Amazon Business Model & Revenue Model to Consider For Own Startup

The Amazon business model started as a straightform e-commerce model. It took over a decade to embrace the razor and blades business model it employs so effectively today. This example is vital to review for any startup owner whether it is content-based or e-commerce. 

In a nutshell, the “razor” is something sold at a cost or even at a loss to a customer. Then, the “blades” are complementary products to a razor and are sold at high-profit margins. Also, the razor makes your customers loyal to your brand. They get locked into your ecosystem of goods or services. And, the longer customers use your products, the more they buy. It makes the business sustainable over time, and revenues take a recurring nature. This is much more efficient than one-off transactions. 

In this blog post, we’ll review Amazon’s transition into the razor and blades model. We’ll see how Amazon’s business model evolved. Lastly, we’ll present some other businesses that employ the razor and blades model.

What is the Razor and Blades Business Model? How did it Develop?

In the razor and blades business model, there are a durable ‘razor’ and a consumable ‘blade’. One serves the purpose of attracting customers. This good locks the customer in the ecosystem of goods or a platform if we talk about services. Then a paired set of consumables is sold at a high profit margin to generate profit. 

If you wonder if the situation can be reversed: selling consumables at low cost and a durable at a high-profit margin, the answer is yes. There is a reversed razor and blades model. If you are also curious to learn about other business & revenue models, check out the article Top 10 Business Models to Consider for your startup.

Development

• The razor and blades business model had its evolutionary stages. It originated in the product’s market with Gillette razors and blades in 1895. It took its name from there. 
• Then, in the 1930s, this model spread to other goods including such goods as pens.
• In 1952, the term made it to the words of academics – economist Milton Friedman used the term in his book. 
• The 1970s were the times when the business model started to be flooded by competition. The value of patents and trademarks started to rise because competitors needed only to replicate consumables to match the durables. So, companies started to match Gillette’s blades and other items to fit into the original low-cost durable. 
• In the 1980s, computer-related industries started to implement this model with printers, for example. Then, the model spread to coffee machines, locked-in mobile phones, and so on. 
• In the 2010s, the model was first applied by digital businesses like Amazon and Dollar Shave Club.

The Amazon Business Model at Origin

For any startup owner, it is always much more exciting to dive into the roots of today’s great companies rather than dissect today’s complex cost-revenue structure. What is it that drives an owner to develop the company, take risks, and push forward?

• With Airb’n’b, it was a necessity.
• With TikTok, it was a calculated business venture of an already established company.
• With Glassdoor, it was an implementation of a tested philosophy in a new domain.  

However, with Amazon, it was simply statistics – and not really complex one. Simply, statistics on the Internet usage.

In one interview, Jeff Bezos said that in 1994 Internet usage grew by 2300%. This made him quit his investment firm job and he founded his startup in June 1994. And a year later, on July 16, 1995, Jeff Bezos launched the Amazon website.

Company’s Vision From the Historic CNBC Interview (Pre-Dot-Com Crisis)

In an interview right before the dot-com bubble, Jeff Bezos acquired fame for aiming at the best customer experience. The interview was quite curious because it was the one where the interviewer heavily scrutinized Jess Bezos’s business moves. It almost felt like the interviewer didn’t believe in the success of Amazon. One of the interviewer’s statements went just like this:

“…you are making an intense gamble here which is twofold. One that you can run this number of businesses different businesses well. And two that you can make money by selling vast volumes of products and essentially razor-thin profit margins.”

The two most important statements to respond to that were:

1. “There is never any misalignment between customer interests and shareholder interests. I believe …you can focus obsessively enough on customer experience, selection, ease of use, low prices, more information to make purchase decisions with. .. you can give customers all that plus great customer service, and with our toys and electronics we have a 30-day return policy…””
2. “… scale is important in this business. And you need scale also to offer the lowest prices and the best customer service to people”

As a result, during the dot-com bubble, Amazon’s stock price grew by 4,180% percent from a mere $2.5 to $107 over a 2-year period.

How did the Amazon Business Model Implement The Razor and Blades Business Model?

So having achieved the scale of business, Amazon needed more ways to generate revenues. As it follows from the interview, the large scale was cost-intensive and profit margins were generally slim. In addition, a high level of customer service came at a cost. So, here is what Amazon introduced.

Electronic Devices: Amazon Kindle e-book readers and Amazon Fire Tablets

Amazon sold these gadgets pricing them quite low and often undercutting competitors. The goal was to make sure as many customers could have it as possible. Then, they were more likely to purchase e-books and subscriptions from Amazon thanks to the integration of these into gadgets. Both Kindle and Fire came with 

• pre-installed apps, 
• notifications about Amazon goods and services, 
• updates on promotions and special offers, 
• benefits of Amazon Prime, and 
• direct access to the Amazon store.

Amazon Echo is a Smart Speaker aka “Alexa”

Speakers were integrated with Amazon so that the customers could have an easier and more seamless experience shopping with voice. In addition, it was also integrated with other Amazon services like Music and Audible.

Amazon Prime

The value of the Prime membership was extremely competitive against the market. Customers with prime memberships would make more purchases and with higher frequency. Also, since they get good value on delivery, they would often opt for higher-priced items.

Amazon Private Labels and AmazonBasics

This is a standard practice of retail chains. They determine the best-selling items and then outsource to third-party manufacturers to produce similar goods. They sell those at cheaper prices but make a profit at scale. Amazon owns more than 100 private labels across a variety of categories. In addition, this makes a ‘razor’ for their affordable customer base. Same as with Amazon Prime. The customers save money on ‘basic’ items and then allow themselves to buy something high-end.

