Imagine being an advisor to Hank Harris. What would you suggest should be Seller’s Lab competitive strategy going forward? 1. What is the Amazon ecosystem structur

C ommunications of the

A I S ssociation for nformation ystems

Research Paper ISSN: 1529-3181

Accepted Manuscript

Seller Labs: Democratizing E-Merchants Competitiveness

Joaquin Rodriguez Grenoble Ecole de Management

[email protected]

Richard T. Watson Department of MIS, University of Georgia, Athens, GA,

USA

Gabriele Piccoli E. J. Ourso College of Business Louisiana State University, USA

& University of Pavia, Italy

Abstract:

Seller Labs was founded to improve the competitiveness of Amazon’s third-party sellers. The company’s core offerings had evolved from a messaging service facilitating communication between customers and sellers to an advanced suite of marketing, advertisement, and financial software tools. Since its inception, Seller Labs continually increased its customer base, reaching more than 9,000 customers by 2019. Being one of the first and most successful software tool providers addressing specific business problems faced by Amazon sellers, Seller Labs was part of Amazon’s Marketplace developer council and was at the frontline of innovation. However, Seller Labs’ main competitors continued to grow in size and strength both nationally and internationally, threatening its competitive position. With the objective of expanding its offerings outside the Amazon’s Marketplace, Seller Labs acquired X-Cart, an e-commerce platform. However, many challenges lay ahead after the acquisition. How should Seller Labs continue to grow? Should the firm continue to focus on the development of solutions targeted to Amazon’s third-party sellers? Should the firm pivot outside the Amazon Marketplace and develop an integrated e-commerce platform?

Keywords: Teaching Case, Platform Competition, Strategy, E-Commerce.

[Department statements, if appropriate, will be added by the editors. Teaching cases and panel reports will have a statement, which is also added by the editors.]

[Note: this page has no footnotes.] This manuscript underwent [editorial/peer] review. It was received xx/xx/20xx and was with the authors for XX months for XX revisions. [firstname lastname] served as Associate Editor.] or The Associate Editor chose to remain anonymous.]

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1 Introduction In April 2013, Brandon Checketts and Paul Johnson decided to leave their business as Amazon and eBay sellers and create a software business: Seller Labs. The founders seized the opportunity to develop software tools that solved common problems faced by the rapidly growing number of Amazon’s third-party sellers. Despite the presence of Amazon’s proprietary software solution (Seller Central), the founders recognized there was a market for advanced software tools for data analytics and work automation that facilitated the pursuit of diversified strategies and improved the competitiveness of Amazon’s Marketplace third-party sellers.

The first Seller Labs’ product was a messaging system (i.e., Feedback Genius), that enabled targeted email communication between customers and sellers. On the impetus of this early success, Seller Labs developed a range of software products for sellers’ advertising, market research, inventory management, and financial reporting. Five years after the original launch, Seller Labs was one of the major complementors1 on the Amazon platform, with thousands of customers, and an invitation to the Amazon Marketplace developer council.

As the Amazon Marketplace grew and became more competitive (see Table 1), numerous complementors developed comparable software products supporting third-party sellers. For the first time in Seller Labs’ history mounting competition required a reevaluation of the firm’s strategic positioning. Hank Harris had been thinking about a way forward since taking over the CEO reigns in November 2017:

I had seen the same dynamics playing out similarly on the Google Advertisement platform, where after years of intense competition, only two or three companies were successful. When looking at Seller Labs, I knew that we were in the middle of that same competitive dynamic, as keeping up with the continuous innovations of the Amazon Marketplace Web Services and Advertisement platforms was becoming increasingly challenging. Our most successful products, such as buyer-seller messaging, could be copied by other startups, or Amazon itself. We needed a differentiation strategy that uniquely positioned Seller Labs in the market.

After evaluating several options, Seller Labs acquired X-Cart in October 2019, an established e- commerce platform 2 with tens of employees. X-Cart, founded in 2001, offered the opportunity of implementing a differentiating strategy that would enable Seller Labs to expand its offerings outside the Amazon’s Marketplace. With the acquisition of X-Cart, Seller Labs could establish a more comprehensive suite of products and services in the broad e-commerce space. However, the acquisition put Seller Labs at a crossroad. Should the firm continue to stay true to the original vision and primarily focus on the development of solutions targeted to Amazon’s sellers? Or should it use the firm’s limited resources to pivot outside of the Amazon Marketplace and developed an integrated e-commerce platform?

