Amazon is a fantastic example to be followed. Their history shows the way from dream to realization, from a small online bookstore to the multibillion-dollar shopping empire that conquered the world.
Some people may say that it was Jeff Bezos’ intelligence, stubbornness, and charisma that drove his incredible success, and they are right. Amazon’s rise, in its essence, is a series of smart and timely decisions that brought the company to the top of eCommerce. There are certain rules of business that allow anyone to try to reach great results, and we created this material to discover all of Amazon’s secrets.
This comprehensive research is dedicated to the financial and technical sides of Amazon and is aimed to help entrepreneurs build their eCommerce website startups on the threshold of 2020.
How Amazon Was Started
Before Amazon, Jeff Bezos graduated from Princeton University in 1986 with degrees in electrical engineering and computer science, and he worked on Wall Street in a variety of related fields for eight years.
In 1994, he decided to leave the company and start his own business. It was tempting to create an everything store, but Bezos understood that it was impractical at the beginning. Selecting from more than 20 possible categories, he concluded that books were the best choice.
The competition was fierce, there was not enough money and employees, and the used technology the site was built with were very simple. But the young entrepreneur had strong perseverance in future success.
The initial company budget was $10,000 of Jeff’s personal assets, and in a year and a half he managed to get an additional $84,000 in interest-free loans for his startup.
For six years the company did not return a real profit. But Jeff was always able to find sources of finances. He believed in the power of technology and eCommerce revolution and, even though many investors thought him crazy, his confidence and energy opened many doors.
In 1996, Amazon’s sales were only $16 million, while their biggest competitor Barnes & Noble made $2 billion that same year. But it was just a matter of time and patience.
During this time, Jeff tried to create a strong team of the best specialists from leading Universities and major companies.
At last, in 1998 the long-awaited moment happened. Amazon started expanding with new categories. First, music and DVDs, then toys, electronics, and other consumer goods. Step-by-step they moved forward, blazing through the competitors in their path and transforming from vertical into the horizontal marketplace.
In parallel with the marketplace, in 2000, Bezos founded Blue Origin, a human spaceflight startup company. In 2002, he launched Amazon Web Service for developers. In 2007, Bezos presented Amazon Kindle. All these projects became no less profitable and important for the empire of Amazon.
But today we’ll focus our attention on the Amazon Marketplace and how to create something similar.
Amazon Marketplace Value Proposition, Strategy, and Business Model
1. Value proposition
There is a very good explanation of a value proposition given by Guerric de Ternay, the author of The Value Mix:
The value proposition is the perception of the benefits that a customer gets from buying, using, or consuming a specific product or service in comparison with available alternatives.
Amazon treats different categories of customers but, in a nutshell, there are sellers and consumers.
Being ‘genuinely customer-centric’, according to Jeff Bezos’ words, everything is made to create special conditions for customers that are better than those of the competitors. The consumer’s value proposition is expressed in the following benefits:
- Lowest prices
- Widest range of products
- Seamless payments
- Convenient worldwide delivery
- Valuable features like shopping in their native language, package tracking, estimating import fees, and 24/7 customer support, among others.
In February 2019, Statista published a report on the most important factors that influence the purchase decision on Amazon among Amazon buyers:
As for the sellers, Amazon provides the best conditions for selling more than on their own online stores:
- A comfortable platform for selling
- A place to advertise their services
- Access to the largest customer database
- The option to make an Amazon store out of the brand’s own shop to protect intellectual property and sell using Amazon’s order system.
For the last point, a clarification should be made. Products sold on Amazon are divided into two sets:
- Fulfilled By Merchant (FBM) – items sold on Amazon by third-party sellers who only manage orders on Amazon’s website while the rest of the processes are fulfilled by themselves (storage, shipping, customer service).
- Fulfilled By Amazon (FBA) – goods that are kept in Amazon’s fulfillment centers and the Amazon staff handles all the operations.
According to Statista,
Amazon created a diversified logistics chain of more than 300 facilities that work smoothly providing great customer experience. Here is how the items travel from manufacture to the customer:
2. Business strategy
Amazon uses the Cash Machine Business strategy. This means that Amazon works at very tight profit margins and invests a lot in inventory, buildings, new products, innovations, and experiments for further extension.
