How Amazon makes money | How world’s largest retailer makes money

In 2025, Amazon reached a historic milestone, reporting a record $77.7 billion in net profit, signaling a fundamental shift in how the company extracts value from its global ecosystem.

While its origins as a 1994 online bookstore are legendary, the Amazon of today is less of a “store” and more of a global infrastructure provider for both the physical and digital worlds. Here is the comprehensive breakdown of how Amazon generates its massive revenue and where the real profits are hidden.

Amazon’s retail operation is split into two distinct models: first-party (Amazon sells its own stock) and third-party (Amazon hosts other sellers). While the revenue from first-party sales is higher, the profit margins and strategic value of the third-party marketplace have become the true drivers of the retail segment.

• Online Stores ($269.29 Billion in 2025): This remains the largest revenue contributor by volume. It encompasses everything Amazon sells directly, including Amazon Private Brands (like Amazon Basics), Kindles, and Echo devices. By controlling the first-party inventory, Amazon can set price floors for the entire market and ensure that “must-have” items are always in stock, reinforcing customer reliability.
• Physical Stores ($22.56 Billion): This footprint consists of Whole Foods Market, Amazon Fresh, and Amazon Go. Beyond mere grocery sales, these stores serve as “micro-fulfillment centers” for ultra-fast delivery and return hubs. In 2025, the integration of “Just Walk Out” technology across more Fresh locations helped reduce labor costs, slightly improving the historically thin margins of physical retail.

This is arguably the most successful pivot in retail history. Instead of competing with every small business, Amazon invited them onto the platform, effectively turning competitors into customers.

• Revenue Model: Amazon takes a “referral fee” (commission) on every sale, typically ranging from 8% to 15%. However, the real revenue driver is Fulfillment by Amazon (FBA). By storing, packing, and shipping products for independent sellers, Amazon turns its massive logistics network into a high-margin service business.

Economic Implications: In 2025, third-party services grew by 10.3%. Today, more than 60% of all units sold on Amazon come from independent sellers. This shifts the risk of inventory management away from Amazon and onto the sellers, while Amazon continues to collect fees regardless of whether the seller makes a profit.

If retail is the heart of Amazon, AWS is the brain (and the wallet). AWS operates as the “tax” on the modern internet; almost every major digital interaction touches an Amazon server at some point.

• 2025 Performance: AWS revenue reached $128.7 billion, up 20% from the previous year. While it represents a smaller portion of total revenue compared to retail, it often contributes over 60% of Amazon’s total operating income.
• The AI Surge: 2025 was a defining year for AWS as it capitalized on the Generative AI explosion. By offering proprietary chips like Trainium2 and Inferentia, AWS provided a cost-effective alternative to expensive GPUs, locking in startups and enterprises who need massive computing power to train LLMs (Large Language Models).

Why it matters: AWS’s massive cash flow allows Amazon to experiment in other sectors—like healthcare or satellite internet (Project Kuiper)—without the immediate pressure of those ventures needing to be profitable.

Advertising is currently Amazon’s fastest-growing segment, transforming the company into a formidable rival to the Google-Meta duopoly.

• 2025 Revenue: $68.64 Billion (a massive 22.1% increase).
• The Strategy: As the search bar on Amazon becomes the primary starting point for shoppers, brands are forced to pay for “Sponsored Products” to maintain visibility. This has created a “pay-to-play” environment where organic search results are increasingly pushed below the fold.

The Data Advantage: Unlike Google (search intent) or Meta (social interest), Amazon possesses purchase data. They know exactly what you bought, when you bought it, and when you are likely to need it again. This “closed-loop” attribution—where the ad and the purchase happen on the same platform—makes Amazon’s ad space the most efficient in the world for ROI-focused brands.

Subscriptions create “sticky” customers. Once a customer pays for Prime, their psychological barrier to shopping elsewhere increases because they want to “get their money’s worth.”

• 2025 Revenue: $49.62 Billion (+11.8%).
• The Prime Ecosystem: Beyond fast delivery, Prime has expanded into a comprehensive digital lifestyle bundle.
  • Prime Video & Music: In 2025, Amazon increased its investment in live sports (NFL, NASCAR), which serves as a massive funnel for new Prime sign-ups.
  • Health & Pharmacy: Integration with RxPass allows members to get common prescriptions for a flat monthly fee, further embedding Amazon into the daily lives of its users.

The Math: Prime members spend roughly $1,400 per year on average, compared to around $600 for non-members. The subscription fee itself is essentially a break-even for Amazon’s shipping costs; the real value is the massive increase in customer lifetime value (CLV).

To understand these numbers, you must understand the Amazon Flywheel (or Virtuous Cycle), which has evolved significantly since Jeff Bezos first sketched it on a napkin.

1. Lower Prices & Selection improve the Customer Experience.
2. A better experience drives Traffic.
3. High traffic attracts Third-Party Sellers, which increases Selection and adds Advertising Revenue.
4. More sellers and ads provide the capital to expand Logistics Speed.

In 2025, Amazon’s regionalization of its US fulfillment network allowed it to deliver over 70% of Prime items same-day or next-day. This speed makes shopping on Amazon more convenient than driving to a physical store, effectively “closing the loop” on the competition.

Amazon’s transition from a retailer to a service and infrastructure provider is now complete. In 2025, nearly 60% of its total revenue came from services (AWS, Ads, Subscriptions, and 3P fees) rather than direct product sales.

By owning the marketplace, the cloud it runs on, the ads that drive the sales, the pharmacy that fills the scripts, and the vans that deliver the packages, Amazon has built a self-reinforcing ecosystem. It is no longer just a company; it is the underlying operating system for 21st-century commerce.