Oct 25, 2021

Three Business Model Patterns Used by Amazon

Business Model Idea
Business Model Pattern
by Maximilian Böger

A Short Overview of Amazon

With the business idea born in a garage, Amazon has evolved into the largest and most influential online retailer. Amazon has separate retail websites for many countries such as USA, France, Canada, India, China, Mexico or Germany. Amazon also offers international shipping to certain other countries for some of its products. The software development centers, the customer service centers, as well as centers for warehousing and fulfillment being the most important divisions are spread across the continents. Along the way, Amazon has inspired and shaped the rest of the retail sector, while revolutionising attitudes to online business and transforming the way people shop.

3 of 11 Business Model Patterns Used By Amazon

Affiliation as a Business Model Pattern

The company's focus in the Affiliation business model is on assisting other parties in marketing products in order to gain from successful transactions. This provides the business with access to a diverse consumer base without the need for additional sales and marketing activities. Affiliates typically operate on a pay-per-sale or pay-per-display basis and are frequently online. A website publisher, for example, may operate as an affiliate by putting banner advertisements from another company on its website in exchange for a commission on 'clicks' or "impressions."
Affiliation has become a critical component of the income strategy. Numerous popular blogs, forums, pricing comparison sites, and product and service directories are significantly reliant on commissions, if not entirely on on them.

How Amazon is Using the Affiliate Business Model Pattern?

Amazon employs the affiliate model to promote both third-party vendor items and their own products by paying promoters to market their products. Amazon can monitor every website visitor to its source through individually trackable links and so has visibility into how much sales are created by affiliates. 

Cash Machine as a Business Model Pattern

The Cash Machine pattern refers to businesses that operate on a negative cash conversion cycle. As indicated by the formula below, the cash conversion cycle is the time during which a business spends and collects cash. More precisely, it refers to the average storage time for inventory, which includes raw materials, work-in-process, finished products, and customer and supplier payment terms that are past due:

Cash conversion cycle = inventory conversion period

+ Receivables conversion period
- Payables conversion period

To maintain a negative cash conversion cycle, a business's revenue must exceed the amount owed to suppliers for purchased goods. Customers are rarely aware of this type of business model. However, the implications for the business are far-reaching. The pattern generates additional liquidity, which can be used for a variety of purposes, including debt repayment and new investment. This enables the business to reduce its interest payments or accelerate growth. Two critical levers to consider when attempting to achieve a negative cash conversion cycle are ensuring that the business obtains generous payment terms from suppliers and ensuring that customers pay promptly. Additionally, a build-to-order strategy or a high stock turnover rate can assist a business in achieving a negative cash conversion cycle by minimizing the time goods are held in inventory.

How Amazon is Using the Cash Machine Business Model Pattern?

In the Amazon online shop, buyers often pay during the check-out process before the things are sent (payment upon receivement possible for a fee). This increases Amazon's liquidity, allowing it to make expansion investments, for example. 

Long Tail as a Business Model Pattern

In comparison to a blockbuster' model, which sells large quantities of a small range of products, the Long Tail business model pattern focuses on selling small quantities of a very large range of products. While the Long Tail has lower margins and lower volume sales of individual products, profits are significant over the long run due to the breadth of products sold. The Long Tail pattern deviates from the classic 80-20 rule, according to which a business typically earns 80% of its profits from 20% of its products. With this model, mass and niche products can generate equal revenue shares, and in some cases, niche products can generate a greater revenue share than mass products. The model enables businesses that sell niche products to differentiate themselves from those that sell blockbuster products and to generate additional revenue. The Long Tail pattern provides customers with the distinct advantage of browsing a much larger, more vibrant range, increasing their chances of discovering products that meet their specific needs. To succeed with the Long Tail model, a business must be capable of efficiently managing distribution costs. More precisely, the cost of marketing a niche product should not be significantly higher than the cost of marketing a blockbuster product. Additionally, customers must be able to locate these specialty items without incurring significant search costs. Intelligent search and recommendation systems that suggest products to customers based on their previous searches and purchases can be instrumental in assisting customers in easily locating the right niche products. Another way to cut down on search costs is to allow customers to design their own products. This concept is implemented in the Mass Customization and User Design business models, which enable customers to modify or even create products from scratch to meet their unique requirements

How Amazon is Using the Long Tail Business Model Pattern?

Amazon offers a wide range of specialized items on its marketplace while keeping prices affordable. As a result, rather than a few high profit items, it enables businesses to address a large audience of prospective consumers via its diverse offering and inexpensive rates. Individual margins may be minimal, but the vast majority of transactions add up to a sizable revenue.

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