For many small retailers, Amazon is an important source of customers and revenue thanks to the retail giant's Marketplace, which lets third parties hawk their wares on Amazon.com.
But some retailers selling through Amazon's Marketplace are learning the hard way that doing business through a potential competitor can be a double-edged sword with a very sharp blade.
Based on interviews with Marketplace retailers, an article in the Wall Street Journal paints a picture of how the world's most efficient retailer may be using the data it gleans from its partners' Marketplace sales to enter new product areas.
According to Brad Howard, who runs CuffCrazy.com and sells through Amazon's Marketplace, "There are countless items that [Amazon] didn't sell before that they sell now because of Marketplace." In other words, Amazon began selling certain products specifically because it saw retailers in its Marketplace having success with them.
What's more: not surprisingly, once Amazon starts selling a product, it can typically use its scale to offer it at the lowest price. When the company offers a particular product at a price that's within 1% of the price offered by the most competitive third party vendor, Amazon becomes the default purchasing option, making life even more difficult for the third party vendors.
For some retailers, Amazon is so effective at muscling in on the action that they eventually give up and pull products from the Marketplace. "It happens fairly regularly that Amazon finds a new product to sell themselves and when they do it's pretty much impossible to compete," Howard commented.
Amazon won't comment on whether its using Marketplace data to identify new products worth selling itself, but if this is indeed what's happening, it begs the question: should retailers even bother with the Amazon Marketplace?
Despite Amazon's ability to turn on its partners, it still operates one of the largest digital distribution hubs. According to one analyst, third parties may make up more than half of Amazon's sales in the next five years, and that means that there's still a lot of money in selling through the Marketplace. That money is difficult to ignore.
But small retailers looking to survive and thrive over the long term have a good reason to consider whether a relationship with Amazon is really worthwhile, just as some of their larger counterparts have. After all, even if Amazon can be a significant source of revenue, they're paying for that revenue with data -- data that could be digital gold.
For small retailers who decide to stick with Amazon, risks and all, just how aggressive Amazon becomes in the future remains to be seen, but thing is certain: it's Amazon's world and you're just living in it.