Amazon makes money through a surprisingly diverse set of revenue streams, and understanding how each one works is essential for evaluating the stock. While most people associate Amazon with online shopping, the company generates significant income from cloud computing, advertising, subscription services, and more. Knowing how Amazon makes money helps investors see beyond the retail surface and identify which segments actually drive profitability and growth.
Key takeaways
- Amazon's business model spans at least six major revenue segments, each with different margin profiles and growth trajectories.
- AWS (Amazon Web Services) consistently generates the majority of Amazon's operating income, despite representing a smaller share of total revenue than retail.
- Amazon's advertising business has quietly become one of its fastest-growing and highest-margin segments.
- The online and physical retail operations produce enormous revenue but operate on thin margins compared to cloud and ads.
- Subscription services like Prime create recurring revenue and reinforce customer loyalty across the entire ecosystem.
How does Amazon make money? A segment-by-segment breakdown
Amazon reports revenue across several segments, and each one plays a distinct role in the overall business model. The major buckets include online stores, physical stores, third-party seller services, subscription services, AWS, and advertising. When you look at total revenue, the retail side (online and physical stores plus third-party services) dwarfs everything else. But revenue alone doesn't tell the full story. Profitability varies wildly across these segments, and that's where the real analysis starts.
Think of Amazon as a collection of businesses operating under one roof. The retail operation generates massive top-line revenue but reinvests heavily and operates on razor-thin margins. AWS and advertising, by contrast, throw off operating margins that would make most SaaS companies jealous. This contrast is the single most important thing to understand about Amazon's revenue streams.
Online and physical stores: the revenue engine with thin margins
Amazon's online store is what most people picture when they think of the company. It includes everything Amazon sells directly to consumers through its website and apps. Physical stores include Whole Foods Market and Amazon Go locations. Together, these two segments typically represent the largest share of Amazon's total revenue.
Here's the thing, though: high revenue doesn't mean high profit. Amazon's direct retail operations are a low-margin business. Fulfillment costs, shipping, warehousing, and returns eat into margins aggressively. Amazon has historically been willing to accept thin retail margins (or even losses) to grow market share and keep customers locked into the ecosystem. For investors evaluating the Amazon business model, the retail segment is more of a customer acquisition tool than a profit center.
Gross Merchandise Volume (GMV): The total value of goods sold through a platform before deducting fees, returns, or costs. For Amazon, GMV includes both first-party sales and third-party marketplace transactions, giving a fuller picture of the platform's scale than revenue alone.
Third-party seller services: the marketplace toll booth
Amazon's third-party marketplace is where external sellers list and sell products on Amazon's platform. Amazon earns revenue from referral fees, fulfillment fees (through Fulfillment by Amazon, or FBA), and various seller tools. This segment has grown steadily as a share of total units sold, with third-party sellers now accounting for a significant majority of items sold on the platform.
This is a higher-margin business than direct retail because Amazon isn't buying and holding inventory. Instead, it's collecting fees on transactions that flow through its infrastructure. The more sellers that use FBA, the more Amazon earns from warehousing, picking, packing, and shipping without taking on the inventory risk. It's a smart model: Amazon provides the marketplace, the logistics network, and the customer base, then takes a cut of every sale.
Why does the third-party mix matter for investors?
When third-party sales grow faster than first-party sales, Amazon's overall margin profile tends to improve. That's because fee-based revenue carries better margins than buying products at wholesale and selling them at retail. Tracking the first-party vs. third-party sales mix over time is one way to gauge whether Amazon's retail economics are getting better or worse. You can research this breakdown on the AMZN stock page on Rallies.ai or by reading Amazon's quarterly filings.
AWS: where Amazon really makes its money
Amazon Web Services is Amazon's cloud computing division, and it's the profit engine of the entire company. AWS provides infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS), and a growing suite of machine learning, database, and enterprise tools to businesses of all sizes. AWS competes primarily with Microsoft Azure and Google Cloud Platform.
While AWS typically generates somewhere between 15-20% of Amazon's total revenue, it has historically contributed the majority of the company's operating income. Operating margins for AWS tend to run in the range of 25-35%, which is a completely different world from the low single digits you see in retail. This is why analysts and investors who want to understand how AMZN makes money almost always start with AWS.
Operating margin: Operating income divided by revenue, expressed as a percentage. It shows how much profit a business segment generates from its core operations before interest and taxes. Comparing operating margins across Amazon's segments reveals which parts of the business actually generate profit versus which ones just generate activity.
AWS also benefits from high switching costs. Once a company builds its infrastructure on AWS, migrating to a competitor is expensive and disruptive. This creates sticky, recurring revenue that compounds over time. For anyone studying Amazon revenue streams, AWS is the segment that most directly supports the stock's valuation.
