Executive Summary
Businesses considering partnership with Amazon face an unavoidable dilemma: form the partnership and risk ceding profits to Amazon, or eschew the partnership and forgo the operational cost savings and access to new customers. Amazon’s platform business model builds on network effects — when sellers join Amazon their products attract buyers to the platform; in turn, the buyers attract more sellers to sell more products on the platform, which attracts even more buyers. It’s hard for businesses to negotiate with Amazon, but there are strategies that help sellers make the system work for them: 1) Maximize value creation, 2) Preserve an outside option, 3) Protect the crown jewels of their business, and 4) Act early. Amazon offers enormous opportunity for value creation for partners if potential partners can think strategically in regards to how to deal with Amazon, both now and in the future.
Since the start of the Covid-19 pandemic, the volume of Amazon orders has soared. As worried consumers moved to shopping more online, choosing Amazon is an easy decision — with a click of the button, they can buy almost anything under the sun from over 8 million sellers. But for sellers, doing business with Amazon is a less straightforward proposition.
On the one hand, partnering with the online retail giant opens up access to more customers and offers operational efficiencies. On the other hand, Amazon controls the marketplace and has a record of leveraging power in the company’s favor over the partners’. Thus, businesses considering partnership with Amazon face an unavoidable dilemma — form the partnership and risk ceding profits to Amazon, or eschew the partnership and forgo the operational cost savings and access to new customers. So what’s a seller to do?
Before offering a prescription for how to strategize as an Amazon partner, it’s important to understand the root cause of the dilemma. Amazon’s platform business model builds on network effects, which enable Amazon to outcompete other sales channels, such as the brick-and-mortar retailers. When sellers join Amazon, their products attract buyers to the platform; in turn, the buyers attract more sellers to sell more products on the platform, which attracts even more buyers. Eventually, Amazon dominates the downstream retail market and gains tremendous bargaining power — and the ability to set the rules in its favor — over the upstream sellers.
There are, however, ways for sellers to make the system work better for them. Understanding that their product offerings are what attract buyers and make Amazon powerful, partners with foresight could strategize their product offerings on Amazon to both benefit from the partnership and maintain their own bargaining power. In many respects, strategizing product offerings in a sales channel is not novel; in traditional retail, manufacturers offer exclusive products to some retailers but not to others. And in digital channels, labels such as Big Machine Records, which represented artists such as Taylor Swift and Tim McGraw, withheld Taylor Swift’s songs on Spotify while the company continued to offer Tim McGraw’s songs on the popular streaming platform. However, to execute a successful product strategy, Amazon partners must address which products they should offer on Amazon and which ones to withhold.
To find answers, we turned to a group of partners that has a long relationship with Amazon: book publishers. In our research, we compared publishers’ product offerings in the printed book channel with those on Amazon Kindle during the formative years of the e-book platform (2007–2013). Our research finds that publishers offer only a fraction of their product portfolios on Kindle. For instance, travel guidebook publishers on average offered only about half of their active printed book portfolios on Kindle as e-books — a clear example of partners strategizing their product offerings on Amazon. In analyzing what types of products were more likely offered or withheld on Kindle, we found four strategies that are broadly applicable to all potential Amazon partners.
Maximize Your Value Creation. Bear in mind that the primary reason for partnering with Amazon is to create more value for your business. To this end, partners should identify the products that could benefit most from Amazon’s broad consumer reach, or its unmatched operational efficiencies.
Publishers are lured by Amazon’s operational efficiencies. Kindle enables publishers to save cost on operations such as production and shipping. Because these activities typically are variable costs, the savings increase with volume. Indeed, we find publishers tend to offer high demand product categories on Kindle because the variable cost savings will be the greatest.
Preserve Your Outside Option. Having a viable outside option is one of the most effective ways to maintain bargaining power. Yet, simply selling products through an alternative channel may not be enough. Partners should also actively bolster the alternative channels by making product offering decisions that are conducive to their success.
Our research shows that, compared to other publishers, the large publishers (which often have stronger relationships with physical book retailers) tend to offer smaller proportions of their book portfolios on Kindle, which suppresses the e-book channel’s appeal to consumers. More importantly, the large publishers are also less likely to offer their most competitive titles on Kindle, reserving them instead for the physical retail channels. This way, the large publishers help maintain the physical retail channels as viable outside options.
Protect Your Crown Jewels. Not all products are equally important. Partners could be especially harmed when the products that account for large proportions of their total sales revenues are exposed to Amazon’s bargaining power. Withholding these crown jewels from Amazon is a defensive action.
Partners withholding their crown jewels from Amazon is not uncommon. In fact, 42% of publishers in our research sample withheld their top-selling product category from Kindle. As an additional reason behind this product decision, withholding the crown jewel from Amazon and reserving them for the alternative channel enhances the preservation of the outside option.
Act Early. Network effects, once developed, are a hard-to-overcome competitive advantage. Yet, even as mighty as Amazon, the company’s platform businesses are not born with network effects on day one. Strategizing the product offering decisions early on can put partners in better positions to deal with Amazon.
This appears to be the case for book publishers. Having witnessed what happened to music record companies when Apple launched iTunes a few years before Amazon launched Kindle, publishers put their product offering strategy into action early on. Doing so slowed Kindle’s network effects development progress, and helped the printed book retail channel stay viable. Today, contrary to early predictions, printed books are far from dead. Despite the fact that Amazon has become the dominant player in e-books, book publishers have successfully retained some control over pricing that ensures their profitability.
Amazon offers enormous opportunity for value creation for partners. Yet, potential partners must think strategically in regards to how to deal with Amazon, both now and in the future, or risk failing to capture a fair share of the profit from the partnership.
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How Third-Party Sellers Can Make Amazon Work for Them - Harvard Business Review
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