Summary

• Amazon’s ‘Buy with Prime’ is unraveling as a full-fledged merchant acquisition strategy.
• ‘Buy with Prime’ not only offers new avenues to increase advertising and third-party solutions revenues, but also enhances the brand power network effect.
• The latest ‘Buy with Prime’ advancements pose threats to Shopify’s platform offerings, and undermine the firm’s ability to effectively monetize its own merchant base.
• Despite Amazon’s fulfillment and marketplace prowess, its shortcomings are likely to undermine its ability to effectively penetrate and acquire Shopify’s merchants.

Shopify (NYSE:SHOP) has been building out its own Shopify Fulfillment Network [SFN] to challenge Amazon’s (NASDAQ:AMZN) fulfillment services, its own marketplace through the Shop app to better compete with the Amazon marketplace, and is striving to enhance penetration of its payment solutions to drive future revenue growth. Amazon has not taken Shopify’s growth efforts lightly. Fulfillment By Amazon (FBA) and the Amazon marketplace are key elements of Amazon’s moat, which it is leveraging against Shopify and other ecommerce website developers to defend its dominance and fend off growing competition. We will assess Amazon’s advancement strategies, and whether Shopify is well-positioned to defend its position in the ecommerce industry.

Amazon was already leveraging its fulfillment prowess through offering Multi-Channel Fulfillment (MCF), which allows non-Amazon sellers to integrate MCF with their own websites to benefit from FBA delivery speeds. This solution not only augments Amazon’s fulfillment revenue, but also offers a passive market penetration strategy through monetizing competitors’ merchants, despite these merchants not being direct Amazon sellers. This year, Amazon has extended its efforts to encourage non-Amazon sellers to adopt MCF solutions, and is striving to deepen integration of its third-party solutions into external merchants’ core operations, through the introduction of ‘Buy with Prime’.

Buy with Prime

Amazon has decided to further leverage both its fulfillment prowess and loyal customer base (Prime subscribers) to monetize digital merchants outside of the Amazon platform, through the introduction of ‘Buy with Prime‘ in April 2022, which extends Prime benefits for its loyal customer base to third-party websites.

Before evaluating its implications, let us first better understand how ‘Buy with Prime’ offers to enhance merchants’ business operations. ‘Buy with Prime’ is sold to merchants through offering two key benefits: faster delivery and access to millions of prime members. Though merchants were already able to access Amazon’s faster fulfillment capabilities through integrating MCF with their own websites. Hence while ‘Buy with Prime’ may further extend prime-like benefits (like same-day delivery), its main value addition does not lie in fulfillment. However, it does facilitate easier access to Amazon’s loyal customer base. Shopify had removed the Amazon sales channel from its platform in September 2021. As a result, Shopify merchants currently access Amazon’s marketplace, including its prime subscribers, through third-party app integrations which incur monthly subscription fees. Enter Amazon’s ‘Buy with Prime’, which allows merchants to access Amazon’s web visitors/ Prime subscribers more cost-effectively. As per Amazon’s press release:

In September 2022, Amazon advanced its ‘Buy with Prime’ offering by introducing new marketing solutions for these non-Amazon sellers. According to Internet Retailing, “Sellers who take part can show their products on…an Amazon storefront that they can customise. Sellers can then use ‘sponsored brand’ ads to direct Amazon shoppers to their own products on their own website”. Hence it offers merchants a way to increase web traffic to their own websites through Amazon.com. From Amazon shareholders’ perspective, this offers a new avenue to increase advertising revenue, as well as third-party solutions revenues.

Amazon is also offering to fund ‘Buy with Prime’ ads on social media platforms like Facebook/Instagram featuring sellers’ products that use ‘Buy with Prime’, essentially offering free advertising for these non-Amazon sellers. Amazon is certainly not allowing merchants to direct visitors away from Amazon.com towards their own websites out of generosity. Sales enabled through ‘Buy with Prime’ require payments to be processed through Amazon Pay. Hence, ‘Buy with Prime’ paves the way to cross-sell its payment solutions, and consequently further augment fulfillment revenue (which includes payment solutions revenue, as per Amazon’s accounting).

Furthermore, Amazon allows external merchants to use the ‘Buy with Prime’ badge on their websites to let shoppers know which products are fulfilled by Amazon, and merchants agree to do so with the aim of driving higher conversion rates among Prime members that trust Amazon’s fulfillment services and speeds. Essentially, this serves as free marketing for the Amazon brand. Website visitors witnessing ‘Buy with Prime’ badges on non-Amazon websites further augments shoppers’ impression of Amazon’s fulfillment services, which in turn could lead to more Prime subscribers, thereby creating a self-reinforcing network effect and brand power enhancement.

