The big deal about 3rd party sellers

Not too long ago in August, Walmart followed Amazon’s decade long lead by allowing third parties to sell products on their site. Now Sears is getting in the game.

Why are third party sales so important to online retailers? A few reasons.

Increased revenues at no cost

Every time you purchase something from a third party seller on, Amazon gets a cut. But, unlike with everything else on the site, Amazon didn’t have to purchase the item, store the item, account for the item as inventory, or fulfill the item once it was purchased. All they do is connect buyer and seller and take a cut. It’s your classic win/win/win situation. And what a win it is:

Amazon doesn’t break out the dollar value of third-party sales, but they made up 31 percent of the overall unit sales in the third quarter of 2009, according to a regulatory filing. Amazon said more than 1.8 million seller accounts were active on its site worldwide in Q3, up 24 percent from a year ago.

Think about that for a second. Amazon is making 31 percent of its sales from third party sellers for products they never need to touch. It’s all pure profit.

Of course, Amazon didn’t pioneer this model, eBay did. But, unlike eBay, which has lost its way entirely, Amazon protected the integrity of the retail experience. Bad sellers are punished ruthlessly and sellers are kept in line. Buyers are not a problem because Amazon handles payments directly. As long as sellers can make money they will stay with Amazon no matter what the terms, but once a buyer is disappointed or taken advantage of they may disappear forever. Amazon understands the leverage and priorities implicit in this three-way relationship.

More sellers create a deeper catalog

On its own, Amazon may not be able to anticipate every potential product a consumer may want. But, if you have 1.8 million sellers like Amazon you also have 1.8 million individual sources for ideas. Third party sellers may sell any number of things from small run specialty products to niche clothing brands and anything else that would be difficult for a giant like Amazon and its army of buyers to identify.

Likewise, the more products you offer from more sellers, the more opportunities you have to provide something a customer wants. And, the more opportunities Amazon has to appear in search for these more obscure items. By encouraging third parties to sell and by protecting the buyer’s retail experience Amazon has created a retail network that is larger and more vibrant than Amazon would be on its own. Third party sellers allow online retailers to sell literally anything that can be sold.

Third party sales provide valuable data

If you’re an online retailer, you want to capture any online transaction you can. Since third party sellers allow you to sell anything, you have no reason not to try to sell everything since you’re simply using your market power to connect buyers and sellers. One thing most people fail to account for is how much data you can glean from third party sales. For example, let’s say there is a brisk business in third party sales for kitchen utensils. If you were Amazon, you might look at the stats for this product category and decide to start buying more products to build out your kitchen utensil product line so that you could take advantage of the buyer interest in the category. Without the data from these third party sales you might never have gone after this category. So, such data is extremely useful in turning up non-intuitive findings.

The problem with the Sears’ and Walmarts of the online world is that no one wants to shop at Sears or Walmart. They do so with reluctance, either because they feel don’t have the financial means or because they have no other choices. With Walmart positioning itself as the world’s low cost purveyor of low quality products and nauseating retail experiences and Sears edging toward oblivion, Amazon is in perfect shape for growth with an impeccable reputation and a powerful brand that they protect at all costs. Amazon understands what Walmart and Sears have forgotten: people want value and value doesn’t just mean having the lowest price. It means making people feel like they got their money’s worth.

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