E-commerce Vs. Marketplace

E-commerce focuses its efforts primarily on selling its products, or selling products through its stores, thus measuring its success based on how many products it sells via its stores. Instead, the marketplace focuses its efforts on how many products third-party stores sell on top of the marketplace. Therefore it measures its success based on the transactions on the platform from third-party stores.

Jeff Bezos explains the difference between e-commerce and a platform

Back in 2019, in Amazon’s shareholders’ letters, one of the last ones from Jeff Bezos, as CEO of Amazon, he highlighted: 

The percentages represent the share of physical gross merchandise sales sold on Amazon by independent third-party sellers – mostly small- and medium-sized businesses – as opposed to Amazon retail’s own first-party sales.

Third-party sales have grown from 3% of the total to 58%.

To put it bluntly: Third-party sellers are kicking our first-party butt. Badly.

The statement above, explains the key difference between e-commerce and a platform!

E-commerce measures its success based on how many of its products it sells directly on its own stores. 

A platform, by converse, measures the success of other stores, on top of the existing e-commerce infrastructure!

Imagine in the physical world, a retail shop, selling products (of his own) and a commercial shopping area, where there are shops of many kinds, selling their products.

In the former case, the retail shop will be concerned primarily about its revenues, and product sales. In the latter, the commercial center needs to make sure within it has a set of thriving shops, which attract as many people as possible. Only with that setup, it will be successful over time.

As Jeff Bezos further highlighted, back then: 

And it’s a high bar too because our first-party business has grown dramatically over that period, from $1.6 billion in 1999 to $117 billion this past year. The compound annual growth rate for our first-party business in that time period is 25%.

But in that same time, third-party sales have grown from $0.1 billion to $160 billion – a compound annual growth rate of 52%. To provide an external benchmark, eBay’s gross merchandise sales in that period have grown at a compound rate of 20%, from $2.8 billion to $95 billion.

He also analyzes the context, to understand what made up Amazon’s success in attracting third-party stores, and he posed a few questions:

Why did independent sellers do so much better selling on Amazon than they did on eBay? And why were independent sellers able to grow so much faster than Amazon’s own highly organized first-party sales organization?

Jeff Bezos emphasized:

There isn’t one answer, but we do know one extremely important part of the answer:

We helped independent sellers compete against our first-party business by investing in and offering them the very best selling tools we could imagine and build. There are many such tools, including tools that help sellers manage inventory, process payments, track shipments, create reports, and sell across borders – and we’re inventing more every year.

In short, a successful platform incentivizes third-party stores and e-commerce to compete against the first-party stores, and it offers them a set of key tools to manage inventory, payments, track shipments, and reporting.

As Jeff Bezos further highlighted:

But of great importance are Fulfillment by Amazon and the Prime membership program. In combination, these two programs meaningfully improved the customer experience of buying from independent sellers. With the success of these two programs now so well established, it’s difficult for most people to fully appreciate today just how radical those two offerings were at the time we launched them.

The combination of fulfilled by Amazon and prime membership, improved the customer experience, of buying from independent sellers, thus making it as good as buying from Amazon itself.

As Jeff Bezos, highlighted, those two programs (now widely successful) were not guaranteed to succeed:

We invested in both of these programs at significant financial risk and after much internal debate. We had to continue investing significantly over time as we experimented with different ideas and iterations.

In fact, while those make sense now, and seem obvious, in hindsight, it took a lot of mistakes, failures, and iterations, to get there:

We could not foresee with certainty what those programs would eventually look like, let alone whether they would succeed, but they were pushed forward with intuition and heart, and nourished with optimism.

This is the core of what customer obsession stands for:

Customer obsession goes beyond quantitative and qualitative data about customers, and it moves around customers’ feedback to gather valuable insights. Those insights start with the entrepreneur’s wandering process, driven by hunch, gut, intuition, curiosity, and a builder mindset. The product discovery moves around a building, reworking, experimenting, and iterating loop.

And what building a flywheel means:

The Amazon Flywheel or Amazon Virtuous Cycle is a strategy that leverages customer experience to drive traffic to the platform and third-party sellers. That improves the selections of goods, and Amazon further improves its cost structure so it can decrease prices which spins the flywheel.

Read Next: Amazon Business Model.

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