6 minute read
Over the past decade we have watched Amazon achieve explosive growth as it transformed from a seller to a platform for sellers. Whereas once Amazon acted like a traditional store, selling goods to consumers at a competitive price, had transitioned to a marketplace hosting an increasing number of more-and-more third-party sellers. Today, third party vendors make up over 50% of Amazon’s annual sales.
This shift didn’t happen by accident. Amazon’s growth was a long and calculated journey. There are many core lessons that sellers can learn from understanding the marketplace.
Amazon built a strong customer-base first, focusing on traffic before becoming a marketplace – and plenty of sellers followed
A question you will naturally ask when evaluating the market and your customer base is “who needs whom more?” If the buyers (i.e., customers) need the sellers, then the buyers may be willing to compromise on price and added offerings. If the sellers need the buyers, then they may have to reduce margins and improve their service to remain competitive. The answer, as you might expect, is a little of both. However, on the Amazon marketplace, the customer is heavily favored due to the abundant and ever growing number of e-commerce sellers on the platform.
Amazon used their own e-commerce store to build a solid customer base over the course of many years. Today, they’re able to maximize the potential of this base with third-party sellers and little reliance on traditional advertising or traffic generation. This strategy allows Amazon to focus efforts on other areas such as new product development and optimizations for higher margins. Amazon’s massive and high-intent consumer base is the sole reason why third party sellers want to participate on its platform.
Today, Amazon has both buyers and sellers “hooked” on their platform. The huge customer-base is attractive for sellers while the growing number of sellers and the diversity of their wares keep the customers coming back. In most countries, Amazon has enough market share for it to be tough for other platforms to displace the giant, and impossible for other e-commerce stores to ignore.
Amazon successfully created a sticky experience for both customers AND eCommerce sellers
A “sticky” experience is one that keeps customers coming back, and ensures they need to come back to you for the best experience. It is one of the biggest success factors for subscription-based businesses and can ensure a loyal customer base for years. Amazon has managed to capture a sticky experience for both buyers and sellers alike.
With Amazon’s reputation on transaction trustworthiness, delivery speed, and customer service, it would be difficult for any consumer to find a marketplace that they can trust more. Using that reputation to back third-party sellers with Fulfillment by Amazon further bolsters that stickiness. Consumers who have experienced Amazon (especially Prime subscribers) are highly likely to keep coming back.
Likewise, Amazon keeps every seller’s reputation locked to their specific Amazon storefront in the form of ratings and reviews. By not allowing vendors to market their stores independently and keeping everything on Amazon owned pages, the marketplace giant can keep their customer base well protected. For an e-commerce store, moving away from Amazon could be akin to starting over.
Rates are competitive enough to deter other marketplaces from joining the scene
Walking the line between profitable and competitive can often feel more like an art than a science, but Amazon has their rates perfected. Amazon takes between 6% and 20% from merchant sales depending on volume, category, and several other factors. The fee is high enough to give Amazon a healthy profit but also low enough to deter other marketplaces from viably competing and stealing third-party sellers away.
In fact, the number of third-party vendors that could feasibly make up a competitor’s marketplace are so fragmented that those competitors frequently have no choice but to use Amazon themselves as a distribution channel. Amazon has a commanding 38% market share in the e-commerce space with the next largest holding only 10% market share. With the volume that Amazon is able to move through their marketplace, other e-commerce stores simply can’t afford to ignore them. This also makes it unlikely that Amazon will lose their footing any time soon.
Amazon kept the marketplace fast paced—a quick and constantly moving experience for customers and eCommerce stores
One of the primary factors of a great experience for both buyers and sellers is market speed. How quickly can a customer find what they are looking for and make the purchase, and how quickly can sellers add and move inventory? Amazon uses their storefront and innate marketing platform to quickly sell products.
As expected, the marketplace speed and liquidity adds to the list of reasons that Amazon is the marketplace leader. Amazon averages 26 purchases per year for Prime members and 14 products per year for non-Prime shoppers—far above the marketplace average. Further, the mean transaction amount remains high at about $55 USD per purchase. This leads us into our final point below: how does Amazon continue to grow their explosive marketplace?
Amazon still has room to grow their marketplace in new ways
What is next for Amazon? Surely with the number of customers they boast, and the characteristics outlined above, their momentum will slow down soon, right? Not necessarily growing their customer count is not the only way to improve profitability. Amazon Prime subscriptions, the number of transactions per member per year, and the average transaction size are all metrics that Amazon can continue to grow.
Reflecting back on Amazon’s ability to create a fast-paced marketplace, it wouldn’t be crazy to assume that average transactions per year is going to be the focus. If they can make the most of their own shopping holidays like Prime Day, the growth seems reasonable. In 2019, Amazon boasted a 70% growth in Prime Day sales. Despite the focus on Amazon’s own products during Prime Day, the explosive growth year-over-year continues to attract more third-party sellers.
Reading through the facts highlighted in this article, you can boil the philosophy down to “focus on the factors you can change, and ignore the ones you cannot.” Amazon and their marketplace are an absolute behemoth in the e-commerce space. Their far reaching influence can often mean competing in various aspects of your own business may be too costly to pursue. Instead, look for ways you can easily optimize your profits without distracting from the day-to-day work that directly contributes to your success.
One factor that you can change is the vendors you use for various aspects of your business. For example, Amazon offers an incredible opportunity to expand your business globally, but something to note is that Amazon charges an unbelievable 3.5-4.5% when converting your currencies from your global marketplaces to your local bank account. A service provider like PingPong help global sellers keep more hard earned money by offering a competitive rate. You’ll significantly save on each conversion and avoid potential double conversion if you need to pay global suppliers or VAT/GST.
Summary: Amazon has made it easier than ever to start an online business. However, it is STILL a business. Know and understand the marketplace, so that you can be fully capable of capitalizing on it! Also, take full advantage of service providers to continuously make your growth and expansion easier.