Table 1. Sellers in US Marketplace (Marketplace Pulse 2020)

Year Worldwide Based in China

2009 900,000 2010 1,300,000 2011 1,800,000 2012 2,300,000 2013 2,800,000 2014 3,400,000 2015 4,000,000 2016 4,700,000 1,090,400 2017 5,700,000 1,943,700

1 A complementor is a firm that leverages platform resources (e.g., Amazon MWS API) to create products and services that address the needs of a large and heterogeneous group of suppliers (e.g., third-party sellers). 2 A platform is an evolving socio-technical system that exposes digital resources supporting suppliers and complementors’ digital innovations.

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2018 6,800,000 2,652,000 2019 8,000,000 3,732,000

2 Industry Background The widespread availability of computers and the Internet has driven a constant year-over-year increase in online sales since the early 2000s. Online sales in the US alone reached more than $600 billion in 2019, up from around $50 billion in 2000, and $200 billion in 2010. Although the total online GMV3 (Gross Merchandise Volume) in 2019 was staggering compared to 20 years ago, online sales still only represented 16% of the US addressable retail market 4 (i.e., $3.5 trillion) (Figure 1). Thus, online commerce was still at a relatively infant stage, and many opportunities still existed for firms that wanted to capitalize on this market as more products and services moved online.

The increase in online commerce saw the emergence of online native companies that tailored their strategies and capabilities around this emerging opportunity. In the US, Amazon positioned itself as the clear maker leader, experiencing a 30% year-over-year revenue increase for almost two decades. In 2018, Amazon’s GMV reached nearly $280 billion, around 45% of the US online market. Amazon’s success was apparent when comparing it to other e-commerce companies. eBay and Walmart, who ranked second and third by online GMV, captured “only” 6% and 4.5% respectively of the US online market (eMarketer 2019). At the beginning of 2020, it was estimated that around 50% of customers start their product searches on Amazon.com. Although barely noticeable to most customers, the driver of Amazon’s success was its effective transformation into an e-commerce platform, where third-party sellers could leverage the end-to-end customer experience and the digital resources provided by Amazon for selling their products.

Figure 1. US E-commerce Share (Evans 2020)

After experimenting with an ultimately failed auction model called zShops, Amazon launched the Amazon Marketplace in 2010. The Marketplace offered third-party sellers, from small resellers to large manufacturers, the possibility to list their products on Amazon’s digital “shelves.” Amazon’s transition into a platform for third-party sellers required the exposure of digital resources that previously were available only internally to the organization. Most importantly, the creation of a platform required the design and implementation of a governance model through which Amazon determined the “rules of the competition” inside the marketplace, which allowed the standardized management of thousands, and then millions of third-party sellers. Furthermore, by controlling the demand side of the market (i.e., end-customers),

3 GMV is used in online retailing to indicate the total sales value of merchandise sold over a certain time frame through a particular marketplace. 4 The addressable market represents the revenue opportunity available for a product or service.

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Amazon could almost unilaterally determine the roadmap of the software tools that they made available to third-party sellers for enabling competition inside the marketplace. Much of the “marketplace governance” was implemented algorithmically, allowing sellers to join the platform, transact with customers, and compete with other sellers without ever having to interact with an Amazon employee.

As a result of an intense competition between sellers, Amazon’s customers benefitted from improved customer service, a vast product selection, and lower prices. Amazon’s sales growth, especially in the 2014-2018 period, was driven by its Amazon Marketplace initiative. Third-party sales on Amazon grew from $70 billion in GMV in 2014, to $160 billion in 2018, representing nearly 60% of all Amazon sales. In his 2019 letter to shareholders, Jeff Bezos synthesized this trend in a paragraph titled, “Third-party sellers are kicking our first party butt. Badly.” Bezos explained the reason for the Marketplace success: “We helped independent sellers compete against our first-party business by investing in and offering them the very best-selling tools we could imagine and build” (Amazon 2019). Those tools would of course be all software tools and algorithms (i.e., digital resources) that sellers could self-provision and use without any interaction or consultation with Amazon employees.

Several large established organizations joined the Amazon Marketplace over the years (e.g., Apple, Nike). However, the vast majority of third-party sellers’ sales originated from small and medium resellers, who joined dynamically in response to market opportunities. In the US, there were 2.1 million sellers on Amazon, although only 1.1 million were active (Table 2).5 Yet a small proportion of retailers captured most of third-party sales (Table 3).

