The Amazon Marketplace -- The Beginning of the End; Or Just the End of the Beginning?

May 19, 2022

The Digital Leader Newsletter — Strategies and Techniques for Change Agents, Strategists, and Innovators

The Amazon Marketplace business, which we launched in November 2002 with about 35 sellers coinciding with the launch of the Amazon “apparel” tab, currently accounts for ~>55% of all Amazon orders and represents $390B globally in GMV (Gross Merchandise Value — i.e. net sales). According to MarketPlacePulse research1, this makes the Amazon Marketplace larger than the economy of Norway and would be the world’s 35th largest economy. The Amazon Marketplace, which does not include “first-party revenue”, represents 25% of total US eCommerce.2 It’s been a great run and, as Bezos has referred to it, represents one of Amazon’s “dreamy” businesses.

But at 20 years old, is this big dog getting too old to hunt?

Is there still an upside in building and focusing on the Amazon marketplace business, or has it started to show its age, limitations, and impact from the increased competition?

I’ve had the opportunity this past year to advise a small but daring team at Klay Brands. As their research shows, the Amazon Marketplace continues to be “the game” that matters and seems to be defying any signs of slowing down. In fact, it is actually accelerating and the opportunity may have never been bigger to participate in the Amazon Marketplace ecosystem.

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The Data

Over the past year, I’ve had the opportunity to advise a small & daring team at Klay Brands. As we have worked on their prospective investor material, the answer to this question is the key backdrop to evaluating their prospects. In researching the answer, they went as far as to reach out to the retail branch chief of the US Census to get us some answers. Here’s some of what was learned.

In 2021, only 13% of retail in the US was online.3 eCommerce is still the primary growth channel within retail with consistent growth of 15% year-over-year, even after adjusting for anomalies like COVID’s impact on the sector (eCommerce grew at 32% in 2020). At this rate of 15% yearly growth, online retail will double and cross over 20% of total retail by 2026.

The Big Dog Still has Bite

The Amazon Marketplace continues to be “the game” that matters with the ecosystem ripe for participation, by both small brands and large ones. By 2026, the 3rd Party Sellers business in just the U.S. is estimated to be a $749B opportunity and will nearly triple by 2026.

Overall, with 31 cents of every eCommerce dollar going to these sellers and 45% of Americans being Prime members in 20214, my belief is that the future of any eCommerce strategy cannot ignore Amazon. In fact, for many, the strategy should be a “marketplace first” strategy, taking full advantage not just of the revenue, but of the insights and infrastructure which can be leveraged from leading with the Amazon Marketplace.

A Winning Playbook for Marketplace Growth

Here are the key elements to a marketplace-first strategy.

Customer-Obsessed. Customers should be the driving force of the products offered. All exceptional companies should “work backwards” from listening to customers. Instead of building physical stores, build digital storefronts where most customers already go to find the majority of their goods. Using the best customer insights data, algorithms, and tools to achieve this is key, paying attention to every detail and signal.

De-risk with Data. Use data and algorithms to determine where the greatest product opportunities reside. Use these insights to not only determine the categories, but the detailed product features, how to display and merchandise products including descriptions and meta-data, and how to forecast inventory and understand price elasticity. Turn your customers (and other people’s customers via the marketplace) into your taste-makers. Sourcing proprietary or hard-to-access data and creating algorithms to make insights becomes perhaps the biggest moat of competitive advantage.

Exceptional Design, Discoverability & Distribution.

The only problem with “the everything store” is that it is “the everything store”. Customers need to find your products and be compelled to purchase. Outstanding and enticing product information, photos, videos, customer reviews, and all meta-data have to be zeroed in to help the ideal customer find your products. Advertising at Amazon becomes a scientific game of demand creation balanced against the cost of customer acquisition.

The best retailers know how to differentiate their product offerings. They start by having a better version of existing products which are proven winners at Amazon - and then finding distinct ways to differentiate your product.

Everything about distribution including forecasting, location, delivery speed, and returns needs to be connected to providing a great customer experience. Leveraging fulfillment-by-Amazon (FBA) only makes sense.

Repeat. Once retailers have a product that’s working, they should repeat the product launch cycle again and systematize their approach building a portfolio of products, perhaps brands, and mastering “the Marketplace”. Refining, accelerating, and systematizing this cycle IS the playbook and creates real scale.

Manage & Scale with Software. Once a new product is launched, it needs to be maintained and grown. If you’re managing more than a few products, you need visibility and automation to scale. Leverage machine learning to understand and automate demand planning, and data visualization to track performance. Retailers need to have live visibility to actively improve their operations. Often a combination of custom analytics with vendor-provided applications needs to be integrated together. There’s a BIG ecosystem where evaluation and integration of tools and data is key company strategy.

THEN… Go Direct and Balance Your Channels. After mastering your system in a marketplace-first strategy, venture to other channels where customers are looking to shop (Walmart, direct-to-consumer (DTC), international). A new “killer feature” has just been released by Amazon. I predict this feature will greatly benefit a brand’s direct-to-customer channel by leveraging the great “Prime” delivery capability and loyalty program. This feature is called “Buy with Prime”5. On a commerce website, a “Buy With Prime” button can be displayed and easily integrates into customers’ existing Prime Memberships. The catch? Your products need to be in the Amazon FBA network (but they already are since you are a marketplace seller)

The Forward Opportunity

What can be accomplished through this type of playbook? Klay Brands has started from “zero” (no products, no customers, no supply chain) equipped with a small amount of capital and a ton of hustle from two founders. In just 16 months…

Having started working with these strategies in February 2021, they exceeded a $7.30M annual run-rate in April 2022 with a team of now just three people in four product categories
Developed a product scoring algorithm and use natural language processing (NLP) to evaluate an eCommerce product's launch potential and features and discern better product features and content
Building an automated financial scenario modeling tool to assess the impact of a product launch on the portfolio
Built ML forecasting models to manage demand planning across the product portfolio

Use data to pick the right products and decision-making at every step leveraging advanced software to scale. Easier said than done, but commerce has evolved and brands must continue to adapt in order to survive. Marketplace-first strategies present a great opportunity to not just grow revenue but to refine your products, brands, and system for growth. This big dog still hunts.

Onward!

John

If the potential of Klay Brands excites you as much as their performance has excited me, they’re planning to raise capital soon and establish strategic partnerships. Feel free to reach out to robby@klaybrands.com if you’re interested in connecting with them.

Klay Brands