The Cost of “Your Margin Is My Opportunity”

Jeff Bezos has famously said, “Your margin is my opportunity,” implying that Amazon delivered better prices by removing the costs added by the middlemen in the retail supply chain. But what is maybe missed by the statement, is whether there was value created by that margin.

The promise of Amazon and its marketplace is the removal of the inefficiencies - and thus the cost - of middlemen. Rather than retailers selling brands on Amazon, the company wants the brands to do it directly. One less middleman. Instead of sellers sourcing from China, the marketplace welcomes factories to sell directly on Amazon themselves. Straight to the source, and straight to the lowest possible price.

However, the removal of middlemen didn’t remove the costs. It has shifted them to different, often hard to police and control places instead.

Retail supply chain

Before online retail, supply chains relied on friction to achieve quality. Becoming a vendor to Walmart required years of work and experience. Those vendor relationships were precious and would last for decades. Because of how hard it was to build one, Walmart could trust on the network of vendors to keep up the quality. In turn, they were invested in vetting their suppliers. Friction in the system meant the supply chain could be trusted. And if anything went wrong, there was a clear path to follow to find the responsible party.

Eliminating counterfeits, for example, in that type of supply chain, was straightforward. The system’s design itself mostly ensured there were few of them. Thus the cost of middlemen included the cost of eliminating counterfeits.

On Amazon, the cost of eliminating counterfeits is passed on to the brands and, sometimes, consumers. Because of the nature of the open marketplace, the supply chain on Amazon doesn’t have the same sort of trust found in offline retailers, and Amazon has limited data to make decisions. Thus, it is often up to the brand to monitor their listings, file trademark violations and patent infringement cases, and try to fight counterfeits otherwise.

Consumers are doing some of that work too. They are growing accustomed to inspecting items after delivery to decide if they are legitimate. It often doesn’t take much time, but all customers totaled represent a significant amount of time spent doing work they didn’t have to do when buying from a store. The cost gets higher when considering product safety and legal liability. Amazon is not liable for products sold by its marketplace, and sellers are often hard to track down even by a court.

The issues are not limited to the physical products themselves. There is no one doing curation either, a job most retailers would do, instead replaced by a search algorithm. That search algorithm tries to pick the best products out of hundreds of millions of choices, while also trying to ignore fake reviews and other abuses. It can’t do that well all the time, leaving consumers, yet again, to do some of the work to pick the right product.

For a while, it looked like Amazon was aiming to erode the notion of a brand altogether too. Ranked by reviews and ratings, products on Amazon looked like more efficient versions of the branded products, minus the billions of dollars brands like P&G spend on marketing every year. But this replaced the fundamental value of a brand - its ability to reduce search time by being a recognizable name a customer could trust - with search-rank and the flawed Amazon’s Choice badge.

Amazon supply chain

The whole journey of how customers discover products, which brands they choose, the quality of those products, post-purchase experience, and more is better when there is accountability in the supply chain. That accountability, inevitably, comes at a cost. The many issues that have surfaced surrounding the Amazon marketplace are real and are the direct result of the lack of trust in the supply chain. And they are both what enabled its growth and problems that are hard to fix. At least, not without changing the fundamental building blocks.

Amazon’s infinite catalog and the millions of sellers are not manageable in the same way Walmart has set up their offline supplier network. Nor can they implement product safety testing in its warehouses. Every aspect of Amazon retail operations is out of scale for people to control. It currently relies on automation to get some accountability, but ultimately Amazon’s most significant challenge is extending its internal incentive structure - customer obsession - to its marketplace and the sellers.

Other marketplaces are trying to introduce friction to be different. Walmart requires approval to become a seller, Alibaba’s demands a security deposit of as much as $50,000, niche marketplaces are curating selection as if they were retailers, and managed marketplaces are taking on the responsibility of deciding on behalf of the customer. They are bringing back concepts of the old retail world to achieve what technology promised to deliver but failed.

The friction of middlemen is undoubtedly valuable. In theory, middlemen-free commerce results in the best prices. In reality, however, it results in costs being passed on to consumers in ways that make them more expensive. Friction makes everything harder, both the good and the bad. In Amazon’s pursuit to remove friction, we ought not to lose sight of the potential bad.

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Juozas Kaziukėnas

Founder of Marketplace Pulse, Juozas wears multiple hats in the management of Marketplace Pulse, including writing most of the articles. Based in New York City. Advisor to other startups and entrepreneurs. Occasional speaker at conferences.

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