How Amazon Added 3rd Party Business
The Birth of Fulfilled By Amazon & Fulfilled By Merchant
Dan Rose -one of the early employees of Amazon- recently shared on Twitter how Amazon added 3rd parties as a seller and what were the challenges they’ve faced while trying to make it work. It’s a quite interesting story and I’d like to share it with my personal experiences as an one-time seller on Amazon.
If you have any experience on how FBA or FBM is working, then you already know how smooth and successful system, Amazon created for sellers. Even if you are first-timer, it’s almost no-brainer to get used to it; from its user interface to how well designed their seller central and how effective their support team. But they didn’t achieve all of these in 7 days. Actually they are working on this from day one with the mentality of “It’s always day one”.
I truly believe that this is the real success story of Amazon and Jeff Bezos; more than being the most customer-centric company in the world. I think Jeff figured it out very early; first you need happy sellers to have happy buyers as a marketplace. And he with his team played this game very well.
According to Dan, Amazon launched 3rd party business in late 1999. At that time they were organized by departments -books, CDs, electronics, etc- and they’ve added new department for products sold by 3rd party sellers.
They started with auctions and competing directly with eBay in their prime. They made tons of cross-promotion but nobody visited 3rd party store. eBay had buyer/seller network effect and Amazon couldn’t compete with them.
By 2002 most people thought that they should shut down 3rd party business completely. It was not working, conversely It was consuming a lot of resources including the best people in the company and it became a big distraction for the core business as well. To support 3rd party business and stop bleeding cash, they raised prices for core retail which cause decelerate to single digit growth.
However Jeff refused the give up on 3rd party. As always, perseverance which is the most important feature of the entrepreneur paid off. After spending tons of money (including TV ads) and banging his head against it over and over again, a light bulb went off. Going against eBay with separate 3rd party store was like bringing a knife to a gun fight.
eBay had an unsurpassable lead in the market for people browsing and looking for deals. Amazon’s strength was people searching for quality products with dependable service and relatively low prices. The best way to attack eBay was to move the battlefield to Amazon’s field.
Sun Tzu wrote at The Art of War: “You can be sure of succeeding in your attacks if you only attack places which are undefended. You can ensure the safety of your defense if you only hold positions that cannot be attacked.”
But in order to show their products and 3rd party products on the same detail page, they needed a canonical product catalog. Jeff created a new team to re-architect the catalog around universal identifiers for every product on the planet (including categories Amazon did not offer yet).
At the time each retail division was responsible for its own P&L. For example, Dan was in charge of computers department included but not limited to source and manage inventory, set prices, run promotions and bundles, etc. This was the standard merchandising for any retail business.
After the universal catalog was complete, Jeff probably came with the best idea since he decided to found Amazon and told the retail teams: “You will now be competing with 3rd party sellers for buy button. If they offer a lower price, they get the button. Adjust your inventory, pricing and margin plans accordingly.”
I can’t think of anyone besides Elon Musk, who can come up with an idea to become a self rival to succeed. This was an impossible task for retail vendors to manage. How they could plan their business in the face of unknowable actions from 3rd party sellers? Even their senior executives with deep retail experience were perplexed and didn't know what to do or how to respond.
The project “Single Detail Page” as what was called back then became a success story within a few years. 3rd party sales went from 0% to 40% in terms of gross merchandise volume. 3rd party profits -back then or fulfilled by merchant as it called today- exceeded core business profit in the blink of an eye since there were no inventory risk, no fulfillment costs, just pure margin.
And again this was just the beginning of a new day in Amazon. After Fullfilled By Merchant (FBM) became a huge success, Jeff and his team decided to expand 3rd party business with Fulfilled By Amazon (FBA) in 2006.
FBA was groundbreaking program for merchants as well as Amazon. Now sellers could leverage Amazon’s tremendous network of fulfillment centers to store, pick, pack and ship their customer’s orders, all for a relatively small fee.This was a win-win and win for Amazon, sellers and also for customers.
From Amazon’s perspective still there is no inventory risk or fullfillment costs since the merchant is paying storage fees and other fulfillment costs like picking, packing and shipping. From seller’s perspective they don’t need to pay excessive rent for storage, they don’t need to pick, pack and ship for every single order by themselves or hire someone else to do it. And from customer’s perspective they have more options with in a wide variety of range from price to quality and they can still benefit from Amazon Prime.
As an overseas seller who doesn’t live in the US, you can start today from zero and manufactured your first product in China, shipped to one of the Amazon fulfillment centers in US with air cargo and sell with Amazon Prime literally less than 3 months.
Before 3rd party business eBays market cap was 4 times higher than Amazon, today Amazon’s market cap is 40 times bigger than eBay’s market cap. And this is the metric that explains everything in a nutshell as clear as day.