Mar 18, 2019 - 10:49 AM
As with most businesses successes there isn't one simple answer. Here are a few thoughts:
- Sometime in the early years Amazon executives debated the issue of holding inventory vs. not holding it. "Is fulfillment a competitive advantage or a commodity?", Jeff Bezos asked according to the book "The Everything Store" by Brad stone. They were struggling with it and often either bought too little or bought too much. They had "Ebay envy" and the first two attempts to create an Ebay-like marketplace (Amazon Z-shops) had flopped.
- If it was a commodity, they should outsource it as soon as possible the team agreed, fueled by large pizzas at Jeff's Medina home! Jeff's focus on always doing what is right for the customer prevailed and they decided it could be a huge competitive advantage if they did it right. They could control and guarantee a delightful customer experience.
- So they went to work and did what it took to figure out fulfillment, poaching a Walmart logistics whiz in the process. This improved customer experience and got a better handle on the right amount of inventory to hold. Walmart is surgical about this and punishes suppliers who deliver too late, too early or not in the right quantities.
- But the thing that really made Amazon sales take off is the Prime program. With guaranteed two day free delivery, customers bought a lot more and the volume helped them refine their processes. At some level, all business problems can be viewed as "data problems". Some time in 2001, Jeff met with Costco's founder Jim Sinegal and was inspired by the Costco membership model. How could he do something similar for Amazon? After an employee independently proposed the idea, they decided to test it. As they say, the rest is history. Prime has more than 100 million members globally, more than twice as many as Costco.
- Meanwhile Ebay was plauged with all sorts of quality problems because they did not control the experience end-to-end. There were also seller revolts which Ebay handled with high-handed tactics.
- Amazon eventually figured out the third party seller piece. They key was to allow them to sell on the main site alongside Amazon's main listings, rather than relegating them to a secondary site.
Note that there isn't always a single right answer to the question about the marketplace model (matching buyers and sellers and taking a cut) versus the holding inventory model.
- AirBnB has a much higher valuation than hotel chains Hilton and Marriott precisely because it does not own buildings and therefore has a higher "return on assets. Ditto for Uber.
- Dell fell from prominence because it outsourced everything, choosing to be in the business of slapping a slick veneer onto boxes assembled by others. For a while the results were great but then the Asian manufacturers eventually figured out they could go straight to Best Buy and cut dell out. Clay Christensen does a brilliant job dissecting the Dell debacle in the article below. At no moment did they make a 'stupid manager" decision. What they did at each step was pretty rational and sound but the cumulative effect of all those decisions led to a disaster.
"Christensen retells the story of how Dell [DELL] progressively lopped off low-value segments of its PC operation to the Taiwan-based firm ASUSTek [LSE: ASKD]—the motherboard, the assembly of the computer, the management of the supply chain and finally the design of the computer. In each case Dell accepted the proposal because in each case its profitability improved: its costs declined and its revenues stayed the same. At the end of the process, however, Dell was little more than a brand, while ASUSTeK can—and does—now offer a cheaper, better computer to Best Buy at lower cost.
Mar 19, 2019 - 12:41 PM
Re-posting JimRhods answer:
Amazon directly competes with 3rd-party sellers. I used to sell various products on Amazon about 10 years ago and as soon as I started seeing a decent amount of sales, A listing would appear by Amazon (not a 3rd-party seller) and undercut me. My sales would soon disappear after that.
They clearly use your sales data to make money and directly compete with you. This combined with their atrocious support for sellers has turned me off to their marketplace completely.
Ebay, on the other hand, doesn't do this and I think this is why Amazon is able to make so much more money.