In the past five years Amazon has had an average profit margin of a measly 2.27%. For comparison, Facebook’s average profit margin for the last five years was 31.12%, Apple’s was 21.49%, and Google’s was 20.18%. (Source:YCharts.com).
Conventional business wisdom said that a business isn’t sustainable with such low profits, but Amazon caught competitors off-guard as it blazed a new trail for business success with two basic ideas:
(1) Pour earnings back into the company to improve itself in ways that make Amazon increasingly more desirable to customers.
(2) Keep margins razor thin to keep competitors under an incessant long term price pressure that they aren’t prepared to sustain.
By the way, most of Amazon’s earnings come from its hosting business, AWS, not its retail businesses. AWS subsidizes Amazon’s retail business, allowing Amazon to keep retail prices lower than competitors can and still be profitable.
Over time, Amazon’s innovation and ever improving infrastructure has made shopping on its platform more and more attractive to customers. Competitors were slow to realize Amazon’s advantages, and now that they have, most don’t have the cash and time to catch up.
