Low margins, per se, isn't a strategy. Amazon is pursuing a cost advantage [1], and it's choosing to keep its prices very low, hence the low margins. With a cost advantage and low prices, Amazon gives away a lot of value to customers (instead of capturing a lot of value for itself in the form of profits). Its primary objective is to gain market share (i.e., both new customers and a greater portion of existing customers' everyday shopping). With an increase in market share, Amazon can further reduce its costs through economies of scale (i.e., spreading its fixed costs, such as infrastructure and R&D, over a greater number of customers served and products sold).

Amazon's cost advantage and low prices explains why most other online retailers have been unable to gain significant market share and why Amazon is posing an increasing threat to companies like Wal-mart, Target, and Costco.

-

[1] I'd argue that Amazon is actually pursuing a dual advantage, both a cost and value advantage (at least for customers that favor convenience over impulse buying). The value advantage stems from the ability to shop at home, its product reviews, its excellent customer service, extensive selection, etc.