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Amazon’s Business Strategy Is Convenience Wins and It Works

Amazon Convenience Wins
Written by publishing team

Independent third-party sellers on Amazon are breaking records this holiday season, the company said in a blog post last week.

Amazon has been promoting for years that its online marketplace is an opportunity for small business owners to succeed, especially when sellers use Amazon FBA (Fulfillment by Amazon), its fulfillment service.

The company started accepting independent sellers or marketplace sellers more than 20 years ago, and entered the eBay domain that has rapidly grown from a mere C2C (consumer-to-consumer) marketplace where small businesses sell products without having to build an online store.

In 2001, eBay introduced eBay Stores, cementing that eBay had grown from an online flea market to an e-commerce platform for online entrepreneurs.

Amazon, which began as an online book seller, began moving out into other categories in the late 1990s. As part of its growth strategy to offer more diverse products on its website, the company has opened its doors to outside sellers, creating a true competitor to eBay.

But it wasn’t really until the launch of Amazon FBA in 2006 that the company differentiated itself from eBay and other online marketplaces at the time.

Initially, the concept of storing inventory for a third party and having them ship products from their warehouse was still foreign to small businesses. Today, third party fulfillment is becoming more common and often a key strategy for new brands and entrepreneurs.

Over the years, Amazon FBA has evolved as Amazon began cutting delivery times, making it nearly impossible for many sellers to match the speed of delivery and customer service Amazon brings to the table today.

With Amazon FBA, the listed products are sold by independent sellers and carried through the same logistics network as the company. Amazon handles customer service issues such as shipping errors or damage in transit as well as product returns and refunds, freeing entrepreneurs to focus on product marketing and development.

According to the 2021 Amazon Small Business Empowerment Report, the company claims to have more than 2 million small to medium-sized businesses (SMB) as third-party selling partners globally with more than 200,000 new partners added in 2020 alone.

The Covid-19 pandemic helped grow Amazon’s marketplace business further as more entrepreneurs saw an opportunity to list their products in the market.

While not every third-party seller uses Amazon FBA, with more than 200 million Prime members globally (estimated over 100 million in the US alone), Amazon FBA is direct access to this highly valued customer base.

Amazon Prime members are an important Amazon asset as they continue to spend on regular customers at wide margins, often in excess of 2 to 1.

Despite the importance of Prime members, the company’s logistics network now rivals package carriers like UPS and FedEx, enabling Amazon to offer a buying experience that can’t be replicated by small businesses independently.

The combination of high-value Amazon Prime buyers, as well as warehousing and delivery services offered through Amazon FBA, has pushed the company to leave other marketplaces like eBay behind.

In many ways, it’s been genius as Amazon has expanded beyond books by using other people’s products and inventory, even charging a fee for stockpiling and selling digital ads on its platform to drive sales to listings.

Amazon’s digital advertising business has grown so much that it is now the third largest digital advertising platform after Google and Facebook, creating another source of revenue for Amazon from its independent sellers.

Since spending on digital advertising will be required no matter where one chooses to build their online business, the “added value” for Amazon Prime members and efficient delivery network is what makes its platform stand out from many others and why many small businesses keep joining the market.

But there are also downsides to selling on Amazon

Since the company owns its customers, outside sellers do not build an independent customer base for marketing purposes, which makes it very difficult to promote products to previous buyers.

Some sellers use warranty registrations to create a marketing database, but this doesn’t capture anywhere near the amount of customer contact data a company could generate if they sold products through their website.

Additionally, as sellers build a business on someone else’s platform, they must keep abreast of ever-changing selling policies, often enforced through automated algorithms.

Sellers can easily be restricted or even suspended from Amazon Marketplace for seemingly vague policy violations. Despite Amazon taking over fulfillment and much of its core customer service, there are still ways for sellers to violate many selling policies that can affect their business.

Resolving issues with Amazon can take a long time, resulting in lost sales or worse yet, the complete shutdown of the company. There is even a home industry of consultants that can help suspended sellers unfreeze their accounts, indicating how easy it is to get into trouble.

Amazon also now limits the number of products sellers can send to Amazon warehouses to keep stock levels at a point that more closely matches historical sales. In some cases, this can prevent sellers from increasing sufficient inventory during promotional periods.

The big drawback to selling on Amazon is that Amazon knows the sales data of each seller and product. There are many complaints from sellers that Amazon copied their original product and started selling it under an Amazon brand at a lower price.

Small businesses continue to join Amazon

However, as much as these flaws seem to prevent entrepreneurs from joining the Amazon marketplace, the sheer size of the opportunity and the dream of making it big on Amazon makes entrepreneurs join the market.

Today, Amazon says the selling partners on its platform come from diverse backgrounds including black- and women-owned businesses, families and the military.

Amazon also claims to have spent more than $100 million to help small and medium businesses reach more customers during Prime Day and throughout the holiday season.

Other statistics the company has cited to show how small business profits sell on Amazon are:

  • Third-party sellers exceed 130,000 sellers worldwide Sales exceed $100,000.
  • US-based sellers sold an average of 11,500 products per minute between Black Friday and Christmas.
  • The best-selling categories for third-party sellers included office products, cameras, and wine-related products.
  • Artists and entrepreneurs selling through Amazon Handmade with sales of at least $100,000 have grown in double digits compared to last year.
  • Handcrafted bestsellers this festive season included jewellery, drinkware, and seasonal décor.
  • Also, HandMaker sold a record number of personalized products including cutting boards, family name tags, and initial necklaces.

But as much as Amazon touts about how it supports small businesses on its platform, there are many sellers that appear to be small businesses that are actually part of larger organizations that own and operate multiple Amazon seller accounts or “Amazon-grown” brands that they’ve acquired.

Some of these business consolidation companies raise ridiculous amounts of capital to buy high-volume brands and sell accounts on Amazon, preserving the original brand image.

In addition, there are Chinese companies that have built brands and businesses on Amazon that look like small businesses.

But in reality, these sellers are part of a Chinese government-backed “Made in China, Sell on Amazon” business model that has been the focus of late as Amazon has banned thousands of them for asking for fake reviews.

For shoppers who prefer to support small businesses, Amazon recently added a new tick to its lists of registered, minority-owned small businesses to identify themselves. However, this requires sellers to be proactive and to provide Amazon with the required documentation.

Amazon convenience wins

Amazon has come a long way and did Jeff Bezos think it would get that big 25 years ago when he introduced Amazon?

Amazon’s success from being an online discount book seller to a company that sells 150 million Fire TV devices rests solely on its reputation as a consumer-friendly company.

Despite a lot of criticism of its labor practices or how it has destroyed small local retailers and retail categories, shoppers keep returning to Amazon, without thinking about the “hidden” side that often makes national news.

Sometimes a company engages in strange behavior one wonders who in a sound mind thought this was a good idea and worth the little money saved for a company of its size? The following negative press certainly doesn’t make sense in those situations.

But aside from the negative publicity, the company’s focus on customer service and quick delivery keeps people coming back. It seems that shoppers quickly forget about negative media reports because Amazon has the only key ingredient that makes its business successful, Comfort wins.

And this is the ingredient that brings new entrepreneurs to Amazon to find their own success story, even if that means playing in someone else’s sandbox.

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publishing team