The Prime Effect: How The Amazon Marketplace Shapes How We Shop
Like everything with Amazon, its marketplace is big. Small businesses like Steve Chou’s Bumblebee Linens can soar. But is the marketplace also destroying main street brick and mortar stores? In the third episode of our Amazon series, a look at the peaks and pits of Amazon’s marketplace for retail.
James Thomson, chief strategy officer and partner at Buy Box Experts, an agency that works with Amazon brands and brand investors. Co-founder of the Prosper Show, an education conference for large Amazon sellers. Author of “Controlling Your Brand in the Age of Amazon.” (@TheProsperShow)
Stacy Mitchell, co-director of the Institute for Local Self-Reliance, a research and advocacy organization focused on combatting corporate control to build equitable communities. Author of several reports and articles about Amazon’s power, including “Amazon’s Stranglehold” and “Antitrust and the Decline of America’s Independent businesses.” (@stacyfmitchell)
Read the Institute for Local Self-Reliance’s summary of the House report on Amazon and digital monopolies here.
Sherri Yukel, CEO and founder of Big Dot of Happiness, a party supply retailer on Amazon.
Steve Chou, owner of Bumblebee Linens. (@mywifequit)
Sebastian Rymarz, CEO and co-founder of Heyday, one of the largest investors of Amazon-centric brands.
Dharmesh Mehta, vice president for Amazon’s Customer Trust and Partner Support (CTPS) organization. (@dharmeshmehta)
On how to visualize how big Amazon really is
Stacy Mitchell: “It’s vast, I mean, Amazon Marketplace, the fees that Amazon takes from third-party sellers, last year nearly $90 billion. That’s a quarter of the company’s revenue, and twice as much revenue as it’s getting from AWS, Amazon Web Services, its huge cloud computing division. So this is massive. And marketplace really illustrates what it is that Amazon is all about. Amazon wants to be the infrastructure for the exchange of goods and service. They want to be the backbone of how commerce works, the platform in which transactions happen. And so marketplace really is an illustration of their core power.”
You mentioned the $90 billion in fees from third-party sellers who sell their wares on Amazon. What are those fees? How does that work?
Stacy Mitchell: “There are three main components to those fees. And just to give some perspective on how those fees have changed over time, in 2014, Amazon was taking an average of about 19% of every dollar that a seller earned. By last year, it was over 30%. And that’s an average. A lot of sellers in the United States are giving 40%, 50% of their revenue right off the top to Amazon.
“Those fees consist of three main components. One is the basic commission, which is simply the percentage you have to give Amazon for listing and selling a product. And that’s 15% for most products. That hasn’t changed in the entire time that Amazon has been in business. One would expect that it would go down as Amazon did more transactions, because presumably everything is becoming more efficient. But it hasn’t changed. So that’s remained quite high. And then on top of that, Amazon has added fees for warehousing and shipping products and also fees for advertising.
“Increasingly, in order to have your products show up on that first page of search results, you have to buy their advertising. So you have to pay additional fees for that. And the shipping and warehousing is obviously a service. But the problem there is that Amazon effectively requires sellers to use its shipping service as opposed to, say, UPS or the Postal Service. And so effectively is compelling them to buy that if they want to succeed on the site. So those are the three main forms of fees. There are a number of other smaller fees, but those are the big ones.”
On how Amazon has fundamentally changed e-commerce
James Thomson: “I work with a number of brands who, quite frankly, even though they may have the opportunity to sell elsewhere in e-commerce, if they’re not on Amazon, if they don’t have an Amazon Channel strategy, it’s rather obvious that there’s going to be a bigger issue for them. Amazon is where the customer shop. And so they have to be present there. Even if they don’t want to be present, they have to be present, whether they’re selling themselves, whether they’re working with other sellers who are selling their products. Brands need to have an Amazon Channel strategy.
