09 July 2018

Amazon: Friend or foe?

For many companies, Amazon represents the ultimate threat to their business model and existence. But Amazon isn't what’s killing other retailers. It's poor service and bad customer experiences. Amazon and other marketplaces offer both opportunities for collaboration and gaps to compete on your terms.Learn more about the threats and opportunities.

Contents

This article is split into 3 sections.

  1. What is the Amazon business?
  2. Copetition strategy
  3. How to: Build a business in marketplaces

1. What is the Amazon business?

Amazon is a global behemoth with endless resources. Their turnover is $527 billion. That's 1.5 times greater than that of Walmart, Target, Kohl's, Nordstrom, Best Buy, Macy's, JCPenney and Sears put together.

Jeff Bezos, Amazon's CEO, describes Amazon as ”a place where you can find and buy everything you'd want to buy online”. And this is clearly evident in the company's ventures overthe years. Since its beginning in 1994, when Amazon sold books, the site has entered the market of cloud computing (AWS), tablets and smart devices (Kindle and Echo) and film production (Prime). And when Amazon enters the market, they really enter it.

This is because Amazon sells concepts that they know will work from their own business.

Their marketplace is built on their own webshop, and is then opened to other businesses as third party sellers. Their cloud computing business is built around their own IT infrastructure and sold on as a service to customers. Their Kindle digitalises their original core business: books. Their Prime membership is built around their own distribution network and content production, and their film budget in 2017 was 4.5 billion dollars:double that of HBO.

Amazon invests in the customer

In 2016 Amazon's profits were $4.2 billion, which corresponded to only 4% of total sales. 50% of the profits came from unredeemed gift vouchers. Amazon doesn't generate large profits, but that's a conscious strategy. The core of Amazon’s business model is to invest heavily in its own business to create the ultimate one-stop shopping experience.

The company’s growth comes from processing data and building loyalty. They have created a subscription business that bundles entertainment such as video, music and e-books together with free 2-day shipping as part of the Amazon Prime membership. It's a tactic that aims to increase the customer's motivation to shop at Amazon every time, and to further integrate the customer in Amazon's business.

Compared with other conventional retail companies, Amazon offers a wider range, lower prices, relevant reviews, personal recommendations, fast shipping and better service. The result is a higher level of customer satisfaction.

2. Copetition strategy

Copetition is when companies both work and compete with each other.

It's easy to view Amazon as a clear threat, but there are alsoopportunities to compete with Amazon in areas where they're weak, and to work with Amazon in areas where they're strong.

Competing in engaging customer experiences

The scope of what Amazon can do is enormous. The idea that you could compete with them on product selection or price is utopian. But Amazon hasn't been built to create engaging experiences around the products, and the opportunities to create a world around a brand on their platform is minimal. And that is a weakness you can exploit.

By focusing your platform and channels to deliver a customer experience that the customer can immerse him or herself in and integrate with, you can differentiate yourself from Amazon's one-stop shopping.

World's biggest marketplaces

And then there's Amazon's marketplace.

Did you know that 50% of the products sold on Amazon's platform are sold by providers other than Amazon? Amazon's market place is your chance to sell products on the world's biggest online trading platform, and to reach customers all over the world.

Amazon's marketplace is an online trading platform that sells products from different companies' product catalogues. The marketplace concept refers to the traditional offline marketplace where independent grocers sell their own products in a shared forum. It used to be the marketplace in the local town square wherepeople shopped, but this spot has now been taken by the global online marketplaces.

Forrester estimates that marketplaces will grow to more than $500 billion in turnover by 2020. Meanwhile, more customers start their first search for a product on Amazon than on Google. All this data supports the fact that marketplaces have a market position that is hard to ignore.

Amazon is not alone

Marketplaces don't just comprise Amazon, but also other similar platforms. Perhaps you're already familiar with Alibaba, Ebay, Wish, Rakuten and the Danish Wupti and Coolshop. From a customer's perspective, these sites resemble overgrown webshops, but they process products and data from a wealth of different webshops and product catalogues.

