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Another approach to the chicken and egg problem - Part 5
Marketplace Risk Management
The transition to a marketplace is far from easy. Moving from an experience where a company owns most customer touchpoints to one that involves several other parties creates challenges. How did Amazon manage to maintain “the most customer centric experience in the world” while a big part of the experience was now driven by 2MM different sellers?
Amazon’s main asset is its brand. If you are an Amazon customer, I bet you don’t remember any Amazon seller you bought from (sometimes you might not even know you bought from a seller), but you remember you ordered from the Amazon platform. After all, you are an Amazon customer. There is a huge reputation risk at stake and Amazon needs to ensure that customers remain happy, otherwise the additional third party selection will become a liability as unsatisfied customers will prefer to take their business elsewhere.
What are all the things that can go wrong in a sale through a third party? While the possibilities are endless, the main cases are:
Purchasing experience issues (e.g. product details are inaccurate, low quality images, wrong quantity description, high price)
Fulfillment issues (e.g. product is out of stock, product delivery is delayed)
Quality Issues (e.g. counterfeit products, broken or missing parts)
To mitigate these, Amazon put in place several programs that enabled the company to monitor seller performance, took over critical parts of the experience, and offered guarantees so that buyers could confidently purchase third party products without having any second thoughts.
Performance monitoring: Amazon applies strict performance standards for third party sellers, providing incentives for ones meeting predefined thresholds, while enforcing penalties to ones who fail to meet expected performance.
Part of the carrot approach comes in the form of additional visibility for sellers that meet Amazon standards and provide an exceptional customer experience. For example, Amazon is awarding the BuyBox, an one-click add-to-cart functionality which drives the majority of sales on the Amazon platform to sellers based on certain eligibility criteria. On the contrary, sellers that fail to meet required performance, aren’t eligible to receive the BuyBox and as a result miss a big part of potential Amazon sales. In another example, Amazon reportedly requires sellers to submit improvement plans after customer complaints.
Taking over parts of the experience: as Prof G would say, the gangster move was taking over the fulfillment experience with the launch of the Fulfillment by Amazon (FBA) program. We expanded on the FBA launch and how this standardized one of the most challenging aspects of the third party experience.
Amazon Guarantee: the A-to-Z guarantee is a program that protects Amazon customers when they purchase items sold and fulfilled by a third-party seller, covering both the timely delivery and the condition of your items. If customers are not satisfied with the purchase, they submit a claim and Amazon refunds them, while it later settles with sellers.
In addition to these initiatives, Amazon has another lever to ensure a great customer experience: their first party Retail business. We already mentioned the importance of the first party business in creating the initial supply and attracting demand on the platform. In addition, it accomplished two other critical goals, ensuring critical selection and competitive pricing.
A marketplace business has great benefits but the platform can’t directly control selection and pricing as these are defined by sellers - the platform puts in place the right incentives and sellers usually act based on those. However, there are cases where incentives don’t work. For example, if only a limited number of sellers can source a very popular product then demand exceeds supply, which in turn drives a price increase. Every seller wants to maximize their profit and as a result will increase prices to accomplish this. But what is the best strategy for a platform? The answer is long term cash flow maximization, which needs to balance short term profit with customer satisfaction. If a customer feels that pricing is higher than expected, they start price checking for their future purchases and this can have an impact on the Customer’s Lifetime Value (CLV). This incentive misalignment is common. Most marketplaces resolve this by subsidizing part of the price through a coupon to buyers or offer a fee discount to sellers in the condition that they maintain a competitive price. These initiatives can mitigate the issue, but add some friction to the experience (buyer needs to click on the coupon or seller to accept the referral fees promo). This is simplified through Amazon's additional lever: source the selection through their Retail business and price at competitive levels.
Risk management initiatives require a large amount of resources. In this case, Amazon built a large fulfillment network and is spending a lot of resources in algorithms that detect quality issues, while refunding unsatisfied customers. While these initiatives are costly, there is no doubt that they are necessary for a marketplace’s successful scale and long term success.
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Part 5: Risk Management (this article)