Channel Strategy Propels Amazon to Fulfillment Leadership

The 2018 program that created thousands of independent delivery companies is the foundation of the marketplace’s eclipse of UPS and FedEx.

By Larry Walsh

If you’re looking for an example of how building a robust channel program can enhance market share and build a new business, look no further than Amazon — the consumer marketplace, not the web services division.

Last year, Amazon became the top parcel delivery service in the United States, overtaking UPS for the first time and surpassing FedEx in total package deliveries in 2020. Despite declining online consumer spending, Amazon will deliver nearly 6 billion packages this year, further extending its lead.

Amazon’s journey from a modest in-house delivery service to a dominant market player is a tale of strategic channel development on two fronts. A key to Amazon’s rapid growth has been its innovative channel of independent delivery services. Launched in 2018, this program enabled the creation of independent parcel delivery companies with an accessible start-up cost of just $10,000. Now, with over 200,000 independent drivers, this network has been instrumental in Amazon’s accelerated expansion.

This approach to cultivating new channels and partners isn’t unfamiliar in the IT sector. Historically, IT vendors have harnessed new market opportunities by developing distinct programs aligned with different partner segments’ specific needs and models. For instance, numerous IT firms have established specialized channels catering to managed service providers (MSPs).

Amazon isn’t immune to inflation, and many online sellers have cut back on benefits such as free shipping or have raised annual membership fees. Here, again, the channel Amazon created pays dividends in cost containment. UPS recently settled a new union contract that includes pay increases; the average UPS driver makes $42 per hour. Some drivers make up to $160,000 per year. Conversely, Amazon’s independent drivers make around $20 per hour, and since they’re independent contractors, Amazon isn’t liable for health insurance and other benefits.

Amazon’s parcel-delivery channel exemplifies how businesses can bolster market share by opening new avenues for partner engagement and success. It’s important to note that Amazon’s strategy also included creating a channel accessible cheaply, thereby minimizing the risk for individuals starting a small business in this domain.

Yet Amazon’s role in redefining delivery channels is just one aspect of its expansive narrative. The company’s growth as a marketplace has continually broadened avenues for resellers to reach customers efficiently. Despite criticism that Amazon has undermined traditional retail through aggressive pricing and low-cost products, its marketplace has enabled new sales opportunities for thousands of small and midsize businesses.

With its far-reaching marketplace, coupled with a cost-effective, efficient delivery service, Amazon has positioned itself as a comprehensive channel facilitator, creating incremental business opportunities for vendors and resellers.

Channel leaders, however, face significant challenges. In an economic climate where customers are reducing IT spending, many vendors, apart from giants like Microsoft and Amazon Web Services, struggle to sustain revenue and margins. This places immense pressure on channel program managers to validate the channel’s value.

While it’s recognized that channel partners need to expand market coverage and control sales costs, there’s often skepticism, particularly from finance departments, regarding the actual value partners add in terms of sales and market share growth. Channel experts cite various metrics that underscore the value of partnerships, including reduced sales costs, broader market reach, lower customer support expenses, influence on customer decision-making, and enhanced customer satisfaction and retention. Those benefits, however, are frequently challenged by criticisms regarding the inconsistency in execution, the limited revenue-generation capacity of individual partners, and the increasing cost of maintaining these partnerships.

Amazon’s model isn’t perfect. Critics correctly point out that Amazon isn’t as good at processing returns as it is at getting packages from the warehouse to the consumer. Amazon still relies on services such as UPS to manage returns processing.

Nevertheless, Amazon’s impressive growth in the parcel-delivery sector is a testament to the effective use of channels in driving growth and securing competitive advantages.

Larry Walsh is the CEO, chief analyst, and founder of Channelnomics. He’s an expert on the development and execution of channel programs, disruptive sales models, and growth strategies for companies worldwide. Follow him on Twitter at @lmwalsh_CN.