Some companies have a small clientele and a huge capacity for making money. Others have an enormous customer base coupled with a long-term plan that goes beyond making as much money as possible as quickly as possible. Amazon.com Inc. (AMZN) is unusual among the largest companies in the United States ranked by market capitalization, in that its profit margins are tiny, but its stock is phenomenally expensive. For years and years, Amazon lost money without apology.

Predating even its contemporaries eBay Inc. (EBAY) (founded 1995) and Google Inc. (GOOG) (1998), Amazon opened for business in 1994 in a small West Coast office with a skeletal staff and a tight budget. Since then the company has focused on growth almost exclusively, showing just enough profit to keep shareholders happy. The existing ones should be ecstatic: the stock trades at more than 500 times earnings. Large short-term payables are a necessary part of Amazon’s business model, meaning that the company’s book value is somewhere south of $10 billion, barely one-twentieth that of America’s biggest banks and petrochemical corporations. (For related reading, see What's At Stake As Google Takes On Amazon.)

It’s hardly worth mentioning that Amazon founder Jeff Bezos, the only chief executive officer the company has ever had, loves and lives to defy convention. If he didn’t, Amazon would be an unremarkable bricks-and-mortar bookstore in downtown Seattle, rather than the one company most responsible for the demise of that type of business.

Revolutionizing Retail

Amazon seems to be the one company most beholden to the idea of trying something novel and worrying about its impact on finances later. In Bezos’s own words, “nothing gives us more pleasure at Amazon than ‘reinventing normal.’” The company breaks even on Kindles, instead making money on the content delivered to each unit. Amazon does this while simultaneously revolutionizing the way books are read, no less – turning them from fragile physical objects into easily transportable digital files.

Take Amazon’s unmanned drone experiment, which is still in the research-and-development stages. If it succeeds, not only will Amazon make the idea of two-day delivery sound glacial, the company will do the impossible – attach a positive connotation to the word “drone.” Amazon recently introduced grocery delivery (in the San Francisco, Los Angeles and Seattle areas) for $300 annually, apparently undaunted by the profound failure of that venture when attempted by others in the late 1990s. Will it be sustainable this time around? If any company is qualified to answer that question, it’s the one that popularized annual flat-fee delivery for non-perishable items in the form of its Amazon Prime membership program. “I already paid, I might as well order some more stuff” is the rallying cry of Amazon’s best customers.

Primed For Profit?

For a literal answer to the question “How does Amazon make money,” it’s not that simple. Revenue is one thing, profits (on famously low margins) something else. Last year’s $274 million in net income came from incalculable little sources: a pillow sham here, a pair of pumps there (in 2009, Amazon purchased Zappos.com). But perhaps Amazon’s most profitable endeavor to date is something blessedly low-tech – the one-price shipping (and related benefits) of Amazon Prime. (For more on this topic, see Is Amazon Prime Still The Best Deal In Tech?)

For the unfamiliar, buying a Prime subscription includes access to digital content unavailable elsewhere – TV shows watchable on certain versions of the Kindle, for instance. In a world in which certain services couldn’t subsidize others, Amazon would be losing money on such an offer. According to a Time magazine report, the average Prime subscriber gets $55 worth of shipping and $35 worth of digital content for the $79 price. The math doesn’t appear to work out.

Why 244M Customers Just Isn't Enough

To quote David Letterman, “We lose money on every sale, but we make it up in volume.” Well, Amazon actually does. That average Prime customer is costing the company $11 a year, but in return is buying an extra $719 in merchandise when compared to the average non-Prime customer. It’s $1,224 annually for the former, $505 for the latter, and even with Amazon’s slim profit margins that’s still money in the bank. At least one analyst believes that the correlation between Prime price and money subsequently spent is perfectly inverse, and that if Prime were free, Amazon’s creative devastation of the physical retail realm would accelerate. The company claims at least 20 million of those high-volume Prime customers, an ever-growing proportion of the whole. Which, by the way, is 244 million customers. That total likely makes Bezos cringe – after all, it means 97% of the planet isn’t buying from Amazon.

The Bottom Line

Apple has the celebratory product releases and slavish devotion. Google has the ubiquity, its tentacles all over our online lives. But only Amazon is the company that – more than any other – redefined commerce for a world no longer content to shop in person when there’s no compelling reason to do so. Leveraging itself into a position of market dominance, Amazon has done so to the extent that it’s now practically synonymous with online retail. With unparalleled convenience and famously receptive customer service, Amazon seems bound to continue its prosperous growth in its third decade of existence and beyond.

Related Articles
  1. Stock Analysis

    3 Predictions for Amazon in 2016 (AMZN)

    Learn the top three predictions for Amazon in 2016 as the company comes off an exceptional year in terms of revenue and expands into new markets.
  2. Investing News

    How Disney (DIS) Continues to Deliver

    The Walt Disney Co. is only an animation studio in the same way that Johnson & Johnson is only a baby powder manufacturer.
  3. Investing News

    How Merck Found Its Way Into Millions Of Medicine Cabinets

    With over $40 billion in revenue from pharmaceutical sales, there's a good chance that you'll be very grateful for one of Merck & Co.'s drugs some day.
  4. Investing News

    What's At Stake As Google Takes On Amazon?

    Google's decision to go head-to-head with Amazon with a new same-day shopping service isn't just about cheap Cheerios, coffeemakers, and clothing.
  5. Investing News

    This Company's Dividend History Is The Real Thing

    Take water. Add some sugar, a little carbon dioxide and some flavoring. Sell at a gigantic markup. It sounds almost too simple to work, and yet Atlanta-based Coca-Cola Co. has remained a staple ...
  6. Investing News

    Is Amazon Prime Still The Best Deal In Tech?

    If you asked that question a week ago, when Seattle-based Amazon.com, Inc. (Nasdaq:AMZN) raised its annual fee for Amazon Prime to $99 from $79, you might have heard a far different answer.
  7. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  8. Stock Analysis

    JCPenney's Path To Profitability (JCP)

    Learn about what J.C. Penney's management team has been doing to profitably grow its business as the company recovers from years of revenue declines.
  9. Home & Auto

    The Latest Airbag Recalls: What to Do

    The latest warnings are from Honda/Acura and Dodge. How to look up your car – and what to do if you find it on the recall list.
  10. Economics

    What is a Complement?

    A good or service that’s used in conjunction with another good or service is a complement.
RELATED FAQS
  1. How does a cost-of-living adjustment (COLA) affect my salary?

    Some companies build salary adjustments into their compensation structures to offset the effects of inflation on their employees. ... Read Full Answer >>
  2. Does QVC accept debit cards?

    QVC accepts debit card payments as one of its many payment options. The company, which is the world’s leading video and e-commerce ... Read Full Answer >>
  3. Where can you buy NetSpend reload packs?

    You can only purchase NetSpend reload packs at Giant Eagle, Albertsons, Roundy's and Pathmark supermarkets. NetSpend cards ... Read Full Answer >>
  4. Does QVC charge sales tax?

    QVC, an American TV network, is registered with states to collect sales or use tax on taxable items. QVC is also required ... Read Full Answer >>
  5. Can you pay off a Walmart credit card in store? (WMT)

    Wal-Mart Stores, Inc. (NYSE: WMT) allows multiple payment options for its credit cards, including in-store payments. The ... Read Full Answer >>
  6. Does Walmart take international credit cards?

    Foreign visitors to Walmart locations in the United States can use their credit cards issued by banks outside of the U.S. ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center