AWS (Amazon Web Services)

Amazon provides free-tier services and low-cost tiers for some services. They use strategic pricing to cap the ‘free’ usage so that it encourages customers to pay for extra services. But the true revenues come from enterprise users.

The Amazon Business Model & Revenue Model

Today, Amazon is not only an online one-stop store, but a marketplace. The business canvas below considers today’s evolved Amazon business model. It incorporates its razor and blades business model implementation.

Value Proposition of the Amazon Business Model

Thanks to the razor and blades business model, Amazon is able to offer its customers both: a combination of low-priced goods and higher-end items. It creates an opportunity to buy basics at the most competitive prices (the “razor”) and splurge on higher-end items (the “blades”). In addition, since Amazon includes prime membership in its ‘razor’ offering, customers can enjoy fast delivery and great service at low cost. 

Having secured a large customer base, Amazon can offer its sellers a large marketplace with millions of customers. In addition, it provides its fulfillment and shipping services which are part of blades within the razor and blades business model in the marketplace line of business. 

Customer Segments

• Looking at things at large, there are prime and non-prime members customer segments.
• In terms of AWS services, there are individual users and enterprises. 
• When it comes to sellers, there are small entrepreneurs, medium businesses, and large enterprises. 

Channels of the Amazon Business Model

Amazon is not a pure Internet play as it was highlighted in the interview. After all, Amazon has distribution centers, physical stores, and other non-digital business elements. So, the channels include both digital and non-digital ones:

• web portals and apps; 
• fulfillment centers and shipment logistics; 
• a variety of devices that enable customers to shop. They are Echo devices, Kindle, and Fire tablets.

Customer Relationships

A lot of companies strive to create a self-service platform. Since they need to provide competitively priced services, hiring a customer support team might seem pricey. Yet, Amazon, in addition to its self-service portal, maintains an online chat. Its commitment to exceptional customer service is maintained end-to-end according to Jeff Bezos’s business vision. 

Key Resources

Amazon maintains a range of physical and digital resources. They include fulfillment facilities, infrastructure for AWS, physical stores, and web technology.

Key Activities of the Amazon Business Model

Customer service is viewed end-to-end, so constant improvements are performed all throughout. Starting with fulfillment centers and product sourcing to the online experience and shipping. Each department constantly improves its performance in order to increase customer service. It concerns the customer service department as much as the inventory department responsible for handling and storing products. Innovation is also a continuous activity, especially in the context of AWS and online store experience. 

Key Partners

• Having more than 100 Amazon own brands, Amazon partners with a variety of suppliers and manufacturers.
• Having more than 60% of revenue come from third-party sellers, Amazon considers them to be its partners. 
• Amazon partners with digital content owners and content providers for its online digital content like Audible and services like Music.

Amazon Revenue Model: Revenues and Costs

In terms of revenues, the sources of revenues are as follows:

• Online store sales and sales from own brands;
• Subscriptions and AWS services;
• Marketplace fees;
• Advertising;
• Sales from physical stores.

In terms of numbers, Amazon generates around $1.6 billion revenues daily. The excerpt from the annual statement is provided below. Numbers are in millions. Net sales include subscriptions, marketplace fees, advertising, and other sources mentioned above. In 2023, Amazon almost reached the $575 billion mark.

In terms of costs, Amazon operates a complex system, and its costs of operations amount to about 90% of its revenues. Cost of sales primarily includes cost of goods sold, fulfillment and shipping fees, distribution centers costs, employee salaries, and also currency fluctuations. 

Other Businesses That Follow the Razor and Blades Business Model

The razor and blades business model is common in a variety of businesses today. Ensuring customer loyalty and locking in a customer with a low-cost durable is a quite common strategy to cement a market share. Here is a list of other companies implementing this model like in the Amazon Business Model. And consider these Startup Services if you see your startup joining the list!

Dollar Shave Club

Same as in the Amazon business model, Kindle and Amazon Fire tablets play the role of a razor, in Dollar Shave Club the razor is the actual affordable razor that attracts the target customers. As blades, Dollar Shave Club offers a variety of consumables. But it does not just sell razor blades – it offers them on a subscription basis. Plus, other premium shaving products are available at high-profit margins.

Nespresso

Again similar to Amazon Kindle and other ‘razor’ devices, Nespresso sells its coffee machine priced competitively. Once a customer purchases a coffee machine, there is a particular kind of coffee pod that complements this machine. Coffee pods are the ‘blades’ for the Nespresso business model.

Nintendo

Same as Amazon Prime, Nintendo’s consoles are the ‘razor’ that shortcircuit customer paths to Nintendo’s gaming ecosystem. Customers owning Nintendo’s Switch console can still buy games from other sources. 

• Yet, the first-party games enjoy exclusive status and are promoted within. 
• There is a special subscription with extra benefits. 
• In addition, there is a range of accessories and add-ons to complement the Switch console. 

Apple

Well, one wouldn’t call Apple’s device prices a ‘razor’ sold at a cost or at a loss. However, they organize a similar ecosystem of premium ‘blades’. It includes the App Store, subscriptions, accessories, and Apple Care. Apple’s business model can still be called the razor and blades business model due to its ecosystem lock-in factor.

Microsoft

Here, the razor and blades business model comes into play with the Microsoft gaming segment. Microsoft’s Xbox is produced by Microsoft Gaming which is a division of Microsoft. Similar to Nintendo, Microsoft’s console comes with integration into Xbox Cloud Gaming and other online services.

FAQs: Understanding Amazon’s Business Model & Razor and Blades Strategy