It’s no secret that Amazon has built a highly successful – and highly profitable – online Marketplace. Third-party sales on this platform account for almost half of Amazon’s unit sales. Further proving the potential in this business model, many other high-profile Marketplaces have emerged in the past few years – Apple’s iTunes, Alibaba, and Farfetch, just to name a few.
The secret to the success of Amazon’s model was actually sketched on the back of a napkin by founder and CEO Jeff Bezos in 2001. He essentially laid out the foundation for a winning Marketplace strategy: the Virtuous Cycle.
The Key to Success: A Virtuous Cycle
Amazon’s entire approach to success centers on the concept of a “virtuous cycle.” This mindset has driven the company’s strategy since the very beginning. According to Bezos, the cycle begins with a fantastic customer experience, which drives a large volume of traffic. Satisfied customers then attract more customers, mostly through word of mouth.
The additional traffic attracts more sellers to the company’s third-party marketplace, as Amazon’s large volume of site visitors is paramount to these smaller sellers. Amazon, in turn, can ensure breadth of product choice without actually sourcing from partners.
As Amazon grew, it lowered its cost structure by leveraging purchase, fulfillment infrastructure and logistics infrastructure, which consequently lowered the cost per unit of products. The decrease in cost allowed Amazon to lower its prices to shoppers, further satisfying their need to find the best possible price.
This low price point combined with an increased selection was critical to improving, and maintaining, the customer experience that drives this cycle again, and again.
Jeff Bezos – Amazon’s virtuous circle
This business model enables Amazon to make money simply by leveraging the power of its name combined with the efforts of a third-party seller.
Three Keys to a Successful Marketplace
Amazon’s success is a great example of the 3 keys to a successful Marketplace in action:
1. Large product catalog
2. Fair price
3. Great buying experience
When Amazon first opened its Marketplace, some thought it was crazy – why would the e-commerce giant allow customers to buy products from its competitors?
But, as Bezos said, “Since we focus on profit dollars rather than margins, we are largely neutral on whether an item is sold by us or another retailer.”
We at Mirakl consider Amazon to be a model of success for many organizations opening their own Marketplaces. With the Mirakl Marketplace Platform, any retailer can leverage its own virtuous cycle.
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