A platform business model is one of the most interesting models arose throughout the web era. Some of the components that make platform business models interesting are their scalability and the fact those platforms can leverage network effects and flywheel models to gain traction.
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.
And how that platform business spurred the growth of other business units (AWS, advertising, third-party services, Prime) who might have not been possible without a solid platform business in the first place, and it all starts with building up critical mass to enable network effects.
Amazon platform-first business today
In 2018, independent third-party sellers (mostly small- and medium-sized businesses) sold 58% of the merchandise on the Amazon platform.
Opposed to Amazon retail’s own first-party sales with the remaining 42%. As Amazon has put it “Third-party sellers are kicking our first-party butt. Badly.“
What are some elements to take into account to understand how Amazon transitioned toward a platform-first business model?
Amazon selling tools and the power of free tools
Amazon favored the transition toward a platform business model by building the selling tools (inventorymanagement, processing payments, tracking shipments, reports) which made Amazon‘s website, not just e-commerce where they could distribute their product, but a management system they could rely on.
Fulfillment, Prime and the flywheel effect
When launching a platform business model that relies on third-party sellers, there are two major issues (among others).
First, you can’t guarantee the quality of the service (in this case delivery) if you don’t control the process.
Second, in the long-run, it becomes hard to have loyal customers, as transaction costs might make the repeat purchase not convenient to those shoppers, thus making a digital platform lose its initial competitive advantage over physical pairs.
How did Amazon, over the years, face those issues?
After many trials and errors, two programs in combination helped Amazon transition toward a successful platform model.
Fulfillment by Amazon and Prime in combination substantially improved the customer experience of buying from independent sellers, thus spinning the Amazon flywheel.
As Amazon highlighted in its 2018 shareholders’ letter, at the time it was not an easy decision to make, as both programs implied huge investment and financial risks and those went through many internal debates and discussions, so at the time their success was not given for granted.
Will Amazon keep its platform business model as it is?
A platform business model was extremely effective to help Amazon scaling up in an era where the web was still an early-stage ecosystem.
Thus, a platform business back then (the late 1990s) up to the 2010s has proved an incredible model for traction, scale, and domination.
Whether Amazon will keep its platform as primarily serving third-party sellers we can’t know for sure.
For instance, Amazon might be able to revert this process by internalizing more brands.
In fact, as third-party sellers provided over the years incredible data about what people want, Amazon, in theory, has the power to have those items manufactured and sold with Amazon’s brand, thus increasing again the portion of first-party products.
Will this happen in the coming years? We’ll see.
Is a platform business model still the most viable solution today?
We’re living in an era where arising competition on the web, its growing maturity, and penetration to the whole world, have also changed the whole digital business landscape.
Building a platform business today might not be an easy option as the consolidated platforms (Google, Amazon, Apple, Facebook, and a few other brands) are acting as winners who took it all, thus locking-in distribution pipelines with their algorithms, and working as gatekeepers.
In this scenario, building up a successful platform business might have become a risky option, initially.
Thus, a cheaper option is to bootstrap the business to product-market fit first, then evaluate whether a platform business helps better serve existing customers, and at the same time expand the customer base.
In the end, Amazon itself took years to transition to a full-fledged platform business.
Will Amazon convert in a private label platform?
The list of Amazon-owned labels and brands grows. As Amazon is both the gatekeeper and the owner of those brands, concerns arise about the ability of the platform to be neutral toward third-party sellers.
As a platform business model, a lot of value is in the data and knowledge acquired by the platform over the years.
As Amazon has grown as a platform over the years, it has become tempting to make its own brands prevail on the platform. Yet, Amazon’s mission is also about price, convenience and variety.
Therefore, we could argue that the third-party sellers’ ecosystem is what made Amazon successful. Thus, the balance to keep the platform successful is also about making this ecosystem survive.
The balance is tricky and can be broken easily. That can put Amazon in a difficult position. First, because third-party sellers might migrate on other platforms that do not have interests (for now) in owning brands because it’s not their core business model (see the Google move in opening its Shopping Platform).
Second, regulators might decide to break up the platform from the brands. Just like in telecommunication, if you own the pipeline, you can’t sell the product, unless of course, those are two separate businesses. Amazon as a platform might become a separate entity compared to Amazon as a set of owned brands.
Why then Amazon is pushing on its private labels over the years? As a platform grows into an established brand, it becomes a key element of its long-term success the ability to be recognized as such.
Some elements that make this strategy appealing to Amazon are:
Control: as a company grows into an established brand, the risk of doing business is much much greater. This requires more control over the products offered, trying to craft an end-to-end experience (other former platforms turned gatekeepers are becoming brands). In short, part of the attempt of Amazon to offer its own products is legitimate as the company can guarantee higher quality standards (from sourcing to delivery).
Margins: it’s also financially attractive to have owned brands, as Amazon can gain higher margins, while still practicing a low-price, as there is no revenue split with third-party sellers.
Branding: being successful in the long-run for a company tied to a consumer’s business is also about making sure its brand can be recognized. Amazon brands, like Amazon Basics, has become a whole category of products going from home to office and travel. And this makes people more and more aware of Amazon, not just as the place where they can find pretty much anything, but also as a brand that fills their homes with useful objects in their daily lives.
Key takeaways
Amazon converted into a platform business model over the years by incentivizing third-party sellers to join the platforms. This helped Amazon achieve it mission to offer a wide variety of products at a low price.
As Amazon has grown into a platform business model, it has also developed a set of related services that pushed even more third-party sellers to join the platform.
By growing, Amazon has also become the gatekeeper between consumers and small businesses featuring their products on the platform. And over the years, Amazon has expanded its brands.
The question remains open on whether Amazon will keep its brands limited, or it will expand them further. Yet, this raises the question of Amazon’s neutrality as a platform and opens up potential breakups.
On the other end, it becomes attractive for Amazon to expand its own brands because that gives it more control, distribution, margins and brand recognition.
The balance is tricky as the ecosystem of third-party sellers which made Amazon successful in the first place might also help it break up if those third-party sellers would move en masse on other e-commerce (neutral) platforms and if regulators might think it’s time to break Amazon’s in two businesses (platform & private brands).
References: Amazon Financial Statements and Amazon Shareholders’ Letters
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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