Amazon.com Is Taking Over The World... of Small Business Development

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The economies of scale at large retailers like Wal-Mart (NYSE: WMT) and Amazon.com (NASDAQ: AMZN) have allowed these retailers to offer lower prices that have have often resulted in the demise of smaller businesses.   This complaint with the "big box" corporate model has been raised across the world over the past few decades, beginning with Wal-Mart expanding to new locations and running incumbent businesses out of town.  Today, a frequent complaint is that price-checking smartphone apps by retailers like Amazon.com allow consumers to touch and feel a product in a local store and then determine that it can be obtained for a lower price online.   With that context, it may surprise you that Amazon.com has created a robust ecosystem that actually helps the development of small businesses online.  

Wide Range of Solutions

As you've likely come to expect in this blog series outlining the impact that Amazon.com has had on everything from pet supplies and streaming video to cloud computing, Amazon.com is developing small businesses online through a number of initiatives.  Below is a brief discussion of several initiatives that I believe will contribute meaningfully to Amazon.com's future growth:

  • Sell On Amazon - Amazon.com has integrated a consumer after-market for new and used goods comparable to the core business of eBay (NASDAQ: EBAY) into its retail website.  For consumers that sell less than 40 items per month, Amazon.com offers this service with no listing fees and only charges a fee when items are sold.  For "professionals" that sell more than 40 items per month, there is a small ($40/month) fee and additional fees that are incurred only after an item is sold ranging from 6-20% depending on the item type.  This unique combination of complete integration into the Amazon.com retail website and the no listing fee model is attractive to many sellers that are not in a rush to sell an item and were previously limited by eBay's offerings.  
  • Webstore - For those businesses looking for a more complete web presence, Amazon.com offers Webstore, an e-commerce solution that allows businesses to create a standalone website.  Webstore can provide tools and hosting for simply operating a standalone site, or it can be leveraged for more powerful solutions through options such as the ability to combine a Webstore standalone site with Sell on Amazon's integration within Amazon.com's retail website.  Webstore provides a fully scalable e-commerce solution for businesses with revenues ranging from microscopic to multi-million dollars, including the ability to set promotions, be featured in Amazon.com's recommendation engine and more. Amazon.com charges a monthly fee, a small sales commission and payment processing fees for its Webstore services.
  • Fulfillment by Amazon - FBA allows small businesses to leverage Amazon.com's expertise in logistics. This service can store a business' products in Amazon.com’s fulfillment centers, pack and ship the products on the seller's behalf.   FBA's unique suite of features also includes the option to participate in Amazon.com's Prime two-day shipping program.  Amazon.com will even utilize "brand neutral" packaging and labeling that will not feature Amazon.com's logos or any other indication that Amazon.com handled the fulfillment of the order.  Amazon.com charges users a range of fees for storage, packing, shipping and handling the items managed in its fulfillment centers.  
  • AmazonPayments - Amazon.com allows websites to utilize its transaction interface directly within their standalone website with functionality that competes with Google's (NASDAQ: GOOG) Wallet and eBay's PayPal.  
  • AmazonLending - More recently, Amazon.com has rolled out a lending program to its small business affiliates.  As noted in a recent Wall Street Journal article, "Merchants who spoke to The Wall Street Journal said they were offered loans ranging from $1,000 to $38,000 apiece, with interest rates from less than 1% (for one of them) to 13.9% (for most who were interviewed)." For most small businesses, this represents a savings over small-business credit card rates.  Meanwhile, these returns are sizable for Amazon.com, especially considering the unique position Amazon.com has regarding its knowledge of the business' results and its recourse against non-payment.
At a high level, these tools offered by Amazon.com allow businesses to choose which aspects of the business the owners want to dedicate time to and which they'd rather outsource and take advantage of Amazon.com's expertise.  From getting funding to listing, selling and fulfilling orders, businesses can utilize Amazon.com for just about every aspect of their e-commerce business other than coming up with the idea of what to sell!
 
So What Does This Mean to Amazon.com's Results?
 
While the list of services Amazon.com offers to small businesses is impressive, the real test is how the company stands to benefit from this unique business model.  Well, there are a number of benefits.  From a quantitative perspective, Amazon.com's marketplace is estimated by analysts to have generated 9-12% of Amazon.com's $48 billion in revenue last year; that translates into a multi-billion revenue generator that is expected to grow as a percentage of Amazon.com's (already fast growing) total revenue over the next 5 years.  Given the nature of the monthly recurring fees that Amazon.com charges as well as its sales commissions for items sold on Amazon.com, this model provides the potential for a highly profitable business given that it utilizes Amazon.com's existing systems and removes the costs associated with managing inventory (and clearing out excess inventory) that face the company's core business.   Additionally, recruiting additional vendors to sell on Amazon.com provides additional variety and further reinforces Amazon.com's competitive advantage of having the widest selection of any online retailer.  
 
In addition to generating additional revenue and expanding Amazon.com's already vast selection of merchandise, Amazon.com's small business services also allow the company to gain a significant amount of information from its partners.  Think of it as a retail version of how Google and Facebook collect a lot of information about their users.  For Amazon.com, this information takes the form of additional consumer data that measures what customers have purchased and how much they paid.  On the retail operations side, Amazon.com has visibility into countless data points that it can analyze to determine ideas that work for its partners in terms of pricing, promotions, sales volume and more.  The value of this data alone is tremendous; rather than see how a buy one, get one free sale works on a box of golf balls (random example), Amazon.com can simply use its affiliates as test subjects and review the results at no cost (or risk).
 
Based on the continued growth of Amazon.com's small business services, the arrangement appears to be a win-win proposition for everyone involved; creating mutually beneficial ecosystems like this can generate powerful results, and I expect this to continue to drive growth for Amazon.com going forward as the company continues to expand its offerings available to small businesses.  In addition to the power of its current success, it is important to note that this set of services is unique; eBay likely comes closest to matching some of the functionality described above, but brick-and-mortar retailers that Amazon.com competes with (such as Wal-Mart) are simply not set up to foster small businesses.  As a result, this model will help differentiate Amazon.com as it seeks to continue gaining market share from Wal-Mart. 


BrewCrewFool owns shares of Amazon.com and Google. The Motley Fool owns shares of Amazon.com and Google. Motley Fool newsletter services recommend Amazon.com, eBay, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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