eCommerce in the age of Amazon

To sell products online, we must understand the market. You can’t talk about eCommerce without talking about Amazon. So let’s talk about Amazon.

Benedict Evans — a partner at venture capital firm Andreessen Horowitz — succinctly summarized the reason for Amazon’s dominance.

Throughout its history, there have been many skeptics of “Earth’s biggest bookstore,” as they called themselves at the start. And for the very reason Benedict Evans cites: it’s a low margin commodity retailer. How could such a model work out?

Well, it did.

If we want to be successful in the world of eCommerce, we must understand, and really get to know, the world’s greatest eCommerce company.

Let’s put Amazon’s success in perspective. If you bought 100 shares of Amazon’s stock when it IPO’d on May 15th, 1997, your magic price to turn your investment into $1 million was $833.34. September 30th, 2016 was a milestone day for this mythical investor, because on that day, Amazon closed at $837.31. It’s still around this price, and many in the market just expect it to continue to grow.

Today, we’re living in Amazon’s world. They have a dominant advantage in eCommerce and retail. Everyone else has to choose whether to battle Amazon, play within their ecosystem, some mixture of the two, or find a niche outside of Amazon’s current market — something that is getting harder to do every day.

The key to living in Amazon’s world is to understand it.

Amazon is eating the world of eCommerce

It’s estimated that Amazon now has 50 million Prime customers just in the United States — people that pay around $100 for the plethora of benefits Amazon is constantly dishing out. Fifty. Million. It’s estimated they have at least 10 million more customers internationally.

Prime video, music, and 21 other currently listed features are certainly appealing. But for the eCommerce sector, we all know it’s shipping and what a “membership” causes for buyers that matters most.

Free two day shipping anywhere is extremely hard to match. Fulfillment is really, really hard when you do it yourself, or even if you have a team to manage it. It requires incredible diligence, and is very costly.

Amazon gets unbelievably low rates to ship all over the world, and they don’t have to make money on shipping, because they make money in many other ways. Free shipping is the go-to Amazon carrot. Independent store owners don’t have such luxuries.

And when a customer knows they have a Prime membership and the promise of a new item in two days (or in some places, same day!), for no extra cost, it’s natural to look there. Once you go Prime, you always look to see if what you want is on Amazon.

Morgan Stanley released a survey that cites how, “about 40% of Amazon Prime members spend over $1,000 a year on Amazon, while only 8% of non-Prime shoppers do so.” When lifetime value (LTV) is the bread and butter eCommerce statistic, that’s a pretty incredible stat.

The pie is getting bigger across the board

eCommerce is growing tremendously. Mary Meeker’s famous Internet Trends report shows the growth of eCommerce from 2000 to 2015:

eCommerce is directly taking away from physical retail. Pam Goodfellow writes, “With the big discounter’s share slipping since peaking in December 2013, Walmart has realized a 3-year compound annual growth rate (CAGR) of -13.9% to Amazon’s +15.2%.” Walmart was the last great retail disruptor — having disrupted local retail — but eCommerce, and especially Amazon, have hurt their retail business.

The question is: can you get a piece of Amazon’s pie? Or, if you choose not to participate on Amazon, what part of the pie is left?

Less than 15% of retail is eCommerce driven still, so the pie will inevitably continue to grow, especially as younger generations grow up with eCommerce as their default shopping method.

By the end of 2018, according to Bloomberg’s analysis, Wall Street expects Amazon’s net earnings (profits) be be more than three times those in 2016. To be fair, plenty of that expected growth is beyond eCommerce alone; Amazon is eating more than just eCommerce. For Amazon, it all feeds back to the same hungry giant.

As eCommerce as a whole grows, Amazon is expected to take up at least half of that growth — compared to just under 40% today. So the pie is getting bigger, but the non-Amazon slice is proportionately getting smaller.

Globally, others are growing even faster than Amazon

Amazingly, other companies are growing even faster, and are by some types of measurements larger than Amazon.

