Amazon doubled in size and Toys “R” Us went bankrupt.
Not only was Amazon inviting greater competition among Sellers who were selling to Amazon, known as first-party sellers (1P), but Team Bezos had opened the door to Third-Party Sellers (3P), who sold products on Amazon. Saul Hansell, in an article for The New York Times explained Amazon’s virtual surge as motivated by the desire “to replicate the success of eBay,” whose first-of-its-kind digital auction-style format was kicking Amazon’s butt.5
In 2003 we were one of the first to get a phone call from Amazon, back when desk telephones were still wired to the wall, about selling our basketball hoops in their brand new Sports & Outdoors category. At the time, the hoops, for which we were driving online traffic (at a nickel a click) were noticeably outperforming other hoops on search engines like Overture.com (later acquired by Yahoo). In fact, we were selling basketball hoops on Amazon.com before Amazon itself was selling basketball hoops on Amazon!
Of course we weren’t the only ones being recruited to expand Amazon’s stake in the virtual marketplace. Amazon was calling everyone with an online presence. What began as an easy new sales channel for us pioneers quickly became harder as more sellers flocked to sell their wares on the new online marketplace. Back then, my brothers and I were selling other people’s brands, a model that later became unsustainable for us on Amazon because every time a new Seller launched the same product, they’d do so at a lower price to win the sale. In response, we were forced to lower our prices and our profit margins began to shrink—fast. To compound the problem, Amazon itself got into the game, buying our same products from the same brands and selling them for less.
Spalding was a top-selling brand for us at the time. In fact, we sold so many Spalding basketball products online that Spalding gave us all-expense-paid trips to attend NBA All-Star games for four straight years in a row. The best part? We were booked into the same hotels as the NBA legends. I’ll never forget telling Shaq in a hotel elevator how he broke my heart when he left Los Angeles for Miami! But as competition exploded on Amazon, boosted by the Prime Free 2-Day Shipping rollout in 2005, we went from owning the coveted Buy Box for most of Spalding’s top-selling products to losing them all to Amazon, along with that all-expense-paid All-Star experience. Oh well, thanks for the memories.
We knew this would happen eventually, but we were shocked by how quickly Amazon bought and resold every brand imaginable. They had the traffic data, product data, sales data, and knowledge from 3P Sellers like us to literally take over entire categories—overnight. Add to it the tremendous buying power of Amazon; then subtract out the small guys’ ability to compete. The only way to maintain our sales and stay in the Buy Box was to lower prices. This race to the bottom became an inevitable consequence of Amazon’s Marketplace structure, and it was no doubt part of Mr. Bezos’ original vision to have the lowest prices, no matter what. This phenomenon still vexes Sellers today, and it eventually forced my brothers and me to rethink our entire approach to selling online. This process repeated itself four times over the years until we finally landed on the strategy that I will share with you in the coming chapters.
IT’S BIGGER THAN YOU THINK
Amazon is everywhere. It is on a speedy trajectory to become the largest retailer in the United States as it continues to gain on Walmart. Nearly half of the U.S. e-commerce market share already belongs to Amazon, with eBay, once the dominant leader in the field, in a distant second position with just 6.6% of online market share.6
Ironically, in 2019 eMarketer revised this initial 49% market share estimate down to 38% following a vague comment Bezos made in his annual shareholder letter. In it he said that 58% of its e-commerce sales come from Third Party Sellers. This downward revision from such a closely followed researcher highlights a glowing problem. No one really knows how many retail sales go through Amazon.com. Only Amazon knows, and they aren’t sharing that information despite the fact that they are a publicly-traded company. Additionally, DigitalCommerce 360 reported $602 billion in 2019 online sales7 and MarketplacePulse estimated that Amazon’s Gross Merchandise Value was $335 billion.8 If these numbers are accurate, then it is clear that Amazon has increased its market share to 55%, well beyond the 2018 market share estimate. I didn’t buy what eMarketer was selling when they decreased their estimate, but one thing is clear: Amazon wants to appear a lot smaller than they actually are, especially as the trustbusters gather at their gate.
Either way, when you look at Amazon’s reported sales, it’s easy to see how big they are. But consider this: they’re even bigger than what’s being reported. Amazon does not disclose the full retail value of goods sold on its platform, known as the Gross Merchandise Value (GMV) because more than half of its sales come from Third-Party Sellers, for which Amazon must only report the fees it charges them. If I sell a $100 chair on Amazon as a 3P Seller, for example, Amazon will charge me a $15 seller fee for the right to sell my product on their website. While I must report the full $100 GMV to the IRS, Amazon need only report the $15 fee, typically 15% of GMV. With 58% of Amazon sales coming from Third-Party Sellers, the sum value of what’s not being reported by Amazon is staggering. Estimates range in 2020 from $330 billion9 to as high as $530 billion,10 which already makes them larger than Walmart. Just sayin’.
Amazon has been so successful and so dominant that the U.S. and European Union governments may be the only overseers with the power to slow the company’s upward trajectory. Mr. Bezos’s empire has a slew of detractors calling for, among other things, increased taxes on the business and, in the most extreme case, a full-blown breakup. Even if Amazon were to be brought to heel, its competitors would likely still be outrun by the Amazon equivalent of the Baby Bells, a reference to the U.S. regional telephone companies that were formed from the breakup of AT&T (“Ma Bell”) in the mid-1980s. Third-Party Sellers already sell more on Amazon than Amazon sells on its own platform, and a breakup would move Amazon.com from the #1 largest e-commerce website to the #1 and #2 largest e-commerce websites. I know a lot of 3P Sellers who would welcome the thought of not competing against Amazon on their Marketplace, but who knows what might happen if Amazon Retail has its own website and is forced to compete? We’re likely some years away from knowing how the current antitrust inquiries play out, but until then, Amazon will continue devouring the competition; of that, you can be certain.
IF YOU’RE NOT ON AMAZON, YOU’RE NOT ONLINE.
I tell my clients, if you’re not on Amazon, your product isn’t really online. It’s a slight exaggeration, but I’m convinced that being on Amazon has become a necessity in today’s retail environment because Amazon has literally become The Internet of Products. Why? A major reason is that consumers don’t have to start on Amazon.com to wind up there. The company’s tentacles spread throughout the entire internet, and it is tough to avoid them. Forty-seven percent (47%) of people searching for a product to buy start their search on Amazon.com compared to 35% who use Google.11 And that’s not even the most amazing part. Because of Amazon’s long internet history and its massive online presence, search engines like Google and Bing give Amazon prime digital real estate on their Search Results Pages (SRPs). As a result, Amazon not only enjoys millions of unpaid organic search results links, but it also pays for clicks on those same search engines and comparison shopping engines (like Shopzilla and Pricegrabber) for top-ranking product search results. If all product searches lead to Amazon (and most do), then that’s where you need to be to sell your products. Simple as that.
The Google Search Results Page (SRP) pictured below
