Learn from the Bezos Virtuous Cycle: Leverage and Invest In Infrastructure
The purpose of this post is to share the key challenges our customers face and share insights from Amazon's "fylwheel" business model which, applied properly, are proven to separate the most successful online retailers from the pack.
Jeff Bezos Interview with Walt Mossberg [Code Conference 2016]
1) Amazon Marketplace fulfillment standards make it increasingly difficult to maintain goodstanding. Sellers are forced to take more control over their inventory or hand it over for Fulfillment By Amazon (FBA). Customers expect a higher level of service and have been conditioned to default to Prime-eligible listings.
2) Brands are increasingly selling direct on marketplaces, making it difficult for resellers to access fast-moving lines. Sellers need to free up time and resources to establish a more defensible retail model.
3) Competition is fiercer than ever, often with 20 or more sellers competing on a given listing, the coveted buy box is elusive. This places tremendous pressure on pricing, and a premium on efficiency.
4) eBay, Rakuten, and other sales channels are not delivering compelling returns and sellers are looking for other ways to grow sales outside of Amazon.
How did we get to where we are today? Where will we be 2, 5, 10 years from now?
Bezos Virtuous Cycle
To understand the conditions which have led to the status quo, we need only look at a simple, ingenious sketch from 2001 by Amazon.com's founder Jeff Bezos.
Aptly termed the "Bezos Virtuous Cycle", careful study of this closed loop system reveals the key to success in online retail: a bias towards leveraging and investing in infrastructure.
There are two hot-button components of this business model which demand further analysis:
1) Lower Cost Structure
- continuous reinvestment
- economies of scale (products, shipping)
- automation (physical and digital infrastructure)
- low cost culture
2) Customer Experience
- fast, accurate delivery
- low prices on growing selection
- continuous innovations make it easier to
- fast customer service
- long-term focus -- willingness to lose money on orders to keep customers happy, win long-term business
The way in which Amazon lowers its cost structure is certainly paradoxical -- it continually invests in infrastructure. Since 2010, Amazon has invested over $15B in distribution centers, proprietary software and hardware (Kiva Systems robots) which all contribute to greater supply chain efficiency.
The pace of Amazon's infrastructure investment is relentless. Thankfully, you can piggy back on this investment and leverage Amazon's fulfillment infrastructure ("Fulfillment By Amazon" or "FBA") for your own retail business.
allows encourages marketplace sellers to utilize Amazon's distribution ecosystem and customer service infrastructure. Giving up control of some or all of your inventory is a scary proposition, but one that we believe is necessary if you want to succeed on Amazon and free up resources to grow your business on and off of Amazon.
Thanks to FBA, we're seeing a major transformation in Amazon's marketplace. Initially, FBA sellers had seen Amazon leverage their sales data to work direct with their suppliers. Now, instead of competing against marketplace sellers as had been reported in the past, we're noticing Amazon is leveraging FBA sellers as their outsourced merchandising team. Earning ~15% marketplace commission while controlling the customer experience is a lot better than investing in merchandising teams and competing away any profits.
Leverage, Automate, Grow
Now it's time to turn these insights into action.
1) FBA Multi-Channel Automation: why not leverage Amazon's fulfillment infrastructure to fulfill orders to customers outside of Amazon? Using FBA to fulfill orders to customers on Jet.com, eBay, your own webstore and other marketplaces allows your team to free up resources (time and money) to invest in merchandising, supplier development, and even sourcing and brand development.
*If transitioning to FBA is not feasible or something you are willing to consider, be sure to push for Amazon's Ship By Region program. Offered to sellers with outstanding fulfillment performance, Ship By Region will allow you to list your products on Amazon as Prime eligible for customers within a 2-day delivery proximity.
2) Custom Software: most marketplace sellers find themselves manually updating inventory and pricing, creating listings on each channel, manually processing returns, jumping between multiple browser tabs, spreadsheets and desktop applications, and even pen and paper to keep track of orders.
At some point you hit a wall. It's a struggle to keep your head above water, maintain sales and goodstanding. You feel like a slave to your own business process. Maintaining the status quo is exhausting and you and your team are perpetually burnt out. It takes months to recover from the stress of your busiest selling seasons. Does this sound familiar?
Think of all of the things you're currently doing manually that a computer could reasonably automate. How transformational would this be for your business?
- How many man hours you can re-purpose towards growing your business?
- How much more productive would your team be if they were able to stay ahead of issues and offer proactive customer service? How much happier would your customers be? Would you grow repeat business?
- Imagine building your own online retail brand (leveraging Google Shopping) with minimal additional effort.
- Imagine being a first-mover to sell on new marketplaces including Jet.com.
- Imagine the economies of scale you will achieve as you continue to grow.
- How much more efficient and competitive would you be?
Execute according to the Bezos Virtuous Cycle and you will be well positioned to grow market share over the long term.
If you'd like to leverage our advanced multichannel inventory and order management software to automate and grow your online retail business, visit our website and request an interactive demo:
Related Reading: The Virtuous Cycle Of Multichannel Product Data