As stated by Bezos, the large number of third-party sellers that joined the platform stemmed from Amazon’s success in creating superior services and software tools that sellers could easily leverage. Amazon Seller Central, an intuitive web application where sellers could manage and monitor their offerings and sales, was a critical element of Amazon’s value proposition. Seller Central functionalities included the management of product listings, tracking of product inventories, creation of marketing campaigns, and monitoring of customer feedback and sales. For example, sellers could leverage Seller Central for uploading new product images, modifying product descriptions, changing prices, or answering a customer review. Amazon services included Fulfillment by Amazon (FBA), which allowed third-party sellers to outsource storage, shipment, and returns management to Amazon. Despite all these advantages, operating as a seller on Amazon was challenging. The sheer number of sellers on the marketplace resulted in hypercompetition and, at times, anticompetitive actions by sellers (e.g., “black hat tactics”6). It was not uncommon to have tens of sellers competing with the exact same product, as well as with Amazon itself, who shrewdly entered the most profitable product categories. Amazon’s power and behavior was at the center of sellers’ distrust and also triggered a series of antitrust inquiries both nationally and internationally (Satariano 2019).

Table 2. Number of Active Amazon Sellers by Marketplace (Marketplace Pulse 2020)

Marketplace Active Sellers 2019 Growth Since 2018

USA 1,114,388 54,388 (+5.1%) UK 281,257 43,727 (+18.4%) Germany 244,425 36,425 (+17.5%) Italy 216,610 51,110 (+30.9%) France 211,859 47,859 (+29.2%) India 205,884 36,184 (+21.3%) Spain 203,413 52,063 (+34.4%) Japan 173,483 28,303 (+19.5%) Canada 163,595 35,555 (+27.8%) Mexico 51,087 17,357 (+51.5%)

5 An active seller performed at least one sale in the previous year. 6 Black hat tactics consist of a seller taking advantage of a vulnerability of the Amazon technology or governance rules in such a way that it can gain a benefit or detrimentally affect a competitor. For example, sellers could force the suspension of a competitor’s account by paying a third party to create fake complaints.

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Australia 24,227 5,587 (+30.0%) UAE 20,842 Brazil 15,605 8,335 (+114.6%) Turkey 5,987 1,967 (+48.9%) Singapore 1,721 Total 2,934,383 441,423 (+17.7%)

Table 3. Active Sellers in US Marketplace (Marketplace Pulse2020)

Marketplace Active Sellers 2019

Professional sellers 514,000 Individual sellers 384,000 Sellers with at least one sale 898,000 Less than $100,000 in sales 672,000 With $100,000 in sales 168,000 With $500,000 in sales 40,000 With $1,000,000 in sales 18,000

Because Amazon controlled the main storefront and platform, sellers were required to monitor and quickly adapt to their policy and algorithmic changes. For example, in 2016, Amazon changed its policy and determined that it was against its terms of services to provide free or discounted products in exchange for products reviews, which was a widespread practice among sellers. Similarly, in 2019, Amazon changed its policy regarding Personally Identifiable Information (PII), as a result it ceased the sharing of information that many sellers depended upon for their marketing campaigns. During the Covid-19 pandemic, Amazon prioritized the restocking of household staples, medical supplies, and other high-demand products going into its fulfillment centers. As a result, many sellers saw their operations disrupted as Amazon’s unilaterally decided not to accept their products in their fulfillment centers, reduce their speed of delivery, and consequently affect their sales. From the standpoint of visibility on the Marketplace, Amazon had been known to make changes to the algorithms that ranks listings and makes recommendations, resulting in third-party sellers’ rankings changing – sometimes overnight (Mattioli 2019). Because Amazon regularly changed its algorithms for “improving the customer experience,” sellers could see their competitive position in the marketplace harmed, without any prior notice from Amazon.

2.1 Hedging Bets Despite the dominant position Amazon had achieved and the substantial tailwind the Amazon platform could provide to independent sellers, with services such as Prime and FBA, many were weary of being excessively dependent on Amazon. Third-party sellers started exploring differentiating strategies that could improve their market positioning while also decreasing their dependency on Amazon. Several technology experts backed up sellers’ concerns and predicted crucial disruptions in the e-commerce space. In fact, after years of growth, some argued that Amazon’s market share would decline. In fact, while Amazon’s ability to aggregate millions of sellers and customers under a homogeneous and standardized experience was considered at the core of its competitive advantage, it was also a limiting factor to its future growth. As an increasing share of the economy moved online, e-commerce was expected to expand beyond the products categories sold by Amazon. Furthermore, many opportunities existed for rethinking business models and online experiences for those products sold on Amazon.

As a testament to this shift, the market for direct sales e-commerce observed a significant increase and was expected to exceed $20 billion in GMV by 2021 (eMarketer 2020). Sellers who wanted to create a direct online presence were not limited to Amazon. They could leverage a wide range of services and software tools that required little IS knowledge. Shopify, BigCommerce, Skubana, Magento, and many others facilitated the creation of an online presence through which sellers could maintain a direct relationship with customers. As further evidence of the widespread interest and success of the direct sales model, Shopify exceeded a $90 billion market capitalization in early 2020 after only five years since its

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IPO (Figure 2), and Magento, another longtime e-commerce platform, was acquired by Adobe in 2018 for $1.68 billion.

