Question 1

Cost structure refers to the various types of expenses a business incurs and is typically
composed of fixed and variable costs.  Fixed costs are costs that remain unchanged
regardless of the amount of output a company produces, while variable costs change with
production volume.
Operating a business must incur some kind of costs, whether it is a retail business or
service provider.  Cost structures differ between retailers and service providers, thus the
expense accounts appearing on a financial statement depend on the cost objects, such as a
product, service, project, customer, or business activity.  Even within a company, cost
structure may vary between product lines, divisions, or business units, due to the distinct
types of activities they perform.

Amazon is a fascinating company to study from the point of understanding a business

model, for it is continually evolving. From being an online book retailer to an auction
platform, a marketplace and now with it’s focus on logistics, Amazon has consistently
reinvented itself to stay ahead of competition. Regardless of whichever business the firm
has entered however, it’s customer value proposition has remained consistent to
delivering price, convenience & variety.
To deliver on it’s customer value proposition, Amazon’s business model has two
overarching objectives – to maximize revenue through diverse business streams, given
the commoditized nature of the retail industry, and to minimize costs through an efficient
cost structure.
Amazon’s objective of revenue maximization is executed through a focus on:
Customer relationships: Customers are well-served by automated and self-service options
that enable the low price point the firm strives for and relationships are further
strengthened as Amazon focuses on service & customization.
Customer segmentation: Though largely a mass market retailer, Amazon caters to
different types of consumers – shoppers, sellers, traders, developers – with platforms
catering to the needs of each segment
Channels: By implementing different platforms – websites, apps, physical delivery points
– Amazon delivers on it’s promise of convenience to each of the customer segments
described above
An efficient cost structure is enabled by it’s:
Partner network: A large ecosystem of suppliers, developers, logistics companies and
third party service providers that enable Amazon to negotiate for low costs.
Investment in key activities: Optimizing order fulfillment, product development,
promotions etc. helps increase efficiency
Access to key resources: Investment in latest technology systems and infrastructure
results in streamlined operations.
Given the two objectives, we would naturally conclude that the firm’s effectiveness in
executing it’s business model should be measured by it’s financial performance, namely
margins. Based on this, we would conclude that Amazon with it’s razor thin margins
(0.3% last quarter), the lowest among it’s peers) has been doing a poor job however,
Amazon says that this is in fact a strategic decision. By ensuring it reports low margins,
the firm believes it keeps competition at bay and instead, focuses on investing it’s
earnings into new avenues for growth.
So then what is the right metric to evaluate performance then? Amazon says we should
look at growth (the very center of Bezos’ diagram) and with a ~20% YOY growth rate
(industry average is ~13%), I would say they are performing extremely well. Growth
implies continuous investment and Amazon seems to use it’s cash to invest in capex
rather than report earnings. Investors seem to buy this rationale too, with the stock
moving up despite the company reporting losses.
To summarize Amazon’s business strategy, I will borrow an analogy I found apt: “A
profitless business model is one in which it costs you $2 to make a glass of lemonade but
you have to sell it for $1 a glass at your lemonade stand. But if you sell a glass of
lemonade for $2 and it only costs you $1 to make it, and you decide business is so great
you’re going to build a lemonade stand on every street corner in the world so you can
eventually afford to move humanity into outer space or buy a newspaper in your spare
time, and that requires you to invest all your profits in buying up some lemon fields and
timber to set up lemonade franchises on every street corner, that sounds like many things,
but it doesn’t sound like a charitable organization”.
If we therefore accept that Amazon is profitable and it is the focus of Amazon’s business
model to keep margins (artificially) low, it implies that Amazon’s operating model must
deliver on this strategy effectively. It does in fact do so in many ways, as can be gauged
from the examples below:
Infrastructure:
Amazon has seemingly optimized the ratio of workers to machines in it’s warehouses
Warehouse locations are chosen after much deliberation to optimize cost of logistics vs
rental.