From Amazon’s perspective, the ‘Buy with Prime’ offering is a wise strategic move to leverage its superior functionalities over website building platforms, creating new sources of advertising and third-party solutions revenues. In essence, Amazon is capitalizing on competitors’ comparatively inferior capabilities and resource inadequacy to monetize their own subscriber bases, hence leaving a delta to exploit. Furthermore, its latest move to allow external sellers to create a customizable Amazon storefront unravels Amazon’s ploy to directly compete against ecommerce web developers. Essentially, Amazon’s ‘Buy with Prime’ solution is a well-devised merchant acquisition strategy, whereby they gradually work to imbed Amazon’s third-party solutions into non-Amazon sellers’ core operations, with the aim of eventually inducing these merchants to leave their legacy website development providers for the Amazon platform.

‘Buy with Prime’ emboldens bearish sentiment towards Shopify

While ‘Buy with Prime’ will eventually be rolled out to all digital merchants, industry followers believe Amazon’s ‘Buy with Prime’ is specifically targeted towards Shopify merchants. It comes as no surprise then that Shopify is dissuading merchants from enabling ‘Buy with Prime’ on their websites by warning of data security risks. Though it still allows merchants to proceed with enabling ‘Buy with Prime’ after they have been warned of the risks.

Despite Shopify striving to develop its own fulfillment network, it allows merchants to choose Amazon’s fulfillment services over SFN, in order to avoid losing merchants to Amazon (and other website builders offering MCF & ‘Buy with Prime’ integration) while it works to catch up to Amazon’s fulfillment capabilities. However, by doing so it is risking augmenting Amazon’s brand power, as it could solidify merchants’ (as well as shoppers’) perception that Amazon’s fulfillment services are superior to Shopify’s SFN. This could prove problematic going forward when Shopify’s SFN is better established and the firm strives to more fiercely compete for fulfillment business with Amazon. To encourage merchants to choose SFN over Amazon’s fulfillment services going forward, Shopify may have to resort to price competition, which would undermine profitability and could be a difficult war to win given Amazon’s superior scaling abilities and financial resources. Alternatively, Shopify will have to work towards ensuring merchants’ core operations remain more integrated with Shopify’s solutions over Amazon’s solutions, which is already a key element of Shopify’s strategy. Shopify could also make MCF / ‘Buy with Prime’ accessibility more difficult through platform/ terms of service changes to fend off Amazon integrations, at the expense of potentially upsetting certain merchants (at least in the short-run).

Shopify also boasts the broadest set of sales channels offerings than any other ecommerce platform. However, Amazon’s initiative to extend sponsored brand advertising to non-Amazon sellers, allowing them to direct shoppers to their own websites, poses a threat to Shopify’s marketing solutions. Amazon boasts high ad conversion rates as it benefits from web visitors intending to buy something when they visit, contrary to most other major ad platforms. This strength was reflected by Amazon’s industry-leading ad revenue growth rate of 18% for Q2 2022, while other ad platforms suffered from Apple’s iOS privacy changes and deteriorating economic conditions. Unfortunately, Shopify’s suite of sales channels consists of several major social media platforms like Facebook/Instagram and Pinterest, which are proving to be more susceptible to Apple’s policy changes and contracting ad budgets across companies. Hence, if Shopify merchants indeed experience higher conversion rates through Amazon’s sponsored brand ads than Shopify’s suite of sales channels, it may undermine the value of Shopify platform offerings. In fact, Amazon is also offering to fund ‘Buy with Prime’ ads on social media platforms like Facebook/Instagram featuring the products of sellers that have enabled ‘Buy with Prime’, essentially offering free advertising for these non-Amazon sellers, and reducing the need for merchants to rely on the Facebook/Instagram sales channel through Shopify. These advertising benefits could lead to merchants becoming increasingly dependent on and integrated into ‘Buy with Prime’ solutions (including fulfillment services and Amazon Pay), undermining Shopify’s ability to monetize its merchant base.

Furthermore, Amazon requiring merchants to set up Amazon Pay when enabling ‘Buy with Prime’ is a direct challenge to Shopify payments/ Shop Pay, and undermines Shopify’s ability to monetize its merchant base if an increasing number of sales are facilitated through ‘Buy with Prime’. As discussed in a previous article, Shopify Payments revenue makes up a significant portion of its merchant solutions revenue (and consequently total revenue), and the newly appointed COO’s solid background in building payment solutions could be signaling Shopify’s future payments ambitions. Consequently, Shopify is discouraging merchants from enabling ‘Buy with Prime’ on their websites in the interest of protecting its revenue base and growth potential, and hindering merchants’ operations from becoming too integrated into Amazon’s solutions.