Due to this strategy, Amazon does not need to borrow or issue stock. Amazon’s Cash Conversion Cycle looks like this: they use their own cash for reinvesting it into buying more goods and creating larger assortment and better service, which in turn drives audience growth and an explosive expansion for more and more industries and categories.
Thus, if your eCommerce business allows you to receive payments from buyers quickly and you are able to win time before you have to return money to your suppliers, your free cash flow will always be positive even when your net income is not.
Cash Conversion Cycle = Days Inventory + Days Sales Outstanding – Days Payable
The Amazon’s CCC of 2019 = 35.03 + 24.1 – 72.15 = -13.02
Nobody knows how long it will keep on before the suppliers start squeezing the terms. We can already see that Amazon’s CCC is moving to zero with each year, leaving less space for reinvesting the cash.
There is another strategy used for growing the marketplace.
Created by Jeff Bezos on a piece of paper back in 2001, the strategy of The Amazon Flywheel or Amazon Virtuous Cycle is still in use.
According to the Amazon Flywheel, growth happens when the customer experience in enhanced, driving more traffic. This stimulates more sellers to join the platform, creating an abundance and variety of goods. Growing Amazon all the time improves the cost structure then allows to decrease prices, which attracts new customers and spins the wheel.
As there is no one-size-fits-all solution for all marketplaces, your flywheel may be different and specific for your industry. Jim Collins, the author of the best-seller Good to Great, in 2019 released a new book
3. Business model
Amazon’s online store brings 61% of the overall Company revenue. But don’t be mislead by Amazon’s
Marketplaces like Amazon usually have a hybrid business model, which means that they combine several methods of monetization that leads to more sustainable revenue.
The Amazon Marketplace generates revenue through the combination of commissions, flat rates, and subscriptions:
- Commissions. This business model is the most popular way of making money in marketplaces. At Amazon, the commissions range depending on the product category and averagely equals 12-16%.
- Flat rate. On each purchase the platform takes a fixed price that today is $0.99.
- Subscription. Amazon Prime is a subscription for consumers who want to have privileges such as free two-day shipping, access to unlimited streaming of movies and music playlists, secure and unlimited photo storage, and other perks. All this will cost them $119 per year. Today, more than 100 million users have subscribed and this number continues to grow.
- Affiliate. There is also an affiliate program that allows merchants to earn 1-10% of a purchase from the link posted on their websites.
To learn more about business models for marketplaces, read our article “6 Things You Need to Know Before Building a Marketplace Startup”
Challenges and Opportunities for Marketplaces like Amazon
One of Amazon’s driving goals was to create something superior to the existing online bookstores. But there are always issues in the way of a marketplace’s startup. Knowing the existing challenges of your competitors, you can find solutions on how to start your own Amazon store wiser. Here are some of today’s hurdles and solutions:
The ‘everything’ stores sell goods that can be bought everywhere, so the lower price creates one of the competitive advantages for marketplaces like Amazon. The issue here is how to keep prices attractive for users but still stay profitable?
The prices on Amazon depend on many factors, like competitors’ prices, seasonality, supply, and demand. Taking into account these and many other factors, the analytical systems of the website may change prices several times per day. And the goods on Amazon don’t always cost less than at other marketplaces. Amazon keeps secret their algorithms of dynamic pricing.
From the technology point of view, there are many ways to tune the dynamic pricing on a website: from web-scraping to AI.
2. Driving the audience
At the time when Amazon started, they already had several powerful competitors, like Barnes and Noble and Books.com. It was like crazy to try surpassing them. But nothing was impossible for Jeff Bezos. His young company had a simple website with few features, no inventory, little budget, and a small team. Jeff did many routine tasks, like packaging the orders, by himself.
The main goal was to by all means drive more and more customers. That’s why Amazon gave huge discounts on books and delivery and almost did not get revenue for the first few years. The Everything Store by Brad Stone describes many extraordinary solutions used by Amazon for trying their best to acquire and retain customers on the platform in its early days:
“One early challenge was that the book distributors required retailers to order ten books at a time. Amazon didn’t yet have that kind of sales volume, and Bezos later enjoyed telling the story of how he got around it. ‘We found a loophole’, he said. ‘Their systems were programmed in such a way that you didn’t have to receive ten books, you only had to order ten books. So we found an obscure book about lichens that they had in their system but was out of stock. We began ordering the one book we wanted and nine copies of the lichen book. They would ship out the book we needed and a note that said, ‘Sorry, but we’re out of the lichen book’.”
