Posted by Brian Walker on March 7, 2011
When Jeff Bezos announced to his Amazon staff his concept for the Amazon Marketplace in November 2000, many people — inside and outside Amazon — thought he was crazy. Amazon was inviting in other sellers — individuals and merchants — to compete against Amazon’s owned inventory on Amazon.com. As full price merchants were added in categories such as consumer electronics, apparel, and baby products in the early 2000s, the head shaking continued. To paraphrase, Jeff Bezos claimed this was about “the world of perfect information.” Customers are going to find the lowest price online if they really want to, and they should be trained to find it on Amazon. Maybe Amazon could grab a piece of the pie along the way.
Of course, what was once seen as crazy is now viewed with envy, as the marketplace now represents approximately 35% of Amazon’s revenues and 30% of total units sold in Q4 2010.* Amazon charges anywhere from a 5% to a 25% revenue share on a sale through its marketplace, roughly determined by dividing the expected margins in a category in half — to be shared with the merchant. With only limited incremental technology and category management costs, the profitability of this for Amazon is easy to see. And as a result, it has also solidified Amazon’s role as the leading product search site. This success is already breeding imitators in Buy.com, Sears, Walmart, NewEgg, and soon a whole host of large UK retailers. And let’s not ignore Apple’s iTunes, clearly a very successful marketplace, though of a somewhat different flavor.
But the growth of the Amazon marketplace did not happen overnight. It took years for Amazon to perfect the feed technology, sell merchants on the concept, overcome objections, and integrate to the platform. It took years to iron out the customer experience challenges. It took years for Amazon to work out the best UI. And it took years for consumers to understand the model and get comfortable with it. It will take years for these imitators to perfect their marketplaces.
But perhaps dark clouds are assembling in Seattle. Recently I have been hearing from clients and non-clients alike about their growing frustration over the Amazon Marketplace. Complaints range from customer service issues to the inability to market to customers acquired from purchases on the marketplace to what merchants perceive as Amazon learning of hot products and categories by watching sales data from merchants in the marketplace. And while Amazon is contractually obligated not to observe individual merchants sales, it is not hard to aggregate data and gain insights. Some will see Amazon as a key partner in driving demand, others a lurking, very dangerous competitor. But for even highly frustrated merchants, leaving the Amazon marketplace is hard. It can translate into significant revenue for some — maybe 5% to 20% of online sales — and there may not be a compelling event to unplug from an integration, which may have already cost $50K to $200K to set up.
As ingenious as the marketplace may be for Amazon from a revenue perspective, the genius goes beyond sales and profits from the marketplace directly. It is a way to offset content costs. When a merchant adds its content to the marketplace, it becomes a part of a whole in Amazon’s unified and normalized product catalog. This means the best content from the many merchants selling an item will be combined to form the best content on a product available anywhere. This helps with the customer experience on Amazon and also with search engine optimization (SEO), a critical competetive tool. Adding high-quality content not only helps Amazon but also helps out low-price merchants in the marketplace who may have an exceptionally low price but do not have to invest in content. Not something everyone is going to want to see happen.
For Amazon, if it had to create content for every item in entirety, these content costs could range in the $200 to $1,000 range per product — depending on content depth, photography requirements, and language versioning. This could cost millions and millions of dollars for Amazon.** The ability for Amazon to offset even some of the content costs associated with having perhaps the largest online product catalog online is a huge win at its scale.*** In my view, there is little question that the marketplace strategy plays a significant role in reducing Amazon’s costs. Some merchants, like Crutchfield, who have invested in differentiated product content, have decided to leave Amazon rather than share their content with them, though honestly most hardly think twice.
The marketplace strategy is definitely crazy. Crazy like a fox.
Thanks, and I look forward to your comments, Brian
*Source: Wells Fargo Securities, LLC, Equity research report on Amazon.com dated February 7, 2011
**Amazon does not report content costs separately. They are bundled with technology costs, therefore making it hard to determine this cost precisely.
***Note: There are third-party catalogs, which may be larger than Amazon’s, but those are not available online in one place for consumers to search, navigate, and shop.