Amazon and the "profitless business model" fallacy
Amazon and the "profitless business model" fallacy
Eugene Wei:
One popular thesis among Amazon profitability skeptics is that Amazon can’t “flip a switch” and become profitable. The most common guess as to how Amazon flips the switch is that it will wait until it is the last retailer standing and then raise prices across the board, so Amazon skeptics argue against that narrative possibility.
But “flipping a switch” is the wrong analogy because Amazon’s core business model does generate a profit with most every transaction at its current price level. The reason it isn’t showing a profit is because it’s undertaken a massive investment to support an even larger sales base. How does Amazon turn a profit? Not by flipping a switch but by waiting, once again, until its transaction volume grows and income exceeds its fixed cost base again. It can choose to reach that point faster or slower depending on how quickly it continues to grow its fixed cost base, but a simple way to accelerate that would be to stop investing in so many new fulfillment centers.
Right. It’s actually more like “not flipping a switch”.