Thus, they could provide customers with needed books without necessity to have them in stock.
3. Diversity of targets
One of the biggest difficulties of horizontal marketplaces that sell everything is how to create targeted value propositions and marketing campaigns for all the variety of customer groups.
To solve this issue, identify the largest group and focus your attention primarily on them. This group, however, can be subdivided into smaller segments with more precise needs.
Amazon defines the following customer segments:
- Region (more than 100 countries)
- Density (urban and rural)
- Age (18 and older)
- Life-cycle stage (bachelors, newly married couples, families with children under six, Retired, etc.)
- Occupation (students, employees and professionals)
- Degree of loyalty (‘Hard core loyals’, ‘Soft core loyals’, ‘Switchers’)
- Benefits sought (attracted by the widest range of products, convenience of online purchasing, competitive prices)
- Personality (easygoing, determined, and ambitious)
- User status (non-users, potential users, first-time users, regular users, or ex-users of a product)
- Social class (lower class, working class, middle class, and upper class)
- Lifestyle (Resigned, Struggler, Mainstreamer, Aspirer, Succeeder, Explorer, Reformer)
You can use the same categorization to segment your audience. If you already built an MVP it will be easier to identify an average user and create an Ideal Customer Profile. This ICP will represent the target group. So, you will need to understand their challenges and provide a better solution than those that already exist in the market. When you manage to grow enough this major audience, you will be able to switch to the other groups to grow them.
4. Treating buyers and sellers equally
With their ‘customer-centric’ model, one of Amazon’s issues is that they praise buyers more than sellers.
Recently Amazon was under investigation by Germany’s antitrust authority, which resulted in forcing the company to lessen the restrictions for European merchants. The changes included 30-day notification of termination of the partnership with business, simplifying the explanation of Amazon’s terms of services, and fairer presentation of customer reviews.
In spite of known issues, merchants keep on joining the largest platform in the world as for many of them it is the only way to promote themselves or increase the revenues on the additional platform.
Still, sellers make up an important part, as the bigger the supply the more customers are attracted to the marketplace. If you just start a business like Amazon, focus your attention on attracting sellers providing them fair and comfortable conditions. By creating a sufficient supply you’ll then be able to attract buyers.
Get cost estimate for your marketplace startup.
How to Build a Marketplace like Amazon
Almost all other websites like Amazon are built with the same scope of basic feature, including Registration, User Profile (different for a seller and buyer), Search, Listings Creation, Shopping Cart, Payments, Shipping, Notification Emails, Support Chat, Disputes and Returns, and Admin CMS.
Before you start making a website like Amazon, it would be vital to know what the users value most while shopping at a marketplace. This will give you ideas for a more valuable list of features.
For that, let’s look at a survey on what eCommerce website components benefit for a great customer experience.
1. Clear product images
As images are an important sales driver, Amazon required brands uploading images that correspond to the developed
- Image size: Images should be at least 1000 pixels in either width or height. Amazon recommends 2560 pixels wide.
- Image frame: The product should fill 85% of the frame.
- Background color: ALL product photos should have a pure white background.
- File format: You can upload JPEG, PNG, GIF, or TIFF files.
- Color mode: Both sRGB and CMYK are accepted.
When creating a website like Amazon, pay attention to having a common style for images. This gives the whole website nice, consistent, and professional look.
2. Product reviews
Reviews are important trust-building tools that cannot be ignored when you make an eCommerce website like Amazon. However, reviews should also be reviewed, i.e. verified for fairness and bots. In other words, reviews are useful only if they are trusted.
For example, the system may check the IP-address of a reviewer to prevent spamming for the same users or to track the fraudsters. Also, you can mark reviews of unregistered users to show others that these reviewers are unauthorised and can be fraudulent. We did this for one of our major clients, NoCowboys, the largest tradesman marketplace in New Zealand. Here is how it looks:
3. Product description
“We don’t make money when we sell things. We make money when we help customers make purchase decisions.” – Jeff Bezos.
