How Amazon Works

Online shopping is a form of e-commerce. Morsa Images / Getty Images

In 1995, sold its first book, which shipped from Jeff Bezos' garage in Seattle. In 2006, sells a lot more than books and has sites serving seven countries, with 21 fulfillment centers around the globe totaling more than 9 million square feet of warehouse space.

The story is an e-commerce dream, and Jeff Bezos was Time magazine's Person of the Year in 1999. The innovation and business savvy that sustains is legendary and, at times, controversial: The company owns dozens of patents on e-commerce processes that some argue should remain in the public domain. In this article, we'll find out what Amazon does, what makes it different from other e-commerce Web sites and how its technology infrastructure supports its multi-pronged approach to online sales.

Advertisement Basics sells lots and lots of stuff. The direct Amazon-to-buyer sales approach is really no different from what happens at most other large, online retailers except for its range of products. You can find beauty supplies, clothing, jewelry, gourmet food, sporting goods, pet supplies, books, CDs, DVDs, computers, furniture, toys, garden supplies, bedding and almost anything else you might want to buy. What makes Amazon a giant is in the details. Besides its tremendous product range, Amazon makes every possible attempt to customize the buyer experience.

When you arrive at the homepage, you'll find not only special offers and featured products, but if you've been to before, you'll also find some recommendations just for you. Amazon knows you by name and tries to be your personal shopper.


­The embedded marketing techniques that Amazon employs to personalize your experience are probably the best example of the company's overall approach to sales: Know your customer very, very well. Customer tracking is an Amazon stronghold. If you let the Web site stick a cookie on your hard drive, you'll find yourself on the receiving end of all sorts of useful features that make your shopping experience pretty cool, like recommendations based on past purchases and lists of reviews and guides written by users who purchased the products you're looking at.

The other main feature that puts on another level is the multi-leveled e-commerce strategy it employs. lets almost anyone sell almost anything using its platform. You can find straight sales of merchandise sold directly by Amazon, like the books it sold back in the mid-'90s out of Jeff Bezos' garage -- only now they're shipped from a very big warehouse. Since 2000, you can also find goods listed by third-party sellers -- individuals, small companies and retailers like Target and Toys 'R Us. You can find used goods, refurbished goods and auctions. You could say that Amazon is simply the ultimate hub for selling merchandise on the Web, except that the company has recently added a more extroverted angle to its strategy.

In addition to the affiliate program that lets anybody post Amazon links earn a commission on click-through sales, there's now a program that lets those affiliates (Amazon calls them "associates") build entire Web sites based on Amazon's platform. They can literally create mini Amazon Web sites if they want to, building on Amazon's huge database of products and applications for their own purposes. As long as any purchases go through Amazon, you can build a site called, pull products directly from Amazon's servers, write your own guides and recommendations and earn a cut of any sales. Amazon has become a software developer's playground.

Before we dig deeper into Amazon's e-commerce methods, let's take a quick look at the technology infrastructure that makes the whole thing possible.


Amazon Technology

The massive technology core that keeps Amazon running is entirely Linux-based. As of 2005, Amazon has the world's three largest Linux databases, with a total capacity of 7.8 terabytes (TB), 18.5 TB and 24.7 TB respectively [ref]. The central Amazon data warehouse is made up of 28 Hewlett Packard servers, with four CPUs per node, running Oracle 9i database software.

The data warehouse is roughly divided into three functions: query, historical data and ETL (extract, transform, and load -- a primary database function that pulls data from one source and integrates it into another). The query servers (24.7 TB capacity) contain 15 TB of raw data in 2005; the click history servers (18.5 TB capacity) hold 14 TB of raw data; and the ETL cluster (7.8 TB capacity) contains 5 TB of raw data. Amazon's technology architecture handles millions of back-end operations every day as well as queries from more than half a million third-party sellers. According to a report released by Oracle after it helped migrate Amazon's data warehouse to Linux in 2003 and 2004, the central task process looks something like this:


­ In the 2003 holiday season, Amazon processed a top-end 1 million shipments and 20 million inventory updates in one day. Amazon's sales volume means that hundreds of thousands of people send their credit card numbers to Amazon's servers every day, and security is a major concern. In addition to automatically encrypting credit card numbers during the checkout process, Amazon lets users choose to encrypt every piece of information they enter, like their name, address and gender.

­ Amazon employs the Netscape Secure Commerce Server using the SSL (secure socket layer) protocol (see How Encryption Works to learn about SSL). It stores all credit card numbers in a separate database that's not Internet-accessible, cutting off that possible entry point for hackers. Customers who are particularly cautious can choose to enter only a partial credit card number over the Internet and then provide the rest by phone once the online order is submitted. Aside from the usual security concerns regarding online credit-card purchases, Amazon suffers from the same phishing problem that has plagued eBay and PayPal, so watch out for fake e-mails asking for your account information. Check out Anti-Phishing Working Group: for details on how to recognize a fake.