Figure 2. Shopify Stock Quote (Yahoo Finance 2020)

3 Starting Seller Labs In 2010, Checketts was buying pallets of books from the Mail Recovery Center7 in Atlanta to resell online. Three years before, he had started BookScouter.com, a website that helped people find the online marketplace where they could sell their used books at the highest price. He soon became the largest user of BookScouter.com, as he methodically determined the online marketplace where he could resell for most profit the thousands of used books he was buying. His software determined that Amazon was the marketplace where he could obtain the most profit for around 80% of the books.

Driven by early success, and now with the help of Paul Johnson, Checketts expanded his inventory and started buying pallets of CDs and DVDs. Although for most transactions he received high review scores, several customers returned the products and wrote negative reviews. Understanding the importance of ratings and reviews for converting customers and achieving superior visibility in the marketplace, Checketts immediately investigated the problem:

When we began selling CDs and DVDs, we noticed that our seller rating dropped from the 98-100% level to the range of 95-96%. When I read through the negative feedback, the common theme was that customers hadn't read our detailed description and were disappointed when the product arrived in a generic case without the original artwork.

Most sellers would have classified the problem as an “user error” and would simply tolerate it. Instead, armed with a strong IT background and experience, Checketts’ approached the problem with a technical solution:

After a couple of weeks developing some software, I created a prototype that would send a message to customers explaining the CDs and DVDs condition. This message was sent as soon as the order was placed, allowing customers to cancel the order if they wanted. For other products that we sold, the software would cross-reference data

7 The Mail Recovery Center (MRC) is the official lost and found department of the U.S Postal Service. The MRC auctions the lost mail after a 90-day period where the legitimate owner could state a claim.

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available from shipping carriers like UPS and the US Postal Service to send the buyer a message shortly after their product was delivered.

As the initial version of Feedback Genius was starting to have a positive impact on his Amazon business, Checketts started gauging the potential for establishing a software company:

The software worked very well, and within a month or two, our feedback rating returned to the 98-100% level that we were used to. As the software business launched, it became very apparent where I wanted to spend my time. In the used book and media business, growth meant bigger warehouses and more overhead, for a relatively slim margin and an increasing amount of capital tied up in inventory. The economics of software are quite different. It requires significant up-front investment, but if done successfully yields higher margins and much more potential for scale and growth.

Seller Labs was incorporated in Athens, Georgia in April 2013. The timing could not have been better, as the company leveraged its early market entrance capitalizing on the quickly growing Amazon third-party sellers base (TableTable 4). The company’s early success allowed it to become cash flow positive within the first two years from its incorporation. Unlike many technology startups, Seller Labs had the opportunity to pursue organic growth without raising capital from investors (Table A 1). By year 2019, Seller Labs was established as one of the most recognized software tools for Amazon sellers, with thousands of customers and a sound market share.

Table 4. Active Sellers in US Marketplace (Marketplace Pulse 2020)

Marketplace Active Sellers 2019

Professional sellers 514,000 Individual sellers 384,000 Sellers with at least one sale 898,000 Less than $100,000 in sales 672,000 With $100,000 in sales 168,000 With $500,000 in sales 40,000 With $1,000,000 in sales 18,000 Sellers with at least one sale 898,000

4 Seller Labs Products and Technology

4.1 Seller Labs Product Suite Shortly after incorporation, Feedback Genius became popular among Amazon third-party sellers. Leveraging the initial success, Seller Labs launched other products that addressed the most critical needs of its growing customer base. The result was a comprehensive software suite tailored at improving sellers’ efficiency for the most critical activities they perform when managing their Amazon business. More importantly, by leveraging Seller Labs’ products, a seller had the potential of significantly improving its competitiveness in the marketplace. In the words of Jeff Cohen, the VP of Marketing:

Success on Amazon depends on three basic marketing components: product, price, and placement. Great products have to continuously evolve as the result of feedback loops with customers. They need adequate pricing given the value they create and the level of competition they face. And they need the right advertisement push. Our mission is to provide the best software tools for monitoring and improving offerings on these three dimensions.

