Private Label Business Model Definition

What Brands Need to Know about Amazon Private Label Growth – and How to Respond

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In 2009, Amazon launched its first private label brand AmazonBasic. Today, Amazon has 100+ private label brands that offer over 4,600 products. That explosive growth has been supported by rich data that Amazon mines from its marketplace. The modern monopoly's control over search results on its website, mobile app, and Alexa voice queries further exacerbates the problem by giving its own brands premium listing space (or in the case of some voice searches, the only listing ).

Reinventing the private label game

To be clear, Amazon is a late comer to the private label game. For decades large retailers such as Walmart, BJ's, and CVS have placed private labels on their shelves at a cheaper price than other brands.

In the decades before the rise of online marketplaces, retailers stocked their shelves by making deals with big manufacturers like Proctor & Gamble or Nestlé. Those big consumer good conglomerates wielded the power to shove out smaller brands, demand premium shelf space, and trade for other perks as part of their deals with big retailers like Walmart. Consequently, Walmart could, and did, use the data it gathered in its stores to build its own private label brands.

On its face, Amazon's approach looks no different – that is, it gathers data on products sold of the website and builds out a private label strategy with that data. However, Amazon's platform business and market share gives it advantages that brick-and-mortar retailers could only ever dream of.

Predatory pricing in Amazon's private label brands

The proliferation of Amazon private label brands has consumer good sellers squirming. Because Amazon prioritizes growth over profits, the tech giant has been able to move quickly across many product categories from electronics to fashion to home and kitchen, pet products, cosmetics, health and beyond. Like the private label brands of traditional retailers, Amazon's products often sell for cheaper than other brands on its own market, and often (though not always) at a loss.

As Lina M. Khan wrote in the Yale Law Review in an article discussing antitrust issues with Amazon , "The economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have rewarded. Under these conditions, predatory pricing becomes highly rational."

Amazon's multi-channel revenue, including the revenue it makes from third-party sellers on its marketplaces, subsidizes its private label experimentation and dominance. But Amazon's platform has done more than provide financial cover for Amazon private label brands, it has also provided the right data.

Data richness and search results

Amazon's marketplace catalog dwarfs even the largest traditional retailers, such as Walmart (especially pre-marketplace ). Amazon democratized access to the consumer for sellers. Soon small brands and living room product startups could open shop on a marketplace that commanded over half of online sales.

That boon cut both ways. Amazon gained access to all the data for itself, and the quality of the data is much richer and more granular than any data collected by traditional retailers at their stores.

The combination of granular data and the democratization of access has quickly benefited Amazon in a matter of years. Consider Anker, a smaller brand of portable battery packs, speakers, and other electronic goods. Before 2017 they were sold almost exclusively on Amazon's marketplace. Compare and contrast Anker's portable bluetooth speaker with Amazon. Anker's is $40 and Amazon's is $20.

Both even come in black, blue, and red! Notice Amazon is out of stock of its blue speaker. Most of its private label brands carry a limited stock of each item to test their performance.

In addition to hyper specific data mining, Amazon also accounts for 49% of online product searches, while another 36% of product searches start on Google and point to Amazon first (according to research firm Survata ). Amazon can, and does, list its items before competitors . In the case of voice shopping via Alexa using generic product terms such as 'batteries', the smart speaker chooses an Amazon brand for the consumer (a practice that, among others, is inviting antitrust scrutiny).

How manufacturers and resellers should respond

Given Amazon's monopolistic advantage, what can product sellers do? In the short term, pulling your product from Amazon simply isn't practical. Amazon accounts for over half of all online sales. They have the consumer goods retail market by the wallet.

Rather than just hoping that antitrust regulation is successfully brought against Amazon, product vendors should build or acquire a marketplace of their own. Listing stock on competing marketplaces is a good idea, but it isn't enough. The publishing industry tried that approach with books, and it found little success. By building or buying a competing marketplace, product companies can scale niche, specialized marketplaces that can serve as a competitive moat against Amazon.

Whether a traditional company builds or acquires a two-sided marketplace, it needs the right roadmap to build out the platform and outmaneuver Amazon by focusing on the segments in its blindspot. The modern monopoly may not look as though it has any blindspot, but we know they do and are passionate about helping retailers fight back. Contact us to learn where to strike next.

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Filed under: Platform Innovation | Topics: amazon data mining, anti amazon, marketplace business, online private label, platform competition, platform thinking

Private Label Business Model Definition

Source: https://www.applicoinc.com/blog/how-amazon-private-label-uses-seller-data/

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