Advertising: Amazon's fastest-growing profit machine
Amazon's advertising business has quietly become one of the most important parts of the company's financials. Amazon sells sponsored product listings, display ads, and video ads across its properties, including the main shopping site, Prime Video, Twitch, and third-party sites through its demand-side platform.
What makes advertising so attractive is the margin profile. Digital advertising is an inherently high-margin business because the incremental cost of serving one more ad is close to zero. Amazon has a structural advantage here because it has something Google and Meta don't: purchase intent data. When someone searches on Amazon, they're usually looking to buy something. That makes Amazon's ad inventory extremely valuable to sellers and brands.
This segment has been growing at a pace that outstrips both retail and AWS in percentage terms. Investors watching how Amazon makes money going forward should pay close attention to how fast advertising revenue scales relative to the rest of the business.
How does Amazon's ad business compare to Google and Meta?
Amazon's advertising revenue is still smaller than Google's or Meta's in absolute terms, but it's growing faster from a lower base. The key difference is context. Google captures search intent broadly. Meta captures social engagement. Amazon captures commercial intent at the moment of purchase. That last-click proximity to a transaction is what makes Amazon's ad business uniquely profitable and attractive to advertisers. Over time, this segment could become a defining piece of the Amazon business model.
Subscription services: the glue that holds the ecosystem together
Amazon's subscription revenue comes primarily from Amazon Prime memberships, but also includes audiobook subscriptions (Audible), music streaming, Kindle Unlimited, and other recurring services. Prime is the anchor. For a flat annual or monthly fee, subscribers get free shipping, access to Prime Video, Prime Music, Prime Reading, and various other perks.
Prime membership does two important things for Amazon. First, it creates predictable, recurring revenue. Second, and more importantly, it changes customer behavior. Prime members tend to spend significantly more on Amazon than non-members. The free shipping benefit removes friction from purchasing decisions, which drives higher order frequency and larger basket sizes across the rest of the retail business.
From a financial analysis perspective, subscription revenue is a medium-margin business that also amplifies revenue across every other segment. Prime members shop more, watch more Prime Video (which attracts more ad revenue), and are more likely to use services like Amazon Fresh or Prime Pharmacy. This flywheel effect is central to how AMZN makes money at scale.
Which Amazon segments are growing fastest?
Growth rates shift from quarter to quarter, but the general pattern over the past several years has been consistent: advertising and AWS tend to grow faster than retail in percentage terms. Third-party seller services also tend to outpace first-party retail growth, reflecting the ongoing shift toward marketplace-style revenue.
Here's a rough framework for thinking about Amazon's growth hierarchy:
- Advertising: Typically the fastest-growing segment by percentage, often in the mid-to-high double digits year-over-year.
- AWS: Strong double-digit growth, though the rate has moderated as the base gets larger. Still the biggest absolute dollar growth driver for operating income.
- Third-party seller services: Consistent growth driven by marketplace expansion and FBA adoption.
- Subscription services: Steady growth fueled by Prime membership increases and new subscription offerings.
- Online stores: Lower percentage growth, reflecting the massive existing base and the maturity of e-commerce penetration in key markets.
- Physical stores: The slowest-growing segment, with relatively flat revenue since the Whole Foods acquisition.
You can track these trends yourself using the Rallies AI Research Assistant to pull up segment growth data and compare it across periods.
How to evaluate Amazon's business model as an investor
When you're researching how Amazon makes money, the mistake most people make is looking at total revenue and forming an opinion. Total revenue is dominated by retail, which gives the impression that Amazon is primarily a shopping company. But the stock's valuation is driven far more by AWS and advertising margins than by the retail top line.
A more useful approach is to analyze each segment separately:
- Look at revenue share by segment. What percentage of total revenue does each business contribute? How has that mix shifted over time?
- Look at operating income by segment. This is where the picture changes dramatically. AWS and advertising punch far above their revenue weight in terms of profit contribution.
- Track margin trends. Are AWS margins expanding or contracting? Is advertising revenue growing faster than the costs to support it? Is retail becoming more efficient through automation and logistics optimization?
- Evaluate the flywheel. Amazon's segments reinforce each other. Prime drives retail spending. Retail volume attracts third-party sellers. Sellers buy ads. AWS provides infrastructure. Understanding these connections is more valuable than analyzing any single segment in isolation.
For a deeper look at Amazon's financial breakdown, visit the AMZN research page on Rallies.ai, which aggregates key financial data in one place.