One of the key elements that helps people make decisions are product descriptions. Same as with the images, there should be certain rules for posting descriptions to make them useful. Descriptions also play a great role in search ranking and conversion. Amazon elaborated the
Descriptions help buyers to take decision, so sellers need to make descriptions attractive and informative. As a product owner of a new online store like Amazon, you can help them by implementing an explicit way of adding descriptions with useful autocomplete forms and error corrections, automatic category recommendation judging by image, batch editing, and other time-saving features, so that the sellers spend less time adding descriptions.
How about estimating your project? It’s free!
4. Easy checkout process and variety of payment options
It was found that
Check out usually takes time and nerve as people need to pass the boring procedure of entering all shipment and payment details. To increase the customer experience, the founder of online shopping websites like Amazon can use the following tips:
- Create a clear and prominent Call-To-Action and minimum steps to complete the checkout.
- Switch variety of payment alternatives. Take into account the specifics of the regions that may not accept some of the payment methods while prefer some local options. Thus, having PayPal only was a mistake of many marketplaces.
- Allow people to buy with no sign-up required. You may just hint to them that registration gives them the option to save their information to facilitate future shopping.
- Don’t collect too much information. First, it takes time for check out and irritates people. And second, it may imply more responsibility on you in terms of data security. So, think twice, do you really need to know something more than the shipping address?
- Prove to them that their banking information is protected.
To create an unprecedented customer experience for user, Amazon’s founder created the ‘1-Click’ ordering option that substitutes multiple actions required for checkout like payments and shipments. Moreover, the platform waits for 30 minutes after the user clicked ‘1-Click’ to allow them to continue shopping and add more items, combining them for cheaper shipping.
5. Easy search and simple navigation
When starting a shopping site like Amazon, one of the main things is to create mechanisms of how people will find necessary goods among hundreds or even thousands of published listings.
It would be absolutely impossible to find something among more than
Also, there are sponsored and privileged listings that are shown in special sections.
In September 2019,
As for navigation, if we compare Amazon’s navigation of 2016 to the navigation of 2019, we’ll see the difference. Previously, there was a clutter of navigation options Amazon used, including the category list on the left of the page.
Now, navigation has been simplified so to not distract users.
Following modern design trends, when you build a website like Amazon, keep in mind that navigation and search should be not only effective but also simple to use. In most of our eCommerce projects, we implement ElasticSearch, the most sophisticated and smart search engine to date.
6. Easy to use on mobile devices
It was found that
Also, pay special attention to the performance – the mobile versions of websites should be very quick. For mobile, the shopping cart abandonment rate is
There are many ways to speed up an online store like Amazon. For example, using sophisticated search engines like ElasticSearch. Or using
7. “Remember me” login
The “Remember Me” checkbox on login was very popular several years ago. However, today website developers reject this feature as during the process of saving password cookies they can be be easily hijacked by hackers.
Now, all modern browsers include a password remember feature, eliminating the necessity to save password cookies in the website’s database. This method is safer but still is not recommended to users.
8. Product videos
Videos have been on the rise for some time. eCommerce can use videos for product demonstration and review as they are more attractive and lead-generating, so having the option of providing video upload is an advantage for those who are going to make eCommerce website like Amazon.
How to Apply This to Your Business
We have reviewed Amazon’s website evolution, business model, and features that increase lead conversion. When creating your own marketplace, you can follow some of schemes that made Amazon’s growth unstoppable and modify them to your business needs.
The main lesson that we can learn from Amazon’s history is that Rome wasn’t built in a day. Even such giants once started with a simple set of features, single product category, and minimal budget and experience. They started with a ‘Concierge’ MVP type where most activities are performed manually by the owners themselves. Only through persistence and focusing on increasing customer satisfaction were they able to scale up quickly.
There are several ways to build a website like Amazon but cheaper. One is to create a site like Amazon with a website builder, of which there are many in the market. But security is a constant concern of such platforms, as well as the possibility to add unique features. That’s why a better solution is to start a custom website with an MVP to verify your idea first. Then, you can gradually increase the power by adding more categories and features.
Our web development agency has a vast experience in launching eCommerce startups. For example, Arcbazar was modestly started as a contest website for architects with only a few orders, but today it serves half of the world and was recently chosen to participate in the ‘Google for Startups’ program. Here is what Arcbazar said about their partnership with Greenice in an interview with
We would be glad to become a technical partner for you and help you realize all of your most ambitious plans!
Need an eCommerce marketplace?