Amazon’s Business Strategy Is Convenience Wins and It Works
Independent third-party sellers on Amazon broke records this holiday season says the company in a blog post last week.
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Amazon has been promoting for years that its online marketplace is an opportunity for small business entrepreneurs to succeed, especially when sellers use Amazon FBA (Fulfillment by Amazon), its fulfillment service.
The company started accepting independent sellers or marketplace sellers over 20 years ago, entering the domain of eBay which had grown rapidly from just being a C2C (Consumer-to-Consumer) marketplace to one where small businesses sold products without having to build a web store.
In 2001, eBay introduced eBay Stores, further cementing that eBay had grown up from being an online flea market to an eCommerce platform for online entrepreneurs.
Amazon, which had started as an online bookseller, began to venture out into other categories in the very late 90s. As part of its growth strategy to offer more diverse products on its website, the company opened up to third-party sellers, creating a true competitor to eBay.
But it wasn’t really until the launch of Amazon FBA in 2006 that the company set itself apart from eBay and other online marketplaces at the time.
Initially, the concept of warehousing inventory with a third-party and having them ship products from their warehouse was still foreign to small businesses. Today, third-party fulfillment is more commonplace and often a key strategy for new brands and entrepreneurs.
Over the years Amazon FBA evolved as Amazon began shrinking the delivery times, making it nearly impossible for many sellers to match the delivery speed and customer service Amazon brings to the table today.
With Amazon FBA, products listed by independent sellers are sold and fulfilled through the same logistics network as the company. Customer service issues such as shipping errors or in-transit damage as well as product returns and refunds are managed by Amazon, freeing up entrepreneurs to concentrate on marketing and developing products.
According to Amazon’s 2021 Small Business Empowerment report, the company claims to have over 2 million small to medium-sized businesses (SMB) as third-party selling partners globally with over 200,000 new partners added in 2020 alone.
The Covid-19 pandemic helped grow Amazon’s marketplace business further as more entrepreneurs saw the opportunity to list their products on the marketplace.
While not every third-party seller uses Amazon FBA, with more than 200 million Prime Members globally (100+ million estimated in the US alone), Amazon FBA directly taps into this high-value customer base.
Amazon Prime Members are an important asset for Amazon as they keep outspending regular customers by wide margins, often in excess of 2 to 1.
As important as Prime Members are, the company’s logistics network now rivals parcel carriers like UPS and FedEx, enabling Amazon to offer a buying experience that cannot be duplicated by small businesses independently.
The combination of high-value Amazon Prime buyers, as well as the warehousing and delivery services offered through Amazon FBA, have propelled the company to leave other marketplaces like eBay well behind.
In many ways it has been genius as Amazon expanded beyond books by utilizing other people’s products and inventory, even charging for storing inventory and selling digital ads on its platform to drive sales to listings.
Amazon’s digital ad business has grown so much that it is now the third-largest digital advertising platform behind Google and Facebook, creating another revenue source for Amazon from its independent sellers.
Given that digital ad spending would be required regardless of where one chooses to build their online business, it’s the “value add” of Amazon’s Prime Members and efficient delivery network that makes its platform stand apart from so many others and why so many small businesses keep joining the marketplace.
But There Are Also Downsides of Selling on Amazon
Since the company owns its customers, third-party sellers are not building up an independent customer base for marketing purposes, making it very difficult to promote products to previous buyers.
Some sellers use warranty registrations to build up a marketing database, but that captures nowhere near the volume of customer contact data a business could build if they sold products through their own website.
In addition, because sellers are building a business on someone else’s platform, they must constantly keep up to date with changing selling policies, often enforced through automatic algorithms.
Sellers can easily be restricted or even suspended from the Amazon marketplace for seemingly obscure policy violations. Despite Amazon taking over the fulfillment and much of the basic customer service, there are still ways for sellers to violate numerous selling policies that can impact their business.
