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Inviting Competition from Amazon

I often read people commenting that when you sell on Amazon you’re inviting competition from Amazon itself.  This is because Amazon knows the sales volume of all products sold on its site, so if they see a third party retailer with a well-selling item Amazon can then sell the item itself.

There’s no doubt this can and probably does happen, but I think it’s a misguided concern for several reasons.

First is that it assumes Amazon won’t be aware of the product as long as no third party retailer sells it on Amazon.  Amazon is a huge company, with 10’s of billion dollars in sales every year.  They actively seek out new products to sell to keep growing.  If there’s a product with a large total volume Amazon probably knows about it, and even if they don’t know about it yet they will almost certainly find it eventually.  Basing your success on the hope Amazon never discovers a high volume, high profit margin product line that anyone can retail is not a great strategy.

It also assumes that if you don’t sell it on Amazon, no other third party retailer will either.  Amazon will see the sales volume no matter who sells the product, and if it’s a good product to sell you can count on some third party retailer eventually selling it on Amazon.

But my main objection to this argument that selling on Amazon is self-defeating is that it bases success on the hope of permanent artificial scarcity.  Let me give an example of what I mean.  If you’re the only retailer selling bread within easy driving distance of a town you can sell a lot of bread at a very high price, and make a good living doing it.  But are you providing a high value service to your customers? 

Certainly having bread is better than not having bread, and you’re enabling your customers to have bread without driving a long distance, so in that sense it’s a high value service.  But it’s only high value because no other retailer happens to be serving the area.  There’s no shortage of bread, and there are no barriers to another retailer selling bread in the area, it just so happens that no other retailer is selling bread in the area – yet.  As soon as another retailer within easy driving distance starts selling bread your business model doesn’t work – prices go down, your profits go down, and eventually you’re driven out of business. 

Not selling on Amazon because of the potential for competition is like spending your life looking for the largest city you can find that doesn’t have a retailer within easy driving distance that sells bread.  Your continued success in any particular town is always tenuous at best.

Basing your business’ success on artificial scarcity is not a good idea.  Instead you should find a way to add value for your customers, to offer them something that large retailers don’t and aren’t going to offer them.  If it’s easy and profitable for large retailers to provide exactly the same products and services you do you should expect that eventually they will do so.  Fortunately, what works well for small retailers isn’t a particularly good fit for large retailers, so there are lots of opportunities for you to thrive.

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