Now let's get back to the business of selling stuff. Amazon's approach to e-commerce is one that leaves no stone unturned.


Amazon E-commerce

Target's store
Courtesy has always sold goods out of its own warehouses. It started as a bookseller, pure and simple, and over the last decade has branched out into additional product areas and the third-party sales that now represent a good chunk of its revenue (some estimates put it at 25 percent).

Both retailers and individual sellers utilize the platform to sell goods. Large retailers like Nordstrom, Land's End, and Target use to sell their products in addition to selling them through their own Web sites. The sales go through and end up at, Land's or for processing and order fulfillment. Amazon essentially leases space to these retailers, who use as a supplemental outlet for their online sales.


Small sellers of used and new goods go to Amazon Marketplace, Amazon zShops or Amazon Auctions. At Marketplace, sellers offer goods at a fixed price, and at Auctions they sell their stuff to the highest bidder. Amazon zShops features only used goods at fixed prices. If an item listed on zShops, Marketplace or Auctions is also sold on the main, it appears in a box beside the item so buyers can see if someone else is selling the product for less in one of the other sales channels.


The level of integration that occurs on Amazon is a programming feat that few (if any) online sales sites can match.

Another sales channel called Amazon Advantage is a place where people can sell new books, music and movies directly from the Amazon warehouse instead of from their home or store. Sellers ship a number of units to Amazon, and Amazon handles the entire sales transaction from start to finish. In all of these programs, Amazon gets a cut of each sale (usually about 10 percent to 15 percent) and sometimes charges additional listing or subscription fees; in the case of Amazon Advantage, the company takes a 55 percent commission on each sale. The Advantage channel is something like a consignment setup, a sales avenue for people who create their own music CDs or have self-published a book and are simply looking for a way to get it out there.

One of the latest additions to Amazon's repertoire is a subsidiary company called Amazon Services. Through Amazon Services, Amazon sells its sales platform, providing complete Amazon e-commerce packages to companies looking to establish or revamp their e-commerce business. Amazon sets up complete Web sites and technology backbones for other e-commerce companies using Amazon software and technology. Target, for instance, in addition to having a store on, also uses Amazon Services to build and manage its own e-commerce site, homepage

But selling goods isn't the only way to make money with The Web site's affiliate program is one of the most famous on the Web. Through Amazon's Associate Program, anyone with a Web site can post a link to and earn some money. The link can display a single product chosen by the associate, or it can list several "best seller" products in a particular genre, in which case Amazon updates the list automatically at preset intervals. The associate gets a cut of any sale made directly through that link. The cut ranges from 4 percent to 7.5 percent depending on which fee structure the associate signs up for (see Amazon Associates for complete program details). The associate can also take advantage of Amazon Web Services, which is the program that lets people use Amazon's utilities for their own purposes. The Amazon Web Services API (application programming interface) lets developers access the Amazon technology infrastructure to build their own applications for their own Web sites. All product sales generated by those Web sites have to go through, and the associate gets a small commission on each sale.

Check out Amazon Web Services to learn more about what you can do with Amazon's e-commerce platform.

In the next section, we'll take a look at how all of these programs and channels come together to create a sales and marketing powerhouse.


Amazon Tools, Marketing and Community

Alan Taylor does not work for He joined the Associate Program, signed up for Amazon Web Services, downloaded the API and built Amazon Light.

The goal is pretty straightforward: "To be Earth's most customer-centric company where people can find and discover anything they want to buy online." The implementation is complex, massive and dynamic. Amazon's marketing structure is a lesson in cost-efficiency and brilliant self-promotion. Amazon's associates link to Amazon products in order to add value to their own Web sites, sending people to Amazon to make their purchases. It costs Amazon practically nothing. Some associates create mini-Amazons -- satellite sites that do new things with Amazon data and send people to the mothership when they're ready to buy. Amazon Light, built and maintained by software developer Alan Taylor, is one of those satellite sites.

The level of customer tracking at is another best-of-breed system. Using the data it collects on every registered user during every visit to the Web site, Amazon points users to products they might actually be glad to discover -- and buy. Amazon recommends products that are:


  • similar to what you're currently searching for (on-the-fly recommendations that use up tons of processing power)
  • related to what you've searched for or clicked on at any time in the past
  • purchased by other people who've searched for what you're searching for or have bought what you've bought

You can even customize the recommendations by giving Amazon more information about yourself and your interests and rating the products you've already purchased.

­ A recent development in customer tracking actually collects information on people who may have never visited Amazon's gift-giving recommendations collect data on the stuff you buy for other people. For instance, if you buy a toy train set in December and ship it to your nephew, Amazon knows you give gifts to a boy aged four to 10 who lives in Ohio and likes trains. Might your nephew enjoy the latest addition to that train series? Might he also have an interest in RC cars? Amazon will give you all sorts of ideas about what to get your nephew when the next holiday season rolls around.