“One of the most challenging parts of working with brands that have historically grown up without e-commerce is that for many of them, they look at the Amazon channel and they say, This is just another channel. We’re going to sell into this physical channel and that physical channel. And, oh, here comes the Amazon e-commerce channel. I guess we can sell into that channel. But the dynamics of what happens on Amazon have impacts throughout all of their distribution efforts, online and offline. And so for brands that don’t pay attention to what’s happening to their products on Amazon, can wake up one day to discover that there are unknown sellers representing their products.
“There are people creating brand content for their brands that they don’t necessarily think should align with the messages they’re putting out in all the other channels. And then there are all sorts of issues that can happen with pricing following on Amazon because there’s much more competition on the channel than there would be in any other channel. And so when you look across all these different types of issues, when you talk about transforming e-commerce, I would argue Amazon is actually transforming sales in every online and offline channel for consumers. Because what happens in Amazon impacts what happens in every other channel.”
On how small businesses are doing on Amazon
Stacy Mitchell: “We did a survey of about a thousand independent businesses across the U.S. in 2019. And only 11% of those who are selling on Amazon site describe their experience as successful. I mean, most sellers are not succeeding. And what we see in the data is that sellers have a relatively short lifespan of being on the site. It’s sort of like going to a casino. You might win a hand. You might even have a good streak. But at the end of the day, only the house wins. And that’s the basic setup here.
“And over time, those two million sellers, it’s a huge variety. It’s hard to characterize them in a generalized sort of way. But we do know that over time, the share of those sellers selling into the U.S. market who are based overseas, and particularly in China, has grown. I mean, China-based sellers are now about half of U.S. sales. And so as a measure of how well U.S. based small businesses are doing, I think that’s an indication that … very few of them are succeeding.”
There was an Amazon internal memo that was unearthed during a recent congressional hearing. What did it say about the power of Amazon?
Stacy Mitchell: “Externally, Amazon talks about third-party sellers as “partners,” but within the company, as this memo revealed, they refer to them as “internal competitors.” So Amazon sees sellers as its competitors. It sees them as an opportunity to glean a lot of revenue, because they have no place else to go. And as businesses that they can appropriate their data and compete against them. And that’s really fundamentally problematic. I think just to go back to this sort of notion of like, well, isn’t Amazon providing all of these great tools and services?
“You know, again, the Web is great, online shopping, that there are platforms and tools available to independent businesses that they couldn’t create on their own. That’s all to the good. The problem is that Amazon faces no real competition. So if you’re a seller and you don’t like the way Amazon is treating you, where else are you going to go? They have two-thirds of all eyeballs.
“Starting when people go to shop online, two-thirds start at Amazon. So you don’t have competition disciplining Amazon’s behavior. You also have no regulation. And without either of those things, what we have is a situation where Amazon itself is effectively regulating online commerce. They’re deciding. And it’s fundamentally not democratic. It’s fundamentally at odds with our values of sort of liberty and open markets.”
From The Reading List
Wall Street Journal: “Amazon Scooped Up Data From Its Own Sellers to Launch Competing Products” — “Amazon.com Inc. AMZN 0.91% employees have used data about independent sellers on the company’s platform to develop competing products, a practice at odds with the company’s stated policies.”
Institute for Local Self-Reliance: “Report: Amazon’s Monopoly Tollbooth” — “Amazon’s dominance of online retail means that hundreds of thousands of small businesses must rely on its site to reach customers.”
The Verge: “Jeff Bezos can’t promise Amazon employees don’t access independent seller data” — “During Wednesday’s antitrust hearing, Amazon and its CEO Jeff Bezos came under fire by lawmakers over the company’s alleged use of third-party seller data in developing its own products.”
USA Today: “Small businesses can become Amazon sellers to leverage both online, retail sales” — “While the pandemic was bad for so many businesses in so many ways. There was a silver lining if you happened to be a small business selling on Amazon, in which case, 2020 was likely a boom year for you.”
New Yorker: “A Kansas Bookshop’s Fight with Amazon Is About More Than the Price of Books” — “If you know anything about the Raven bookstore in Lawrence, Kansas, then you know that it charges more for books than Amazon.”
This article was originally published on WBUR.org.
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