As the second-largest private employer in the U.S., Amazon's compensation strategies significantly impact regional and national labor markets.

Deflation and Price Stability

  The low prices set by Amazon attract more consumers to “choose” Amazon over other stores like Walmart and BestBuy to lower their prices, setting a deflationary environment. For example, in 2010, when Amazon’s low prices started a price war, Walmart responded by doubling down on its price range, by promising more deals and increasing price rollbacks on thousands of items, as seen in 2024. On the contrary, between 2024-2025, while Walmart focused heavily on price cuts for essentials, reports indicated Amazon sometimes raises prices on low-cost items due to shipping costs, giving Walmart an opening to appear cheaper on specific goods.

Transaction Costs

Transaction Costs for Consumers: 

Amazon’s platform is designed to reduce transaction costs for consumers, Amazon’s website layout and enhanced features minimize a common hurdle consumers face while shopping online; verified reviews, product pictures and details, standardized product pages, and “One-click” payments eliminate the need for negotiation or complex decision-making processes. Amazon's algorithms and personalized tools like Rufus (AI shopping assistant) surface relevant products and price comparisons instantly, keeping consumers engaged and constantly buying more while reducing their independent costs. Subscriptions like Amazon Prime bundle shipping and returns, removing the "hidden" cost of logistics for the individual buyer. For sellers, it is quite the opposite. Some third-party merchants face higher costs; for example, in December 2022, Amazon offered a series of binding commitments to change its business practices after the European Commission fined the company when it used non-public seller data to promote its own brands, effectively raising the cost of competition for third-party sellers.

Transaction Costs for Sellers:

Amazon's business model for third-party sellers involves charging a combination of account fees, referral fees (commission), and fulfillment fees, which together can average 20-30% of an item's total sales price. Sellers on Amazon can expect to pay various transaction costs depending on their chosen selling plan and fulfillment method. More on this has been discussed earlier in this article.

Conclusion

As the Amazon Effect continues to shape the retail landscape, businesses must remain agile and innovative to survive. Embracing technological advancements, refining supply chain operations, and offering unique value propositions will be crucial for retailers to differentiate themselves in an increasingly digital-first economy. The key to long-term success lies in leveraging data-driven strategies, customer-centric innovations, and adaptive business models. Companies that recognize and respond to these shifts proactively will not only survive but thrive in the evolving world of retail.

Amazon continues to behave like a retailer while building adjacent service businesses that scale faster and deliver better margins. Retail remains essential as the first customer for fulfillment and advertising services, but Amazon’s real business has become selling the infrastructure that powers everyone else’s commerce.

References

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