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Amazon's Business Model and What It Means for Sellers

Allison Lee
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September 19, 2019
September 19, 2019

Amazon is the nut that many sellers want to crack.

Being the largest marketplace on Earth, Amazon is home to 105 million Prime subscribers and over 300,000 third-party sellers in the U.S. alone. It makes up nearly 50% of the U.S. ecommerce market, sweeping up online sales across submarkets like books, electronics and toys.

Chances are, if you’re a brand owner and you’re not already selling on Amazon, you’re thinking about it. But despite all its splendor and glory, Amazon has an elusiveness about it.

The company offers services like Fulfillment by Amazon (FBA), Amazon Onsite and more in seeming collaboration with its sellers. At the same time, it is known to suspend sellers overnight, compete directly with brands in key categories and even force third-party sellers into wholesale relationships (and vice versa).

So how do you best prepare for Amazon? What do you really need to know before hitching your wagon to Amazon’s fast-moving cart?

This blog will go under the hood of Amazon’s legendary marketplace to shed light on how the company makes money, its motivations and how this can inform your approach to selling on its marketplace.

callout for zentail's amazon seller tools

Amazon’s Core Revenue Segments and Shift to Service

Amazon’s overall business model looks like a giant umbrella, encompassing many entities in one. It’s extremely diversified, having grown far beyond the core of its business since its founding in 1994: its online book store.

Now, its revenue is split between six key segments: online stores, physical stores, Amazon Web Services (AWS), subscriptions, third-party seller services and “other.”

  • Online stores - includes product sales and digital media content, among other goods like groceries sold on a transactional basis      
  • Physical stores - spans Amazon’s bookstores, Go stores and Whole Foods locations  
  • Subscriptions - like Amazon Prime membership, audiobook, ebook, digital video and digital music  
  • Third-party services - like commissions, shipping and fulfillment fees and other third-party seller services
  • AWS - Amazon’s cloud computing platform offering compute, storage, database and other services
  • Other - includes advertising services, affiliate credit cards and other non-retail activities  

Amazon’s speciality is evidently in its ability to scale and disrupt industries of all kinds. Its impact on the world is enormous and unpacking its strategy across all of its revenue streams would take a long time.

But when you take a look at the company’s overall portfolio performance, you can start to see a trend forming. Amazon’s cash cow isn’t necessarily in product sales, though online sales made up nearly 53% of Amazon’s total revenue in 2018.

As time progresses, services like AWS and ads that run higher margins are taking more of the revenue pie. Amazon is moving well beyond its role as a retailer into that of a service provider.  

breakdown of amazon's key revenue segments from 2014 to 2018
Source: MGMResearch

"While I don't think Amazon is abandoning retail and that it will continue to grow that division, there is no doubt that services are becoming more important," GlobalData Retail Managing Neil Saunders told Retail Dive while observing the same trend. “Amazon has a huge amount of customer data and a phenomenal platform...They are also adding in more elements to that reach, including home delivery. It is only logical that Amazon monetizes this asset by offering services to both consumers and other business."

Similar to its promise of convenience to customers, Amazon now promises convenience to its sellers. It’s essentially marking its territory in the world it created—one that’s starting to attract outside ad agencies and management services, all stretching out their hands to Amazon sellers who seek support.  

Amazon’s recent gain in the services side are far from accidental. It’s the product of an iconic ecommerce strategy that was thrown into motion 18 years ago.

Behind the Scenes: Amazon’s Ecommerce Strategy  

When Jeff Bezos first introduced the “Virtuous Cycle” in 2001, it was simply a sketch on the backside of a paper napkin.

It stemmed from the idea that a great customer experience would attract more customers. Customers would attract more third-party sellers. Third-party sellers would drive greater product selection. And a wider selection would ultimately lower the cost of products and innovation, creating a positive flywheel effect for the company.

drawing of jeff bezos' virtuous cycle business model

Fast forward to 2019, and the impact of the virtuous cycle is far reaching. Not only is Amazon’s obsession over the customer experience crystal clear, but the company has also groomed a marketplace that’s known as the “everything” store.

Product sales offer a consistent flow of cash that can be reinvested into initiatives for growth. As an example, when Amazon sources products for Amazon.com, they’ll establish relatively long payment periods with suppliers. Between the time of sale and the deadline for repaying suppliers, they’ll use the cash on hand to invest into things like its massive fulfillment infrastructure in order to lower per-unit costs.  

As more and more customers flock to Amazon for its convenience, prices and product selection, advertisers and third-party merchants are running towards it too. In fact, third-party sellers now overshadow Amazon’s first-party business.