This type of information gathering has generated a fair amount of controversy. Some say Amazon gathers too much information for comfort, and the Electronic Privacy Information Center reports that in 2000, Amazon started sharing its customer data with its partners and subsidiaries. The concern has increased with the tracking of "gift-giving habits," because the gift-giving information Amazon collects could be about minors, which is against the law, and because the gift receivers don't even know that their name, age, gender, location and interests may be stored in Amazon's database of customer information.

Despite concerns about Big Brother Amazon, tons of people love the personalized experience Amazon offers. It's not just sales offers -- there's a community on that's based on people providing even more information about themselves to other Amazon users. People write their own reviews, recommendations, "So You'd Like To..." guides and "Listmania" lists based on Amazon's product offerings and share them with all of One Listmania list, "The Top 25 Weirdest Items You Can Purchase Through Amazon!" by Sheila Chilcote-Collins of Van Wert, Ohio, includes a jar of S.E.P. (Stop Eating Poop) that should make your dog stop eating its own feces; bird feed in the form of live caterpillars shipped to your doorstep; and a book entitled "Owl Puke" that comes complete with a genuine pellet of regurgitated owl meal. You can make any sort of list you want, and any Amazon member can view it and rate it. (Click here to view the Top 100 Listmania lists.)

Beyond e-commerce and its trappings, some of the more recent Amazon endeavors have the company branching out into new realms. Amazon's Mechanical Turk project seeks to combine community, technology and compensation. Using the Mechanical Turk system, software and Web developers can post tasks they need help with, usually tasks related to things computers can't do but humans can, like quickly caption a set of photos. Anyone can post a task, and the person who completes it gets a small amount of money in return. Amazon gets a commission on each completed transaction. In a much more visible trek into the unknown, Amazon has funded the A9 search engine. It has full search capabilities, mapping functions, a toolbar with pop-up blocking and an easily accessible personal search history. A9 also provides a "Diary" where you can makes notes to yourself about specific Web pages and lists of recommended links for you to check out based on your previous searches. In keeping with Amazon's omnipresent marketing techniques, you can sign up to get an discount for using A9 on a regular basis, and when you type in a search term, you'll see a display of Amazon book results related to that term.

From a "Where's Amazon going?" point of view, perhaps the most notable project is the previously mentioned Amazon Services subsidiary. Amazon Services is building complete e-commerce solutions for companies that are potential Amazon competitors, leaving open the possibility that Amazon will ultimately head in the direction of technology service over retail sales.


Amazon FAQ

How does selling on Amazon work?
Amazon uses a multi-level e-commerce strategy to allow professionals and individual sellers to sell products through their platform. It lets almost anyone sell almost anything directly through Amazon. All a seller has to do is set up a seller's account, provide the necessary details, list their products and start selling through the Seller Central portal.
How much of a cut does Amazon take?
Amazon charges a referral fee to the sellers for each item that is sold through the Amazon platform. This amount varies slightly depending on the product category but generally, referral fees fall between 8 and 15 percent.
How does Amazon get its products?
Businesses, individual sellers and manufacturers sell their inventory to Amazon at wholesale rates. Amazon Vendor Central then gives Amazon ownership of the seller's inventory, which is then marketed and sold to shoppers on their website. Once an order has been placed, the product is shipped from Amazon's warehouse.
What is the Amazon FBA program?
Fulfillment By Amazon or FBA is a program offered by Amazon to sellers that provides services like storage, packaging and shipping assistance. Sellers ship their inventory to an Amazon fulfillment center where items are stored in big warehouses until an order has been placed. Amazon then ships the product to the buyer directly.
Is it profitable to sell on Amazon?
It can be profitable to sell on Amazon, but you need to maintain a gross margin of 50 percent or higher because Amazon generally takes between 25 and 30 percent of the seller's revenues as fees.

Lots More Information

Related HowStuffWorks Articles

More Great Links

  • "After Many Years, Turbolinux Finally Goes Public." The Linux Beacon, Volume 2, Number 36. September 27, 2005.
  • "Amazon Knows Who You Are." Wired News.,1272,67034,00.html
  • "Amazon lauds Linux infrastructure."
  • Amazon Web Services.
  • Help: Is it safe to enter my card number online? 4492038-0437536#secure
  • Media Kit
  • "AMR Research on OracleBI 10g." Oracle.
  • Kleinschmidt, Cory. "The Book on's A9 Search Engine."
  • Roush, Wade. "Amazon: Giving Away the Store." Technology Review.
  • Shankland, Stephen. "How Amazon puts Linux to the test." CNET
  • Sharma, Dinesh C. "Amazon opens second development unit in India." ZDNet.
  • Terdiman, Daniel. "Amazon looks to solve problems that stump computers." ZDNet.
  • Winter, Richard and Auerbach, Kathy. "Contents Under Pressure." Intelligent Enterprise.