Learning from Amazon

Many retailers want to get more out of their online shops at the moment. They’re opening up to other partners and are turning into platforms or marketplaces. But is it enough? What are the factors behind the success of the platform economy?

GAFA economy: the acronym for Google, Apple, Facebook and Amazon is often used as a synonym for the platform economy. The companies’ stock market value, which outshines everything, is electrifying entire sectors. This includes retail, which is particularly based around Amazon.

But these companies aren’t the only examples of platforms. In Asia, Alibaba is part of the mix and in Europe, the payment provider Klarna is now becoming a platform.

What’s at the core of the platform economy?

Without delving too far into economic theories, the platform economy can be described as follows: companies which have become platforms have moved away from thinking about their ‘own’ products or services (or never thought about them this way in the first place).

These companies take on an intermediary role, coordinating the relationships between various partners (customers, suppliers and even competitors). This can be demonstrated most simply with Google and the publishing industry.

On the one hand, you have media producers offering their content. On the other, you have the consumers, i.e. people who want to find the latest information. Google brings both together (much to the dismay of publishers, but that’s another discussion). And there’s something else that’s significant about this example: Google doesn’t earn anything from this transaction on its own, i.e. through its search function service.

This leads directly to the question of how Amazon managed to become so powerful and why it’s difficult to stand your ground against a platform in any business field which has reached a critical mass.

Why competing with Amazon is so hard

In many media reports, Amazon is still falsely referred to as a “retail giant”. The roots of Amazon are actually in the book trade. In the early days of Amazon in Germany, Amazon’s customers were particularly excited about having titles from the USA delivered quickly and conveniently to their homes. And yes: Amazon does still sell goods, but retail only accounts for a fraction of the company’s revenue.

Traditional retailers buy in goods, slap on the margin they want and then sell them for a profit (hopefully), with the margin being used to pay for their marketing costs. Amazon took another route. Step by step, the company has established more and more services and sources of income that contribute to revenue.

The margin on a product no longer plays a direct role, because revenue is ultimately spread across all customers. This allows Amazon to reach completely different dimensions that the company can potentially spend on marketing, which smaller market participants are barely capable of competing against.

• Amazon has used its growing popularity to allow retailers to offer their products under their own names via the platform (the marketplace). Amazon simply takes a cut of the sales. External retailers now contribute considerably more to the GMV than Amazon does itself.
• The company makes parts of its infrastructure that are already in use available to others and can use the income to further expand the services. Retailers can deliver their products to Amazon’s warehouses and even have them shipped from there (FBA). Now even large companies happily use the company’s cloud infrastructure (AWS) – including those that compete with Amazon in one sphere or another
• Retailers and brands can book ads to gain attention and make them more visible on Amazon (Amazon Advertising).
• And the Prime customer loyalty programme gives the corporation enormous leverage. Those with a Prime membership can use Prime Video. Customers subscribing to channels make a further contribution to revenue.

In the end, everything revolves around the company and its access to customers. This is the platform economy in its purest form. The company is so appealing to users, thanks to all its services, that there’s little room left for anyone else. And whereas a traditional retailer can spend perhaps CHF 10 on customer acquisition from the margin they gain on a jacket, Amazon is capable of investing a great deal more. And this amount is constantly growing thanks to the additional revenue streams.

A marketplace can be a first steps towards becoming a platform

Access to end customers and the monetization of services form the core of the platform approach. It remains to be seen whether the Swedish payment service provider Klarna will follow this strategy exactly. Klarna first specialized in handling transactions that banks had little interest in. Then came the first products, such as payment by invoice for customers. These are risk-free from the retailer’s perspective, as the retailer first receives their money and the customer then pays Klarna. Next they added instalment payments. And now there’s a shopping section in the Klarna app where users can find offers from retailers collaborating with Klarna, all while keeping transactions within the Klarna environment. In other words, someone is starting to position themselves between end customers and retailers.

The success of platforms is plain to see and inspiring. Three things need to be considered:

1. It doesn’t work without complete digitization of processes and technologies. It’s not just the foundation for services, but also the basis for scaling up the entire model, i.e. creating more resources without an exorbitant increase in fixed costs.
2. The market is changing. This always offers opportunities for retailers – even Amazon must peak at some point. This will happen if the core promises (e.g. the service) are no longer the focus. This may lead to opportunities for retailers in the future.
3. There is no ideal route for creating a platform. Each company needs to find out for themselves which services or ideas are suitable for achieving this goal.

Opening up your own online shop to third parties, i.e. opening a marketplace, can be a first step in this direction. But it then needs to be continued with creative ideas as a marketplace isn’t a platform in and of itself, as can be seen with Amazon for example.