Clearing up problems with Amazon can take a long time, resulting in lost sales or even worse, a full shutdown of the business. There is even a cottage industry of consultants that can help suspended sellers unfreeze their accounts, indicating just how easy it is to still get in trouble.
Amazon also now restricts how many products sellers can send to Amazon’s warehouses to keep inventory levels at a point that more closely matches historical sales. In some situations, this can keep sellers from beefing up sufficient inventory during promotional periods.
The big disadvantage of selling on Amazon is that Amazon knows sales data for every seller and product. There are many complaints from sellers that Amazon copied their original product and started selling it under an Amazon-owned brand at a lower price.
Small Businesses Keep Joining Amazon
Yet, as much as these disadvantages sound like they would keep entrepreneurs from joining Amazon’s marketplace, the sheer size of the opportunity and the dream to make it big on Amazon keeps entrepreneurs joining the marketplace.
Today, Amazon says selling partners on its platform come from diverse backgrounds including black-owned, women-owned, family-owned, and military-family owned businesses.
Amazon also claims it spent over $100 million to help small and medium-sized businesses reach more customers during Prime Day and throughout the holiday season.
Other stats the company cited to show how small businesses profit selling on Amazon are:
- Over 130,000 third-party sellers globally surpassed $100,000 in sales.
- US-based sellers sold an average of 11,500 products per minute between Black Friday and Christmas.
- Top-selling categories for third-party sellers included office products, cameras, and wine-related products.
- Artists and entrepreneurs selling through Amazon Handmade with sales exceeding at least $100,000 grew by double digits over last year.
- Handmade top-selling categories during the holiday season included jewelry, drinkware, and seasonal décor.
- Also, Handmade Makers sold a record number of personalized products including cutting boards, family name signs, and initial necklaces.
But as much as Amazon promotes how it supports small businesses on its platform, there are many sellers that appear to be small businesses that are actually part of larger enterprises that own and operate multiple Amazon seller accounts or “Grown on Amazon” brands they acquired.
Some of these business consolidators are raising ridiculous sums of capital buying up higher volume brands and selling accounts on Amazon, maintaining the original brand image.
In addition, there are Chinese companies that have built brands and businesses on Amazon that seem like they could be small businesses.
But in reality, these sellers are part of a Chinese government supported “made in China, sold on Amazon” business model that has recently been thrust into focus as Amazon banned thousands of them for soliciting fake reviews.
For shoppers who prefer to support small businesses, Amazon has recently added a new indicator to its listings for certified minority-owned and registered small businesses to identify themselves. However, this requires sellers to be proactive and provide Amazon with the required documentation.
Amazon Convenience Wins
Amazon has come a long way and did Jeff Bezos think it would ever get this big 25 years ago when he demonstrated Amazon?
The success of Amazon from being an online discount bookseller to one that sells 150 million Fire TV devices is solely based on its reputation of being a consumer-friendly company.
Despite a lot of criticism of its labor practices or how it destroyed small local retailers and retail categories, shoppers keep coming back to Amazon, not thinking about the “hidden” side that ever so often makes national news.
At times, the company engages in odd behavior that one wonders who in the right mind thought this was a good idea and worth the few dollars saved for a company of its size? The negative press that follows certainly doesn’t seem to make sense in those situations.
But regardless of negative publicity, the company’s focus on customer service and fast delivery keep people coming back. Shoppers quickly seem to forget the negative media reports because Amazon has the one key ingredient that makes its business a success, Convenience Wins.
And it is this ingredient that brings new entrepreneurs to Amazon to seek their own success story, even if that means playing in someone else’s sandbox.
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Richard is co-founder of eSeller365. He has over 17 years of experience on eBay which includes tens of thousands of sales to buyers in over 100 countries and even has experience with eBay’s VeRO program enforcing intellectual property rights for a former employer. And for about two years Richard sold products on Amazon using Amazon FBA in the US.
To “relax” from the daily business grind, for a few weekends a year, he also works for IMSA as a professional race official.