It’s important to start by clarifying that typically in the marketplace model, 3rd party sellers control their prices. The marketplace operator takes a commission on the sale, but doesn’t control the price.
However, today one of the largest Marketplace operators decided to wield their power and control 3rd party seller product prices. The Wall Street Journal covered Amazon’s decision to discount third party products ahead of the 2017 holiday season.
The article showcases the fact: Amazon will stop at nothing to gain further market share. Here’s what we know:
- 43% of US online retail sales went to Amazon in 2016.
- 55% of US product searches start on Amazon.
- In The State of Global Retailing Online, Forrester Research recently reported, “Without Amazon, sales growth of B2C online retail sales would decline by four to five percentage points in the US.”
This move is significant and retailers need to pay attention. I’ve no doubt the Amazon Effect will immediately hit stock prices across retail, and when we wake up tomorrow we’ll see leading retailers down.
What’s significant about this move by Amazon?
- Amazon is paying for the discounts, further burning their extra cash so they can acquire more customers and not pay taxes. The issue is Amazon is wielding their massive profit margin which they need to invest back in their business, or risk paying taxes like the rest of us. Extensively covered by L2’s Scott Galloway, Amazon takes the money from their lucrative marketplace and pours it back into their business showcasing very little earnings each year so they don’t have to pay taxes. His theory: Big tech is avoiding taxes and destroying jobs.
- Amazon is bullying the heart of their operation - their 3rd party seller community. Sure, Amazon is paying for these discounts themselves. If you’re looking around, you’ll see the “Discounted by Amazon” tag on all products they’ve discounted. They’re making it right for the seller - covering the difference between the seller price and the one Amazon is selling for. The problem? Many sellers also sell on Wal-Mart and have signed price parity agreements. This forces the sellers either out of compliance, or if they want to be in compliance, to discount on Wal-Mart and take the hit themselves.
What can retailers do about it?
There is only one option: Just as Sucharita Mulpuru said it five years ago in her doc “Why Every Retailer Needs a Marketplace” - retailers need to launch their own marketplaces. Without the marketplace model, retailers cannot create a more compelling offer for their clients. This more compelling offer = more products and better prices.
Amazon’s latest move is short-sighted, and creates an opportunity for retailers to recruit sellers away.
Join our webinar this week to see how our customer Best Buy Canada is using the marketplace model to offer their customers more, and mind the gaps surrounding their core inventory, to dominate this holiday season.
Written by Adrien Nussenbaum
Graduated from HEC Paris, Adrien Nussenbaum started his career with Paribas in Hong-Kong. He then went on to co-found All Instant, an instant messaging solution that was later sold in 2003. While with Deloitte, as part of the restructuring team, he advised many retailers who were in the throes of company turnarounds and transformations until 2005.