There are also a number of niche platforms that specialise in specific industries or product categories, such as Lyst, which specialises in clothing or Etsy, which represents small craft companies.

But it's the global, broad marketplaces that have the most to offer most businesses. These are large well-oiled machines and this is where most of the customers are.

Your customers are there too 

The best argument for selling via marketplaces is that you sell where customers already exist and from a system they know and often use. If we look at Amazon's data, 57% of visitors are looking for a specific product. 14% are looking for refills or repurchases. The remaining 29% are customers who browse the site looking for new products.

29% of 6.5 million daily visitors is an attractively large customer group that you can gain access to.

Agile infrastructure

Amazon is about a lot more than just exposure. There’s an entire stock and order processing system behind the platform, which could be the key to finding new markets for your company.

Amazon's Multi-Channel Fulfilment system can handle the entire process around product processing: they receive the product, stock it, upload it to the site, find the relevant product data and images, translate where necessary, process payment, ship the product and process any returns. And with sufficient volumes, you can also get trained staff to handle your customer service. This is the full service and is an agile model for quickly getting into and testing new markets with new products.

It means that you reach customers both at home and abroad, which would be difficult with any other marketing channels or without a costly expansion of your distribution network.

However, as already mentioned, a marketplace strategy on Amazon's platform can also be a threat. Firstly because you put your turnover into Amazon's business. You also strengthen Amazon as a channel and give a potential competitor an insight into your market.

44% of the companies already selling on Amazon fear that Amazon will spot the potential of their market and offer their own competitive products.This is also something you need to consider.

3. How to: Build a business in marketplaces

Before you put your products out on various marketplaces, you need to know the terms and conditions that apply to the relatively new eco-system of marketplace players.

1. Your products must be found through the right searches and filters

You need to perform SEO for a new search engine in your product data, and your data model must be able to deliver the right data and indexing opportunities to an external system. You should also actively use recommendation opportunities in the platform so that you are displayed in the right context alongside competitive and similar products.

2. Create local relevance

Even if the platforms are global, the customers are still rooted locally, which means that you need local context around your products in different markets. German content for the German market, descriptions of local terms (legislation, climate, language versions, adapters for power sockets) and anything else that might be relevant for the customer with regards the product.

3. Reviews over brand recognition

Your brand identity and the customer's knowledge of your business may have a very small place in a global marketplace. This means that you need to use your opportunities for gaining trust that lie in the system. Incorporate reviews in your order flow so that customers remember to reward your great service or products.

Among those companies already selling on Amazon, poor customer reviews are considered the 3rd biggest threat to their business (43%). The biggest fear is exclusion from the platform (61%).

4. Better product information than the competition

Display your product with good images and product descriptions. This makes it easier for the customer to decide when viewing your products. Products with clear descriptions and images can be sold at a higher price than similar products that only have a product number and an unknown Chinese manufacturer.

5. Hand-pick from your product catalogue 

Pick the right products for the marketplaces. This means products that require minimal customer service and which have a low return rate. If you know that a specific product breaks in plastic packaging in 1 out of 3 cases, then this isn't the product you want to sell on Amazon or Alibaba, as this will quickly become expensive.

6. Avoid the most common products 

Don't sell generic imported products on marketplaces. Because if your products don't stand out, then there's probably a manufacturer, wholesaler or agent who is selling them directly from the factory cheaper than you and on the same platform.

Know the competition, but work together when it adds value

As long as you understand the terms, you have a good opportunity of creating an effective marketplace strategy, giving you access to an international audience or a local market, either as a test or as a complete venture. And when you find the right strategy and data model in the first platform, you can develop your business on the other marketplaces.

About the author

Toke Lund
Toke LundHead of International E-commerceSend e-mail

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