And I submit to you that that second question is actually the more important of the two � because you can build a business strategy around the things that are stable in time. They want fast delivery; they want vast selection. And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now.
When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it. But how much do we really know about the things that make most of their revenues?
They have been expanding their network largely over time. But since it has seen vastly accelerated growth not just in the number of their facilities but also in the increasing type of facilities. From fulfilment centres to sortation and delivery centres to Amazon Prime air planes and air hubs. They receipt goods coming from vendors, often from overseas. As such they are close to ports and borders. They act as buffers and package the incoming goods into truckloads and replenish fulfilment centres as needed.
Amazon has over fulfilment centres of 8 generations. They are at the heart of storing and distributing their goods. In the early days, they were built at locations chosen to avoid sales tax. Passing on the savings from sales tax onto the customer was one of their competitive advantages that was possibly instrumental in getting them through the dot-com bubble burst. Newer fulfilment centres are located closer to population-dense areas to reduce outbound transportation costs.
Amazon still tries to negotiate certain tax benefits with local governments for bringing jobs to their area. Must read for anyone who wants to understand Amazon! From onward, Amazon started to introduce so called sortation centres and delivery stations. Both serve the purpose of gaining greater control over delivery cost, delivery speed and customer experience.
Amazon utilises trucking partners to move goods within its warehouse network i. Delivery stations make the next step to the customer. They are often positioned in metropolitan areas often in proximity to airports and are smaller than sortation centres. These facilities help to gain more control over the last-mile logistics. In , Amazon launched Prime Now. Amazon Prime Now has its own set of storage buildings. Amazon Pantry offers groceries and household goods. It requires special infrastructure in cold and ambient storage centres.
Here is more on how Amazon grows into various product categories. These items were previously seen as bad candidates for online sales due to the cost of shipping them, as a consequence of their size to cost ratio. Get the knowledge you need to develop innovation ideas you can be proud of and actually work! You might be wondering why there are so many different types of facilities? Why does Amazon have fulfilment centres, sortation centres, delivery stations and more? They sure add to the fixed cost base.
The costs added by new facilities and with that some inventory duplication need to be justified by savings on transport costs.
Time-tested supply chain fundamentals show the relationship between these costs with the number of facilities increasing. Now, this number comes from a study focusing on China. We can clearly see that it is not negligible. It makes clear that there will be a tipping point where it makes sense to start a delivery centre Amazon does not necesserily own all their facilities but leases some as well. It is a trade-off between capex and lower variable costs.
The right chart shows that last-mile costs can be a significant part in overall transportation costs of parcel delivery costs. The left chart shows that it requires scale to do this cheaper than an outsourced solution. The breakeven point will depend on many factors such as population density, etc [source: AtKerney study, pdf , China] The proximity of the last dispatching station to the served area is a big cost driver.
Another key variable is the time between individual deliveries which is where route optimisation comes into play. Amazon has started using Delivery Service Partners more below which � depending on the number of vans and employees � serve up to 40 optimised routes.
These partners operate from the respective delivery centres described above. Whenever you see Amazon extending their own infrastructure onto others this principle is the explanation. Higher utilisation of high fixed-cost assets by opening it to external parties helps to get to scale faster.
But they are still a high fixed-cost business with all their fulfilment infrastructure. Being able to increase the number of delivered packages thus improves their contribution margin ratios. Scale helps to improve contribution margin ratios. But Amazon does the next step and opens up their infrastructure to others to increase volume further and thus make revenues to improve contribution margin ratios more. You will see a number of examples below Fulfilment by Amazon, Shipping with Amazon, etc.
You will get an email notification of new articles roughly once a month, no spam ever, plus unsubscribe anytime. It is packed with valuable innovation knowledge that can help you to develop innovation ideas you can be proud of. Amazon Marketplace allows ordering 3rd party i. This includes:. Amazon also provides a Marketplace for services. I have described service sharing platforms previously which is why I am keeping short here.
Amazon Marketplaces are popular with small and medium-sized businesses SMEs. Amazon Marketplace falls under the platform business model that I have described at length in many articles here is an overview. It brings together the customer on one side and the merchant on the other side. Merchants who are sell through Amazon Marketplace pay fees that fall under the platform business model. Those who use FBA pay additional fees. Fees under the platform business model are a percentage on the sales and are called a referral fee.
Charging a percentage of the transaction value is the most common revenue model for platform business models. Underlying economic principles underpinning the business model are direct and indirect network effects. The indirect network effects come to play in the Amazon Marketplace where more merchants attract more buyers and more buyers attract more merchants.
I have described indirect network effects here and here within the complete guide to the platform business model. If the merchant chooses the fulfilment by Amazon FBA option, then it also falls under the Amazon service business model. This incurs separate fees. The pricing depends on a few factors with the size of the good s being the key driver of the costs. Here is a pricing table. Extension of assets to the external customers as done in the case of FBA falls under the contribution margin principle described above.
If merchants decide to advertise on Amazon, they pay to rank high at the top or very close to the top in the search results.
Now that Amazon is the dominant online retailer in the US and some other countries, they start expanding into other business areas.
Brick-and-mortar stores are one of them. Amazon Go is a new shopping experience with no queues and no checkout interactions. Using the Amazon Go app to check-in on entry, customers can just grab the items they need and walk out without using a check-out counter. As of July , there is one Amazon Go store in operation and rumour has it that 6 others are planned for Amazon Books is a brick-and-mortar bookstore that had its debut in There are currently around 20 Books stores around with a few opening every couple of months.
Amazon features their own electronics Kindle, Fire, Echo, etc as well as books and other media. I have described the Amazon Fresh infrastructure above.
It has a delivery service described below and more recently a pick-up service. While not a physical store in the traditional sense, it now allows self-pickup in certain locations within 15 minutes of the customer ordering through the app. In , Amazon acquired Whole Foods Market who have their own set of distribution centres and shops.
Some have wondered why Amazon would go into the brick-and-mortar space when their strength is the online retail. But Amazon is simply a company that combines things in innovative ways. Some people find transportation very interesting, others � not so much. Drones are part of Amazon Prime Air and an exciting innovation idea for bridging the last-mile. You sure have heard about this many times.
A similar last-mile idea are self-driving robots that several companies experiment with. A recent Amazon patent covers driverless delivery vehicles, such as drones and trucks. Amazon key is a clever and secure way to let a delivery person into your home. This can avoid the typical problem of having to wait for a package. The system is has a camera and a smart lock. When the delivery person arrives they send a request via the app.
The owner then can grant access.
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