Alibaba and JD.com are the two largest retailers in China — the world’s largest market — online or by land. And the uptake for eCommerce is faster than in the US. Again, from Mary Meeker’s Internet Trends:

eCommerce growth in China compared to the US

eCommerce growth in China compared to the US

JD.com and Alibaba both deliver goods all over China, just like Amazon in the US. Alibaba is well known for their international wholesale business; in fact, a lot of wholesale items from Alibaba are refitted for US consumers and sold on Amazon (and other locations).

By gross merchandise value (GMV), Alibaba is larger than Amazon. But Amazon makes more money, as Alibaba only makes fees and commissions from third party sales, whereas Amazon sells plenty of stuff themselves direct to consumers. Still, GMV is the key indicator for the size of the growing eCommerce marketshare.

China and pretty much every other country are growing rapidly, and in plenty of cases, faster, than the US. Therefore, the trends described thus far are not unique to the US, and if anything, there is untapped opportunity for US sellers in international markets.

Similarly, international companies are perhaps the most likely candidates to provide the level of  competition required to challenge Amazon in the US. It will be harder, I think, for a new US online retailer to take aim at Amazon than it would be for an established international retailer. See Jet, for example.

Amazon will continue to integrate into your life

“Alexa, volume 2!”

That’s what my Dad said last time I was at my parents house. They were pretty excited about Alexa, Amazon’s latest entry into consumer goods that make their eCommerce goods all that more accessible.

You can switch the lights, control music, and all the other fun stuff the internet of things (IOT) promises with Alexa.

You can also shop on Amazon, of course.

Amazon has made huge early gains with Alexa, with a skyrocketing ecosystem of apps and other features — along with a very low price — to entice more than 11 million people to put Echo devices in their homes.

Ben Thompson explains exactly why that is so impactful on eCommerce:

Amazon, meanwhile, doesn’t need to make a dime on Alexa, at least not directly: the vast majority of purchases are initiated at home; today that may mean creating a shopping list, but in the future it will mean ordering things for delivery, and for Prime customers the future is already here. Alexa just makes it that much easier, furthering Amazon’s goal of being the logistics provider — and tax collector — for basically everyone and everything.

Millions of people can just yell at Alexa that they need more toilet paper, and she automatically buys it and ships it to them. That’s great, if you’re selling Alexa’s favorite toilet paper. It’s a little less great if you’re not. And you’re not.

For books, it was the Kindle. For other goods, it’s the Echo, and who knows what else it will be.

Amazon is an enormous company, with hundreds of sprawling departments, an infamous culture with high performance expectations for its employees.

And if you’re getting going in the eCommerce world, you must acknowledge its presence.

Where does your eCommerce business fit in with Amazon?

As Amazon grows, and their slice of the total pie gets bigger, it will continue to challenge alternative eCommerce models. Sellers can continue to do battle with Amazon, attempt to go a different route completely and stay away, or somewhere in-between.

So what options do you have?

Meet consumer expectations set by Amazon

When half of households are familiar with Amazon, then Amazon is setting the buyer’s expectations for how eCommerce should work.

If you bypass Amazon completely, then your platform will need to deliver in the following ways:

  • Is shipping free (or at least cheap for more exclusive items)?
  • Is shipping fast, with detailed tracking?
  • Does your return policy always give the buyer the benefit of the doubt?
  • Is the price competitive to quick online price checks?
  • Do you have loyalty mechanisms in place?
  • Are product reviews easy to find?

Sell something Amazon doesn’t, or can’t sell

If you can sell something Amazon doesn’t sell, you have a market opportunity. However, if it could sell on Amazon but doesn’t currently, you may need to reanalyze the market, or realize that your item may end up on Amazon and hurt your sales down the road; and you might want to beat them to that opportunity.

You may sell personalized items, proprietary items, manufacture-on-demand or one-of-a-kind items, or other types of products that make Amazon or other marketplaces a difficult option for selling.

In this case, you may be able avoid Amazon altogether.

Be human

Another thing Amazon will always struggle with is the personal touch of humanity.