Processes:
Amazon has emulated Toyota’s Kaizen Continuous Improvement program, which
significantly contributes to cost-effective, fast product handling.
No individual picks specific, whole orders, but instead picks parts of orders located in his
or her work area to maximize speed & accuracy.

People:
Amazon focuses on training and a strong work ethic. There are multiple orientations and
even on-site universities.
Amazon workers aren’t allowed to bring anything with them to the warehouse floor,
including cell phones to avoid distraction.
KPIs for workers are defined on an order fulfillment basis i.e. rate of correct fulfilled.

Technology:
Every order funneled from Amazon’s website to the fulfillment center is relayed to a
handheld scanner carried by all workers in the library or pick modules. The scanner
directs the associates to the cubbies where the ordered items are stored.
Amazon’s database knows where there’s empty shelf space and fills it as quickly as
possible to maximize efficiency – there’s more efficient use of shelf space because
products are shelved at random rather than categorically.
Amazon machines are programmed to tell whether the order is incorrect e.g. scales weigh
each package, and if the weight is off, the box gets pulled and a “problem solver” is
called over to inspect it.
Going forward, as Amazon looks to expand, the challenge will be in sustaining this
competitive advantage as a low margin player by continuing to perfectly align it’s
operating model and business objective.

Question 2
It’s no secret that pricing on Amazon is complex, and both Sellers and consumers can get
lost quickly in the world of Amazon pricing. 
  
How does Amazon pricing work?
Amazon pricing is tricky on all fronts, from how it charges Sellers to how product pricing
works on the platform. 
 
Amazon Seller pricing
There is an Amazon pricing structure for any Seller, regardless of how many products
you have in your shop. Whether big or small, you can find an affordable way to sell items
through the marketplace. 
 
Amazon pricing structure
There are two ways to sell on Amazon: as a Professional or as an Individual. The
Professional plan lets you sell an unlimited number of products for a $39.99 monthly fee.
Individuals can sell on Amazon for $0.99 per item sold.
 
If you plan to sell more than 40 items each month, it makes more sense to purchase the
Professional Seller plan. The Professional plan also makes sense if your items have low
price points; $1 per product sold is an outrageous fee if you sell a product for $3.
 
The Professional plan also unlocks new categories for sales and has additional features
that help you sell more products. 
 
Amazon seller fees
If you think the costs of different selling plans on Amazon sound inexpensive, you’re not
alone. Unfortunately, besides a monthly payment for your store (or payment per product
for Individual Sellers), Amazon charges fees per product sold. 
 
There are several fees that individuals and professionals must pay per item sold. These
include:
 
Referral fees on each item sold: a percentage of the final price of a product sold Shipping
fees (which apply regardless of fulfillment method).
Closing fees 
Amazon’s fee structure can get complicated, so it’s worth examining the Selling on
Amazon Fee Schedule. If you are an FBA Seller, Amazon will charge you additional
storage and fulfillment fees.
 
Amazon also has a calculator that can help you estimate your revenue, even with fees.
Just enter the product name, UPC, ASIN, ISBN, or ASIN number and product details and
you’ll get an estimate of how much revenue you can expect to earn. 
 
Amazon price changes
Besides having a complicated pricing structure, Amazon also has a complicated pricing
model. The company is a pioneer in dynamic pricing and makes over 250 million price
changes every day. The average product’s price will change once every 10 minutes,
making it difficult for Sellers and consumers to keep up.  
 
Amazon price match
Amazon doesn’t have any price-match guarantee. If consumers find a product they’ve
bought for a cheaper price online, there’s no way for them to ask Amazon to pay the
difference in price. 
 
This is mostly for practical reasons. Amazon used to have a policy like this, but as the
market became more fluid, the policy became impossible to honor.
 
Amazon recognized that a dynamic market meant price match policies would become
obsolete. With this knowledge, the company eliminated the policy in 2016.