Here’s why tech companies make so much money:
For the most part, tech companies make so much money because they reach so many people.
The largest tech companies have billions of users or customers, so even small sales at that scale will add up quickly.
On top of that, tech companies manage to maintain good profit margins.
So if you want to learn all about why tech companies rake in millions, then this article is for you.
Let’s jump right into it!
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What Tech Companies Are We Talking About?
When I read this question, I immediately start thinking about tech giants like Google, Apple, Netflix, and the like.
The truth is that there are almost 500,000 tech companies just in the United States.
They range in size, function, and revenue, and you can trust that some of them aren’t actually making a ton of money.
So, it’s probably not fair to try to say that all tech companies are making a lot of money.
My point is that I want to focus on the ones that are clearly making tons of money.
Those are going to be Fortune 500 tech companies, and even among those, I’ll be using some of the best-known as examples.
How Much Money Do Tech Companies Make? (3 Companies)
Now we know who is up for discussion, but there’s another important point to cover.
We all have heard tales of these companies making tons of money.
They’re often cited as the most valuable companies in the world, but that doesn’t really paint a picture.
How much money are these companies actually making?
If we’re really talking about the biggest tech companies, then their annual revenue is in the billions of dollars.
For the three biggest tech companies in the world, annual revenue can exceed $100 billion.
That’s an insane amount of money, but I’m going to break down a few companies to really put this in perspective.
Amazon is the big king.
According to the market research I just linked, Amazon brings in well over $400 billion a year.
That’s a staggering amount of money.
I’ll get into general tech company business models a little later, but Amazon is mostly making money through the online store.
It accounts for almost half of the company’s revenue.
Services are the other primary revenue streams (things like Amazon Web Services).
Apple comes in at second with more than $350 billion a year in annual revenue.
Keep in mind, we’re talking about the tech companies that make the very most in the whole world.
Still, these numbers are astronomical.
If Apple cashed in all of that money for $1 bills and stacked them on top of each other, it would be more than 23 miles high (about a tenth of the way to the moon).
It’s a lot of money.
As you can guess, most of Apple’s revenue comes from selling hardware (like the iPhone).
But, they do bring in a good chunk of change from their services, like ApplePay and Apple Music.
The third on our list today is Alphabet, which is the parent company that runs Google.
You know Google is huge, and it actually brings in a little over $250 billion a year.
What makes Google different is that almost all of its money comes from advertising revenue.
In fact, ads across the various Alphabet platforms account for more than 80% of the money that Google brings in each year, proving that there are multiple ways for giant tech companies to rake in the cash.
How Do Tech Companies Make Money? (4 Ways)
I touched on this a little bit for the three biggest tech companies in the world, but I was really just trying to provide some concrete examples for you.
In general, tech companies make money through four means:
While you have seen some examples of each of these, I’m going to go into more detail about how tech companies tend to approach each option.
This will help explain exactly how these companies make so much money when we get into that part a little later.
Advertising is a big one.
A lot of tech companies make websites, online tools, apps, or similar software.
They’re making tools that you can use, and if you’ve used the internet at all in the last 20 years, you know that a lot of these things are free to use.
You’ve never paid for a Google search (hopefully) or any number of apps on your phone.
All of this is because tech companies have really cornered the market on advertising.
I mentioned Google earlier, and they’re the absolute champions of tech advertising, but plenty of other tech giants play this game too.
Meta (which owns Facebook) brings in over $100 billion a year, and 97.5% of it is through advertising.
The truth is that if a tech company can make something that a lot of people like to use (like social media), then they can give it away for free and make hundreds of billions of dollars just by selling ad space.
There are also subscriptions.
The most popular example is probably Netflix.
You pay a monthly fee, and you get access to Netflix.
It’s really simple.
It turns out that a lot of tech companies offer various kinds of subscriptions.
Amazon offers its Prime services that are extremely popular.
The company also offers subscriptions for businesses for cloud services.
Microsoft is big in the subscription game too.