While Shopify strives to impede ‘Buy with Prime’ penetration across its own merchant base, Amazon is already emboldening its strategy by granting ‘Buy with Prime’ users the ability to set up their own customizable Amazon storefront on the Amazon website, and allowing them to direct visitors to their own websites, as discussed earlier. Of all the strategies Amazon has employed as part of ‘Buy with Prime’, this is certainly the boldest, as it seeks to compare neck to neck with Shopify-powered websites. Indeed, Shopify faces the risk of its merchants witnessing the majority of its web visitors/ sales conversions arriving through Amazon overtime, as this could potentially induce merchants to reconsider their Shopify subscriptions and re-platform to Amazon altogether. If not Amazon, it could also raise the risk of Shopify merchants moving to other cheaper website development providers (offering equivalent Amazon integrations) if they deem that Shopify’s platform offerings are no longer worth the higher subscription fees.

Given the threat ‘Buy with Prime’ poses to Shopify’s platform, it is natural for observers to consider whether Shopify could block ‘Buy with Prime’ access altogether to protect itself. Let us consider this scenario. While such a move could help Shopify preserve its merchant solutions revenue and protect the platform from Amazon’s merchant acquisition strategies, it would not be aligned with merchants’ interests who would be losing out on a cost-effective sales channel opportunity. In fact, Shopify’s competitors like BigCommerce have embraced the offering, seeing it as a value add for merchants as opposed to a threat. As a result, Shopify’s attempt to inhibit Amazon from monetizing (and potentially acquiring) its merchants by blocking ‘Buy with Prime’ would raise the risk of losing merchants to other ecommerce development providers that do offer access to Amazon’s Prime members. Furthermore, this could also undermine Shopify’s ability to attract new merchants looking to build ecommerce websites, as access to Prime members could prove to be a critical factor when choosing between website development providers. Therefore, any decision to block ‘Buy with Prime’ altogether could be a risky move, and Shopify will need to fight Amazon’s merchant acquisition threats head-on.

Amazon’s short-comings fuel bullish perspective on Shopify

Regardless of Amazon’s latest ‘Buy with Prime’ offerings, selling on the Amazon platform has always been an option for digital merchants, and there are important reasons behind certain merchants choosing web developers like Shopify over listing on Amazon.com. While Shopify investors are rightfully concerned about Amazon’s ‘Buy with Prime’ strategies at a time when Shopify is still developing its own fulfillment network and marketplace, there are reasons to be optimistic.

Firstly, Amazon has a lingering trust issue. Amazon sellers face the threat of directly competing against Amazon itself if it decides to launch similar products. Amazon has faced well-publicized anti-trust litigations for leveraging third-party data against its own sellers. Shopify is well aware of this weakness, hence they prudently targeted their attack on ‘Buy with Prime’ by warning that “Amazon’s service could steal customer data“. Although, given that Shopify has been allowing merchants to use Amazon’s MCF integration for fulfillment and third-party apps to facilitate Amazon marketplace integration, the firm’s sudden concern about data sharing raises eyebrows, and bolsters the argument that its latest move against ‘Buy with Prime’ is more to do with feeling competitive threats than concerns around merchants’ data. Nevertheless, playing the ‘trust’ card could still prove to be an effective strategy in dissuading Shopify merchants from enabling ‘Buy with Prime’, and fending off competitive threats from Amazon.

Amazon’s growing private label business is certainly a threat to smaller retailers on its platform. According to Stacy Mitchell, co-executive director of the Institute for Local Self-Reliance:

Merchants put a lot of strenuous effort behind making successful products and building their space in the ecommerce market, and do not want to see their products being a copied by a powerful tech giant, essentially threatening to put them out of business.

When Jeff Bezos was questioned about this issue by Congress in 2020, his response wasn’t very reassuring to win back trust:

Amazon inevitably suffers from a tarnished brand image (at least from seller’s perspective) rooted in distrust, which has helped website developers like Shopify grow, as they are often seen as the anti-Amazon solutions to ecommerce. Hence, despite Amazon’s lengthy efforts to acquire merchants from competitors through various ‘Buy with Prime’ initiatives, these strategies will prove futile among merchants who deliberately avoid Amazon due to its anti-competitive business practices.

Secondly, Amazon had attempted to build its own ecommerce website development solution, Amazon Webstore, over a decade ago, which it eventually shut down in 2016 as it failed to effectively penetrate the market. On the one hand, it is surprising that the leading ecommerce platform with access to an industry-leading marketplace, loyal Prime subscribers and advanced cloud computing capabilities (aws), failing to build a competitive ecommerce website development service. On the other hand, its failure is testament to a lack of trust as well as digital merchants’ need for advanced tools and creative solutions to stand out from competitors, which Amazon failed to provide, and left a delta for firms like Shopify to capitalize on. Digital merchants have shown to value accessibility to advanced and unique functionalities that allow for more pronounced brand and product differentiation. In fact, it is these strengths that allowed Shopify to grow this large and become an effective competitor to Amazon in the first place.

