For any business, the ultimate goal is to intertwine profit, growth and customer satisfaction. However, growth and customer satisfaction often come at the expense of profit. For many years, this tradeoff was the norm at Amazon.com — the company achieved amazing growth, but spent what would be profits on business experiments (e.g., fulfillment centers). Recently though, Amazon has strung together several quarters of profitability, much to the joy of investors.
Much of the media coverage attributes Amazon’s success and profitability to Amazon Web Services (AWS), the company’s cloud computing division. However, that assertion doesn’t take into consideration that most competitors of Amazon are not going to get into the computing infrastructure game — they’re going to need to find other sources of growth and profit. Because as we’ve seen recently, Amazon has been an underlying cause of several retailers changing their courses of action: consider Macy’s announcement of 100 store closings or Wal-Mart’s recent acquisition of Jet.com.
The media narrative also neglects a crucial profitable component of Amazon: its third-party marketplace. Since Amazon doesn’t release revenue data for its marketplace, how do we know if it’s even profitable? We can start at the ChannelAdvisor blog. Executive Chairman Scot Wingo has been tracking and analyzing the performance of Amazon’s own products vs. those sold by third parties for several years. Here’s a snapshot of his review of this year’s second quarter.
With regards to the third-party marketplace, revenue begins to take off in 2014 and grow rather quickly each quarter thereafter. In fact, the gross merchandise volume (GMV) going through the third-party marketplace is larger than the GMV produced by Amazon’s own products — and the third-party marketplace GMV is growing at a faster rate, too.
While the third-party marketplace’s contribution to Amazon’s revenue was only 10 percent in early 2014, it has grown to 22 percent by Q2 of 2016. And once the third-party marketplace becomes a large enough contributor to Amazon’s revenue, the online retailer’s gross profit margin will also markedly increase.
It’s not coincidental that this improvement in gross margins occurs. The marketplace model is a profitable one. Anything sold on the marketplace is virtually pure profit, as Amazon never pays for the inventory (or for any other overhead, like customer service or logistics). The model enables a virtuous cycle: consumers come to the site for the wide breadth of products offered, a compelling user experience and attractive prices.
The integration of third-party sellers improves offers via competition, which improves user experience. There’s also an increase in site traffic, which attracts more sellers and generates self-fulfilling growth. This growth allows the operator to further reduce fixed costs, offer the best user experience and increase traffic so as to generate even more value.
For other retailers, this should be a wake-up call.
Amazon has disrupted retail, not long after being massively underestimated by its retail competitors. The company’s marketplace model is a win for Amazon, customers and sellers alike. The momentum is undeniable.
The marketplace model represents a direct path to growth and profitability. Many other retailers are beginning to turn to the marketplace model. Retailers are applying the flexibility of the model to their advantage: its implementation helps companies stay relevant to their customers by offering the right assortment of products and prices, thus driving profitable growth.
Adrien Nussenbaum is the U.S. CEO and co-founder of Mirakl, a SaaS-based online marketplace solution.