From your product’s creation, to the website design, to your product copy, to your customer service: focus on the fact that you are a human being, selling to another human being.

As personal as an Amazon seller may try to be, it will never carry the same human touch that a unique store on your own domain will. Embrace this advantage and make sure the person shopping at your store and buying from you knows that they are doing so.

I equate this boutique feeling to what it’s like shopping at a locally owned brick and mortar store versus at a big box retailer. It just feels better.

It’s even better and more effective if what you are selling is designed and/or made by you and your team. If you are fully responsible for your product, you must take advantage and showcase it on your store.

Sell something personal, on subscription

Amazon is already on this track, but whether for food, alcohol, fashion, or beard products — subscription sales are booming.

Dollar Shave Club for this or Blue Apron for that are popping up for literally everything. This market is getting more crowded, but that doesn’t mean it can’t still be a good opportunity, especially depending on what kind of sales numbers your business requires; a one-person business is easier to sustain than a ten-person business, or a five-hundred-person business.

I recently heard of a wine service that not only sends subscription wine, but it evolves the subscription over time based on your feedback for taste. A differentiated model like this — where I realize the service will be better at picking wine I will like than I am by choosing labels I like in the store — is a great opportunity.

Let Amazon do what they are best at

You won’t compete with Amazon’s fulfillment’s reliability and speed. You just won’t.

However, even if you don’t want to sell on Amazon, Fulfillment by Amazon (FBA) is now available for your own eCommerce store. That means you can ship inventory to Amazon, integrate your online store, and when you make a sale, Amazon can fulfill the order — just like they do with Prime orders. It comes at a cost, but it can solve some headaches.

Sell on Amazon and on your own store

There are many risks for selling just on Amazon. Primarily, you are in their world, and they can kick you out of it.

There are many stories of sellers who are permanently banned due to a few pieces of bad feedback from buyers, or even very innocent things like a consumer blaming a store owner for counterfeit goods when it wasn’t even that store owner’s inventory (one of the quirks that must be learned if you decide to sell on Amazon).

It’s always a good idea to maintain your own storefront and brand, even if 98% of your business is on Amazon. There are several ways to do this and keep things in sync, and most of the software you can use for your store enable it. We’ll get into such topics in future posts.

Find a smaller marketplace and own it

Despite my pronouncements of Amazon’s dominance, there are other marketplaces, and some of them are amazing! Etsy, for instance, has proven to be incredibly successful for tens of thousands of store owners.

You can focus on an alternative marketplace and do very well. There are other marketplaces than Etsy, but that’s a great example, and there is a ton of strategy to consider in such marketplaces as well. Just the other day, I bought an obscure but in-demand product I couldn’t find anywhere else, from a shop on Etsy. It screamed opportunity to me, but it’s probably also serving that Etsy store owner very well.

Go hybrid: embrace Amazon, and anywhere else that will take your product

When Amazon is so big, it can be silly to not embrace it. However, there are plenty of challenges to consider, and you need to make sure you know what you’re getting into. For instance, just the inventory implications for shipping your items through Amazon’s FBA program could leave you liable to various state’s tax requirements.

However, if you want to sell, you shouldn’t be afraid to sell where the customers are. That means your own site. It means Amazon. And it means places I haven’t even mentioned yet, like directly on Facebook! Social channels are also a skyrocketing marketplace.

In the end, the goal of someone selling stuff is to…. well, sell stuff! You want to do everything within your power — and your bandwidth — to enable that, wherever that may be.

The opportunities are massive

The opportunities for selling online are massive. But we must know the elephant in the room; and the elephant is Amazon!

Amazon can be an incredible tool for an eCommerce store owner. It can also be a massive risk. The key is to understand it, and know how to either work with it or around it.

It seems appropriate to begin Commerce Notebook talking about Amazon, because Amazon will likely affect nearly every decision an eCommerce store owner makes from here on out for the next decade or more.

If you enjoyed this inaugural post, please don’t forget to share it, offer your feedback, and subscribe to the newsletter to make sure you get the next one!