Out of the $168 billion a year that the company earns, a quarter of it comes from subscriptions to the Office suite.
Tech companies love subscription models because they bring in consistent revenue.
It makes a lot of logistical planning easier because they can predict how much money they’re going to make a little more reliably.
Services are the third major way that tech companies make money.
Services can range from helping you fix your phone (think AppleCare) to helping your business with marketing (Google Ads).
Really, a tech service can do anything, and direct services are great revenue generators.
When it comes to the very largest tech companies, services are usually a secondary or tertiary source of income, but they still generate billions.
The best example is probably Amazon Seller Services.
This program helps other businesses set up Amazon shops.
The service helps those companies reach a larger customer base and make a lot of money, and Amazon charges for that help.
This service alone brings in around $100 billion a year.
Of course, there are also products.
Three of the biggest tech companies in the world focus heavily on products.
Amazon sells basically everything that exists.
Apple sells computerized devices.
Microsoft, another huge player, heavily focuses on selling software.
All of these things count, and it’s easy to understand.
People like technology, so they buy a lot of Apple and Microsoft products.
Meanwhile, Amazon can sell you whatever you actually want or need, so the appeal is fairly universal.
You can even consider a company like Tesla that focuses on selling cars.
If the tech company can find a way to sell actual products, they’ll do it, and there is potential for a lot of money.
Why Do Tech Companies Make So Much Money? (2 Reasons)
Ok. That’s a lot of background information, and we’re really peeling back layers of how tech companies work.
Now, we can really get into the original question.
Why do they make so much money?
It’s kind of easy to understand when you think about it.
These tech companies are massively popular, so they have a lot of customers.
As long as the thing they sell generates a profit, you can multiply that profit by the number of customers, and the numbers get very big.
That’s the essential answer, but I want to dig into two concepts a little deeper to fully drive this home: scale and profit margins.
Scale is really what this is all about.
Like I just said, if you can sell something for a profit and do it a lot of times, you’ll make a lot of money.
But, it’s easy to overlook the true scale of these companies.
Let’s consider Google.
It’s the best advertising company in history.
According to researchers, more than 4 billion people around the world use it on a regular basis.
To really put that in perspective, there weren’t even 4 billion people in the world back in 1970.
Before then, it was literally impossible for a company to have a customer base as large as Google.
So, if Google sells an ad spot for a fraction of a cent every time someone clicks on that ad, they can still distribute that ad to 4 billion people.
And, most people use Google more than once a year.
In fact, most people use it more than once a day.
Google is able to make $200 billion a year with this model, and it’s because of the ridiculous scale.
I want to hit you with one more example to really impress how scale works for these companies.
Let’s say you open a lemonade stand.
You charge $0.10 per cup of lemonade, and each cup earns you $0.01 in profit.
If you can turn that stand into a corporate company with a stand on every corner and reach 4 billion people who buy a cup every day, you’ll make $14.6 billion a year.
Tech companies make so much money because they’re selling lemonade to a lot of people, so to speak.
#2 Profit Margins
There is a second element to all of this, and it’s a little more complicated.
Basically, it doesn’t matter how many people buy your stuff if you’re not selling it for a profit.
Tech companies get huge because they find ways to distribute whatever they sell to billions of people while still turning a profit.
Once again, Google is a great example.
Selling digital ads is very cheap compared to a lot of other ways to try to make money.
Google doesn’t need to own storefronts.
They don’t need a fleet of trucks and airplanes and ships to move their products around the world.
They aren’t paying for gas for those fleets.
By all means, Google has some very expensive server farms and office locations, but compared to a lot of other ways to try and make money, Google’s overhead expenses are tiny.
That allows them to sell ads for very low prices.
Combine that with Google’s massive outreach, and you have a perfect recipe for making money.
For other tech companies, like Apple, that do have higher overhead costs, there is a simple solution.
They find ways to sell their goods at a profit.
As long as you’re doing that and you have enough outreach, you’ll make big billions.
That’s how these tech companies work, and it’s why they make so much money.