At the beginning of 2020, Seller Labs’ suite of products could automate many day-to-day activities, facilitate recurrent tasks, and provide analytics and actionable recommendations, among many other functionalities. Seller Labs primarily targeted small and medium sellers that needed software tools that enhanced their productivity and enabled the implementation of diversified strategies on the Amazon Marketplace. The sheer complexity of the Amazon marketplace was daunting, especially for small and

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medium businesses that do not have the resources, capabilities, or IS infrastructure, for competing with large established sellers. The Seller Labs Pro suite addressed the four most important business cases that an Amazon seller had to get right for improving its chances of success: manage online reputation; perform market research; monitor performance and profitability; and secure placement via advertisement campaigns (see Table 5 for a full product description). Katie Reilly, the VP of Product, captures Seller Labs’ core value proposition:

Admittedly there is no single solution that does it all. You could give all the tools they need to win on Amazon, but that becomes unbearable and risks paralyzing sellers as they are overflown by information. Our goal is to address the most important areas, simplify the customer experience, and make recommendations tailored to seller’s goals in a way that is digestible and actionable. For example, our solutions can look at a seller’s performance and compare it to benchmarks in their category, or similar types of business, and recommend ways they could tune their advertising, improve their listing, or increase conversion.

Table 5. Seller Labs Suite of Products

Product Name Product Description

Feedback Genius Manage buyer-seller email messaging to share product information or solicit a product review. By sending targeted emails to buyers, sellers can improve their online reputation and increase their brand awareness. Feedback Genius offers email analytics and the possibility of performing A/B testing to compare the effectiveness of different messages.

Scope Find product opportunities and perform market research on competitors’ products. Scope helps understand the potential profits for any product available on Amazon.com by analyzing keywords, search volume, average Cost-per- Click (CPC) bid, products fees, and estimated sales volumes.

Ignite Manage advertisement campaign optimization on Amazon. Ignite provides personalized suggestions based on a seller’s products, advertisement budget, and goals. Furthermore, Ignite enables campaign automations that can improve advertisement efficiency (e.g., avoid adverting during non-peak times) and drive Average Cost of Sales (ACoS) down.

Quantify Monitor the inventory and financial performance. Quantify provides detailed profitability analysis for each product by automatically calculating gross and net margins. Furthermore, it offers customizable inventory management metrics for managing and optimizing storage fees and stock levels.

Another important element of Seller Labs success was the Managed Services group, which acted on a consultant basis for sellers that needed help with the management of their business. Seller Labs’ experts combined their deep expertise of the Amazon Marketplace with their knowledge of Seller Labs suite of products. The group provided a white-glove service in the areas of listing optimization, advertisement management, and messaging optimization. In addition to contributing to the overall profitability, the Managed Services helped reduce the churn of those sellers that required higher levels of customization and support.

Over the years, Seller Labs’ role of facilitating seller’s success extended beyond providing products and professional services. The company significantly contributed to the creation of articles, guides, and webinars that informed small and medium sized sellers about the latest news, trends, and best practices they needed to consider for establishing a successful business on Amazon. In addition, Seller Labs was active in all major conferences, while also hosting its own conference, Resonate, since 2016. Resonate’s objective was to provide experienced sellers a venue to connect and learn advanced selling strategies from each other and from Seller Labs Managed Services’ specialists.

4.2 Seller Labs Technology Seller Labs understood from the beginning the need for an agile IS infrastructure that allowed rapid development and release of new products and features. From day one, Seller Labs decided that it would

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leverage Amazon Web Services (AWS) cloud computing8 platform and that all products would be offered with a Software as a Service (SaaS)9 model. The decision to leverage AWS enabled Seller Labs to implement a flexible cost structure and the possibility of focusing on the development of software functionalities rather than the management of a proprietary and complex IS infrastructure. Furthermore, the SaaS model was critical for Seller Labs’ success, as it meant that sellers were not required to install any software or buy specific hardware when using its products. Any seller with an Amazon professional sellers’ account,10 a PC, and an Internet connection could take full advantage of all products without needing any specific hardware, software, or capital investment. Furthermore, by leveraging AWS, Seller Labs had access to advanced IT services (e.g., computing and storage resources), without needing to own an IT infrastructure (e.g., servers) or having to make long-term financial commitments. Moreover, offering a SaaS solution enabled Seller Labs full control over its application. For example, the company could release new versions of its products without requiring sellers to make software updates. This was essential as sellers often depended on Seller Labs for quickly introducing or removing software features to comply with changes to Amazon’s platform and marketplace policies. In fact, most sellers trusted Seller Labs to inform them about changes to the policies and technological requirements enforced by Amazon. Also, as sellers’ data were not stored on their premises, they had an incentive in maintaining a recurrent relationship with Seller Labs to preserve their transaction and financial performance history.

Seller Labs adopted a three-tier architecture (see Figure 3), whic