Amazon has clearly not given up and is trying a new merchant acquisition strategy through ‘Buy with Prime’, particularly through offering customized storefronts on Amazon. While Amazon may have advanced its customization and brand building capabilities since the Amazon Webstore shutdown, the storefronts would after all still be an extension of the Amazon domain and website, hence certain “Amazon-ish” elements will still be present, limiting merchants’ brand differentiation capabilities. Shopify is well aware of the value limitless customization and full website control can offer merchants to strengthen their brand power, and runs a well-established third-party app store to offer merchants “a rich ecosystem of app developers, theme designers and other partners, such as digital and service professionals, marketers, photographers, and affiliates”.

In fact, as per Shopify’s 2021 annual report:

This strategy reflects Shopify’s commitment to constantly expand the availability of advanced functionalities and commerce tools for its merchants and maintain its competitive edge. Shopify empowers merchants to decide how best to customize their store, yielding them full control over how to drive sales conversions higher and build long-term customer relationships. While Amazon also offers access to over 2,500 third-party apps for advanced functionality through its ‘Seller Central Partner Network’, Shopify is still leading in this space with over 8,000 apps. Moreover, investing in brand building and customer loyalty to induce word-of-mouth marketing and drive recurring sales is also more worthwhile when merchants run their own ecommerce websites rather than on Amazon. Despite Amazon giving merchants the opportunity to build their own storefronts, merchant still face the risk of potential customers being distracted by other pages on the Amazon website while searching for a merchant’s brand.

Furthermore, given merchants’ need for brand and product differentiation away from Amazon’s competitive marketplace, merchants may be wary of using Amazon’s ‘Buy with Prime’ badge next to their products on their own websites, as it may potentially backfire by reminding web visitors of the Amazon marketplace, and may potentially induce shoppers to check for similar products on Amazon.com before making a purchase decision. A chief purpose of running one’s own website as opposed to listing on Amazon is to achieve product/ brand differentiation and encourage web visitors to buy into the brand story, subduing shoppers’ tendency to engage in further product comparisons, and thereby improving merchants’ pricing power. However, covering one’s website with multiple ‘Buy with Prime’ badges with the famous Amazon arrow logo may defeat the entire purpose of a merchant’s product/ brand differentiation initiatives, as any potential comparisons with products listed on Amazon would undermine merchants’ pricing power given the price-competitive landscape of the Amazon marketplace. Hence once again, despite Amazon’s promising strategies for penetrating competitors’ merchant bases, its success may be undermined by merchants who intentionally avoid Amazon to evade undue product comparisons.

Same logic applies to Amazon’s offer to fund social media ads featuring external sellers’ ‘Buy with Prime’ products. While ads would be funded by Amazon, merchants would have no control over how their products are presented alongside other products, and may not be aligned with their own marketing preferences to drive sales conversion and long-term customer relationship building. A positive, long-lasting impression is a key element to driving sales conversion, and merchants may be unwilling to yield this control over to Amazon. As a result, demand for Shopify’s multiple sales channel exposure may indeed withstand Amazon’s latest ‘Buy with Prime’ marketing solutions among merchants who seek to stay in control over their brand image and story.

Therefore, in spite of Amazon’s initiatives to penetrate and eventually acquire Shopify’s merchants through ‘Buy with Prime’, the Shopify platform offers compelling value and brand-building capabilities that would inhibit wide-scale re-platforming to Amazon.com among Shopify merchants. Furthermore, the high switching costs incurred would also dissuade merchants from re-platforming to Amazon (or other cheaper web developers). Long-term success in this industry entails deeply integrating a platform’s suite of services into merchants’ core operations, and this has indeed been one of Shopify’s core business strategies. Hence, it may not be easy for Amazon or cheaper web developers to acquire merchants from Shopify. In fact, if Amazon’s ‘Buy with Prime’ solutions are cost effective enough, merchants could indeed maintain dual exposure through both their Shopify-powered websites and Amazon.com presence.

Summary

Amazon’s ‘Buy with Prime’ advancements are directly challenging Shopify platform solutions. What started off as offering Prime-like fulfillment benefits to external sellers is becoming a full-fledged merchant acquisition strategy, under the pretext of a “mission to help merchants of all sizes grow their business-whether on Amazon or beyond”. ‘Buy with Prime’ certainly offers compelling value to external merchants, and will augment Amazon’s revenue generation potential going forward. However, its market penetration efforts are likely to be undermined among merchants with deeply ingrained distrust in Amazon’s business practices, as well as brand building/ pricing power limitations. Hence, ‘Buy with Prime’ certainly does not induce a threat to Shopify’s existence in the ecommerce industry, contrary to fears of some bears.