Amazon is one of the largest online marketplaces. However, like other top competitors, Amazon doesn’t stock all of the products available for purchase themselves. Instead they allow users to sell their own products online. So, if Amazon is a giant online marketplace of people buying and selling things among each other, then how does any money make it back to the company?
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Amazon makes money by stocking and selling its own products, as well as allowing third parties to sell on the website. Sellers are charged a small fee (a flat rate of $1 per item plus a varying percentage based on the category of the sale) for the privilege of setting up within and selling on the website.
Want some more information? We’ll explain this process in a bit more detail below!
How Amazon makes its money
1. Amazon sells its own products
Many of the products that you can purchase on Amazon are actually owned by the company itself. Just like many other stores, Amazon buys products where there’s high supply and low demand, and then sells them where there’s low supply and high demand in order to make a profit. If it helps, think of it as a giant online convenience store. You’re basically paying them for the convenience of buying an item without having to run around trying to find a store that has it in stock, compare prices between different stores, or get the item back home if it’s heavy or bulky.
Also, as we mentioned in our introduction to Amazon, Amazon now sells its own unique line-up of high-tech gadgets. These include tablet computers, mobile smart-phones, e-readers, and media streaming consoles.
2. Amazon gets a cut from third-party sales
Even when other people sell their products on Amazon, the company still gets some of the profit. Why is that, you ask? Well, think about it: Amazon eliminates a lot of legwork for someone looking to sell things. It allows them to easily organize their inventory and expose it to thousands of potential customers at once. It can even take the hassle out of setting up delivery of their merchandise and collecting payment. All of that must be worth something, right?
There are two types of third-party seller accounts — “Professional” and “Individual” — and the amount of money Amazon makes from each varies.
- Professional — Amazon collects a $40 per month subscription fee, but does not collect additional fees from sales on a per-item basis.
- Individual — Amazon does not collect a subscription fee, but does collect a $1 selling fee from each item sold.
In addition to these fees, there are closing fees of $1.35 per item that Amazon collects from the sale of “media” items (e.g. books, DVDs, video games, CDs, video tapes, and so on). Variable referral fees are also collected for each item sold, depending on its merchandise category.
You can read the full list of fees that Amazon charges its third-party sellers here.
In the event that a third-party seller tries to get you to process a payment for an item outside of Amazon, they may be trying to avoid these fees. Or, in a worst-case scenario, they may be running a scam. The bottom line is, as we told you in our article on Amazon safety: DON’T PAY AN AMAZON SELLER OUTSIDE OF AMAZON.COM. It’s best to look for another seller, one who plays by the rules.
Is Amazon free?
Amazon is free to use for buyers, as anyone can sign up for free. Buyers must pay the rate indicated for each product they purchase, plus shipping and handling fees. Sellers must pay a monthly subscription rate, and a $1 fee for each product sold. Amazon does offer free shipping in some circumstances on eligible items. If you want to learn more about free shipping, we have an entire tutorial on it.
How much money does Amazon make?
Currently, Amazon makes hundreds of millions of dollars in profit each financial quarter, and is consistently increasing its market share value. Amazon’s second fiscal quarter of 2016 was its most profitable thus far, showing an $857 million profit. The company’s overall revenue is currently in the tens of billions of dollars.
In 2016, Amazon increased its total sales to over $30 billion. It has also grown substantially by expanding its services outside the online marketplace. Amazon now offers web development services, as well as its own line of digital devices (such as the Kindle e-reader, Fire Phone mobile smart phone, and Echo voice-activated digital assistant). Both product lines are becoming increasingly popular.