It can be hard to understand why selling on Amazon is, in the long run, inherently a bad deal for merchants and brands. Some of the downsides for merchants are straightforward. Amazon can dictate pricing, terms, inventory, and delivery. They’ll advertise your competitors to customers who search for your brand by name, they’ve advertised their own private label brands to shoppers who searched for a product by brand name.

A page of search results on Amazon showing that the search was specifically for Melitta-brand products, but showing competing products before Melitta's.
A search for a Melitta pour over coffee maker shows 2 competitors first.

But those are just adverse conditions, difficulties that you might be able to solve or mitigate through better product or marketing, improved procedures, or deeper pockets.

The fundamental problem, and the one that can be hardest to grasp, is that Amazon Marketplace isn’t actually a marketplace. Amazon is running the biggest R&D department in the history of commerce. Your store is part of the biggest focus group in the history of retail, and you’re stuck on the wrong side of Amazon’s mirror. Amazon learns from everything its shoppers and sellers do, from clicking links to reading reviews to abandoning shopping carts as well as completing purchases, writing reviews, or making returns. And even though you’re funding that research—you and all your competitors and customers and potential customers—you’re not seeing the information that Amazon captures. 

Let’s say you sell storage furniture on Amazon. You and Amazon both know how much business you’re doing: how many people bought the 6-foot tall chrome shelving unit and how many people bought the upholstered bench with concealed storage, for how much, and what months are best for your sales. And you make your business decisions based on that information.

But Amazon also tracks who bought that same chrome shelving unit from the office-supply brand that just entered the home-furniture market. Amazon knows how many people chose to buy that storage bench from you after first considering the un-cushioned one sold by another of your competitors. They know how many affluent shoppers who have the Amazon Prime Visa card read multiple 5-star reviews of your shelving unit but then, after reading the single complaint that says your product is difficult to assemble, replaced it with one from your competitor. 

All of that valuable data can be used to make even more valuable predictions: which demographic would have bought your product if it came in more colors, or if it cost five dollars less, or if you included shipping. And when you lower your price by 10 dollars for Labor Day, Amazon’s algorithms have still more information, more consumer behavior, that can be used to test whatever hypothesis about shopper behavior that they want to make.

You’re making decisions based on your sales and the information you can glean about your customers, and your competitors are making decisions based on their sales and what they can learn about their customers. Meanwhile, Amazon is deciding based on every merchant’s sales and every customer’s purchases, wish lists, abandoned shopping carts, the time they spend or don’t spend looking at ads or researching alternatives, whether they recently changed their default shipping and billing address or recently ordered bubble wrap or packing tape—people who just moved are good prospects for buying furniture—how much time elapsed between the time they first began to idly browse storage solutions on Amazon and when they made their purchase.

The information that Amazon hoards doesn’t just feed the decisions for Marketplace, it also informs their manufacturing decisions.

If you invest heavily in R&D and improve your product, build a newer, faster, cheaper, stronger, longer-lasting storage bench, and you sell that bench on Amazon, and customers buy it, then Amazon takes note. Every improvement you make to the product itself, and every improvement your competitors make to their rival products, becomes data in Amazon’s decision whether or not to create their own competing products. You’ll know if customers prefer units that can safely support 50 pounds per shelf or 100 pounds, but Amazon knows enough about every purchase made or contemplated to calculate how much the typical customer is willing to pay per safely supported shelf-pound across different brands.

People worry that Alexa is eavesdropping on their living rooms and bedrooms, but Amazon Marketplace is more insidiously invasive. Because if a smart speaker harvests your private information, the company that sold you that speaker knows more about you than it should know. But that doesn’t mean the company knows more about you than you know yourself. With Marketplace, that’s exactly what’s happening.

You can win the arms race against your competition, but as long as you’re all selling on Amazon, you’re all sharing some of your most valuable information with another player that doesn’t share back, a player that can afford to jump in or out of any market it wants to at barely a moment’s notice.

In my next post on Amazon, I’ll get into more detail about the unfair advantage Amazon has over any other publicly traded business in the United States, which is illustrated by the line widely attributed to Jeff Bezos: “Your margin is my opportunity.” Or: if you’re public, you better show a profit—unless you’re Bezos. Wall Street believes in the company’s continuing success, so the stock markets don’t punish Amazon for continuing to put its money back into the business, prioritizing growth and market share over reported profits. Amazon’s freedom from the constraints of more traditional profitability is one reason it can enter any market it chooses as a serious competitor from the moment of entry.