Stories How Amazon Built a Marketplace Around Third-Party Sellers

How Amazon Built a Marketplace Around Third-Party Sellers

Amazon's marketplace strategy began with a counterintuitive decision:

Let other merchants compete for the same customers Amazon had worked to acquire.

A traditional retailer tries to capture the sale itself.

Amazon chose to maximize selection and customer utility even when the seller was someone else.

That decision later created entire businesses around seller services.

The Original Retail Problem

Every first-party retailer faces the same problem.

limited capital
+
limited warehouse space
+
uncertain demand
↓
limited assortment

Adding a product requires a buying decision.

If the product sells poorly, the retailer absorbs the inventory risk.

This makes “sell everything” impossible under a pure first-party model.

The Marketplace Idea

Amazon could let outside merchants bring their own inventory.

Seller owns product
↓
Amazon exposes offer
↓
Customer buys
↓
Amazon earns service revenue

The seller takes much of the merchandising and inventory risk.

Amazon supplies demand and transaction infrastructure.

Why Invite Competitors?

Because the customer does not necessarily care who owns the inventory.

The customer cares about:

  • price;
  • availability;
  • selection;
  • delivery;
  • trust.

If third-party sellers improve those variables, they can make Amazon more useful even when Amazon loses a first-party sale.

This prioritizes platform value over individual transaction ownership.

Selection Becomes a Network Effect

more sellers
↓
more products / offers
↓
more customer utility
↓
more traffic
↓
platform becomes more attractive to sellers
↓
more sellers

This loop is one reason marketplaces can scale differently from first-party retailers.

But Marketplace Created a Delivery Problem

Selection could grow faster than shipping quality.

Amazon could control fulfillment for its own inventory.

It could not automatically control every seller's warehouse and carrier relationship.

That created a risk:

great selection
+
poor delivery
=
weak customer experience

FBA was the answer.

FBA Changed the Seller Relationship

With FBA, the merchant could send inventory to Amazon.

Amazon then handled much of the post-order process. [S12]

The seller relationship changed from:

pay Amazon to access demand

to:

pay Amazon to access demand
+
possibly pay Amazon for fulfillment

That is a much deeper commercial relationship.

Prime Made FBA More Valuable

Prime increased customer expectations for fast shipping.

FBA helped seller inventory participate in Amazon shipping benefits. [S12]

This created a three-sided reinforcement loop.

Prime member wants fast delivery
↓
seller uses FBA
↓
more seller products become fast-delivery eligible
↓
Prime selection improves
↓
seller gains access to Prime demand

Advertising Added a Third Seller Service

As marketplace competition increased, sellers needed visibility.

Amazon could sell that visibility.

The seller relationship now looked like:

Marketplace commission
+
FBA / storage
+
Amazon Ads

Not every seller uses every service.

The architecture nevertheless gives Amazon multiple monetization opportunities around one merchant.

Amazon Business Added Another Demand Pool

Amazon Business brought organizational buyers into the same broader commerce system.

A seller could now reach:

consumer demand
+
organizational demand

without building a separate B2B storefront.

The Accounting Makes the Marketplace Look Smaller Than the Commerce Volume

This is the most important financial-reading lesson.

If Amazon owns a product, the sale is generally recorded gross.

If a third-party merchant owns the product, Amazon generally records its commissions and service fees. [S1]

Therefore:

first-party revenue
and
third-party seller-services revenue

are not directly comparable measures of merchandise value.

This is why a marketplace can account for more than 60% of sales in Amazon's store while third-party seller-services revenue is smaller than online-store revenue. [S10][S1]

Marketplace Changed Amazon's Competitive Position

Without third-party sellers, a competitor could attack Amazon by offering products Amazon did not stock.

With a marketplace, Amazon could let outside merchants fill selection gaps themselves.

The platform becomes less dependent on Amazon's own merchandising decisions.

Marketplace Also Created Governance Problems

The same openness that expands selection introduces risk.

Amazon must manage:

  • counterfeit products;
  • unsafe products;
  • fraud;
  • fake reviews;
  • seller misconduct;
  • prohibited products;
  • customer disputes.

Amazon's 10-K explicitly discusses seller-related legal and reputational risks. [S1]

Marketplace scale therefore creates governance cost as well as economic value.

The Result

Amazon transformed from:

retailer that buys inventory

into:

retailer
+
marketplace operator
+
fulfillment provider
+
advertising platform
+
B2B commerce platform

That is why the marketplace decision is one of Amazon's most important historical turning points.

Evidence

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