The Amazon flywheel: why the business model is hard to replicate
Jeff Bezos famously sketched Amazon's flywheel on a napkin, and it still explains a lot about how the company operates. The logic goes like this: lower prices attract more customers. More customers attract more third-party sellers. More sellers increase selection. Better selection and more competition drive prices down further. The increased volume allows Amazon to spread fixed costs across more transactions, which funds lower prices and faster shipping.
Layered on top of that original flywheel are newer components: AWS profits subsidize retail expansion. Prime membership locks in customer loyalty. Advertising monetizes seller demand within the marketplace. Each new business reinforces the others. This interconnected model is what makes Amazon's revenue streams so durable and why competitors struggle to attack any single segment without facing advantages Amazon has in the others.
If you want to explore similar business model analyses for other companies, the Rallies.ai Vibe Screener lets you filter stocks by various fundamental characteristics to find comparable businesses.
Try it yourself
Want to run this kind of analysis on your own? Copy any of these prompts and paste them into the Rallies AI Research Assistant:
- Break down how Amazon actually makes money — I know AWS is huge, but how much comes from retail vs. cloud vs. advertising, and which segments are growing fastest?
- Break down how Amazon makes money — what are their biggest revenue streams and what's growing fastest?
- Compare AWS margins to Amazon's retail margins and explain what that means for overall profitability.
Frequently asked questions
What is Amazon's business model?
Amazon operates a diversified business model that spans e-commerce (both first-party retail and a third-party marketplace), cloud computing through AWS, digital advertising, subscription services like Prime, and physical retail through Whole Foods and Amazon Go. The company generates revenue from product sales, service fees, cloud infrastructure subscriptions, ad placements, and membership fees. The segments are interconnected through a flywheel effect where growth in one area supports the others.
What are Amazon's biggest revenue streams?
Amazon's largest revenue streams by dollar volume are its online stores (direct retail sales), third-party seller services (marketplace fees and FBA), and AWS (cloud computing). Advertising and subscription services are smaller in absolute terms but growing faster. When measured by operating income rather than revenue, AWS and advertising contribute disproportionately to Amazon's total profit.
How does AMZN make money from AWS?
AWS charges businesses for cloud computing resources on a pay-as-you-go or reserved-instance basis. Customers pay for compute power, storage, databases, machine learning tools, and other cloud services. AWS margins are high because the infrastructure costs are largely fixed, so each additional customer adds revenue without proportionally increasing costs. The recurring nature of cloud contracts creates predictable, sticky revenue.
Is Amazon profitable without AWS?
Historically, Amazon's non-AWS businesses have operated at much lower margins, and in some periods the retail operations have barely broken even or lost money on an operating basis. AWS has often generated the majority of Amazon's total operating income. More recently, improvements in advertising revenue and retail efficiency have helped the non-AWS segments become more consistently profitable, but AWS remains the primary profit driver.
How does Amazon make money from advertising?
Amazon sells sponsored product placements, display ads, and video ads across its shopping platform, Prime Video, Twitch, and partner sites. Brands and sellers pay to have their products featured prominently in search results or on product pages. Because Amazon shoppers typically have high purchase intent, advertisers see strong conversion rates, which makes them willing to pay premium prices for ad placement.
How does Amazon Prime make money for Amazon?
Prime generates direct subscription revenue from membership fees. But the bigger financial impact is indirect: Prime members shop more frequently and spend more per order than non-members. The membership fee essentially pre-pays for shipping, which removes a psychological barrier to purchasing. This increased spending volume boosts revenue across retail, third-party services, and advertising simultaneously.
What segment of Amazon is growing the fastest?
Advertising has generally been Amazon's fastest-growing segment by percentage in recent reporting periods, frequently posting year-over-year growth rates well above the company average. AWS also grows at a strong double-digit pace. Third-party seller services tend to grow faster than first-party retail. Physical stores have been the slowest-growing segment.
Bottom line
Understanding how Amazon makes money requires looking beyond the shopping cart. The company's retail operations generate enormous revenue but thin profits, while AWS and advertising deliver the margins that support Amazon's valuation. The flywheel connecting these segments is what makes the Amazon business model durable and difficult for competitors to replicate.
If you're researching Amazon or similar large-cap stocks, start by breaking down revenue and profit by segment rather than looking at headline numbers. For more frameworks on evaluating individual companies, explore the stock analysis resources on Rallies.ai.
Disclaimer: This article is for educational and informational purposes only. It does not constitute investment advice, financial advice, trading advice, or any other type of advice. Rallies.ai does not recommend that any security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. All investments involve risk, including the possible loss of principal. Past performance does not guarantee future results. Before making any investment decision, consult with a qualified financial advisor and conduct your own research.
Written by Gav Blaxberg, CEO of WOLF Financial and Co-Founder of Rallies.ai.