From Amazon’s perspective, third-party businesses pay to play and offer higher margins and infinite growth. Marketplace growth isn’t limited by how much inventory the giant can buy or the number of account managers it can hire. Amazon is therefore incentivized to chase marketplace expansion above its wholesale growth in upcoming years despite its retail roots.

What does this mean for Amazon sellers?

For starters, Amazon will open up access to more resources that were previously limited to wholesale vendors, like Subscribe and Save (making products eligible for regularly scheduled auto-deliveries at a discounted price) and the Early Reviewer Program (for prompting customers to review your products). As the lines between first-party and third-party resources blur, you may witness the genesis of One Vendor, the rumored consolidation of Vendor Central and Seller Central.

Some wholesalers have already experienced cancelations of purchase orders per the implications of One Vendor. Under this concept, Amazon would gain more control over which of your ASINs are sold third-party versus first-party—all in the name of improving the customer experience.  

Customer experience is no less important now than it was in 2001. Amazon will continuously be updating its marketplace to offer the most intuitive user experience. This will translate into changes across its taxonomy and listing requirements (think: recent Amazon shoe size changes), in addition to efforts to purge counterfeit goods from its site.

It’ll also be tightening the reins on seller performance. With plenty of sellers to choose from and never enough buyers, Amazon will likely continue to rule in favor of the customer when it comes to issues with orders, product data accuracy and more. The end goal is to boost customer loyalty by empowering them and making them feel protected when shopping on Amazon. Account suspensions will remain a thing of the future, including ones triggered by negative reviews or those impacting even the most established sellers (a hat tip to the saying, “the customer is always right”).

As Amazon leans more into its services role, you may experience pressure to enter in highly-incentivized programs like Fulfillment by Amazon (FBA) whereby Amazon will take care of the logistics for you. While you won’t have to manage warehousing or shipping your own goods, you’ll still have to pay storage and other fees.

So how does this impact your strategy as a seller? We’ve compiled a list of key takeaways to help you safeguard your Amazon storefront and thrive in the Bezos economy.

Key Takeaways

  • Create a Seller Central account — Don’t limit yourself to Vendor Central, especially if you’re a smaller supplier doing around $10 million in sales volume per year (this was the cutoff for Amazon’s recent purge of suppliers). Adopt a hybrid approach or shift to a third-party model to align with Amazon’s current focus on marketplace growth.
  • Establish a system for managing change — This is critical. As Amazon tests different solutions for improving the user experience on its site, one slight tweak, such as a change in how products are categorized or displayed, can affect all of your ASINs. When this happens, you’ll want to have an easy, reliable solution (like Zentail’s SMART Types) for quickly and accurately updating your ASINs. Otherwise, you risk account suspensions or having your ASINs removed. Worse, you’ll experience a disruption in sales.
  • Enroll in Amazon’s Brand Registry — Amazon has a strict policy against counterfeit goods, but you should still be on the lookout for copycats or unauthorized sellers among its crowded marketplace. By officially getting your brand on Amazon’s Brand Registry, you can gain extra protections for your brand and access to special tools for marketing your products.      
  • Automate tedious tasks — There’s little room for error when it comes to Amazon’s strict seller standards. You must be able to maintain a low order defect rate (ODR) and high customer satisfaction. Without automation to keep your listings, inventory and orders in check 24/7, you could easily oversell on products and lose control of your performance.
  • Fulfill through your own warehouse or a 3PL — Though FBA may seem appealing, it comes at the cost of control over your inventory, branding (all FBA packages are shipped in Amazon-branded boxes) and margins. If Amazon were to one day suspend your account, you also lose access to your products and won’t be able to fulfill orders until your account is reinstated, which could take months. By staying in control of fulfillment, you can ensure that this never happens and have full visibility over your inventory.

    Note: Amazon recently launched FBA Onsite that offers greater flexibility for participating merchants. It’s a invitation-only program that turns your warehouse into an FBA node—the one main risk being that Amazon can deputize your facility.  

Future-Proof Your Amazon Business with Zentail

Amazon is a land of great opportunity, but it’s not without its obstacles. To succeed, you need to understand how the marketplace will evolve and be able to anticipate changes that impact your business.

Fortunately, Zentail offers AI-driven automation tools for keeping your product data compliant with Amazon's requirements. Zentail's full commerce operations suite lets you automate everything from listing to pricing, inventory to orders. Gain the industry’s best defense against threats like product data issues, overselling and sudden marketplace changes—all while working at top speed.

Contact us to see Zentail in action and to learn how to set yourself up for long-term success on Amazon.

Written by:

Allison Lee

Marketing Manager

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