Chapter 4 How Not to Sell on Amazon, According to The Former Head of Selling on Amazon
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The Amazon marketplace is designed to make it easy for practically anyone to list products on the site, including the brands themselves.
Add the features of the FBA program, and now companies that haven’t historically fulfilled direct-to-consumer orders can easily handle that operational complexity. Layer in how Amazon’s Buy Box algorithm prefers lower-priced offers to higher-priced ones and competition across different sellers can quickly become a race to the bottom for margins.
With far too many sellers not properly incorporating all of their costs into their pricing decisions, I regularly see sellers overestimating how far they can drop their prices and still be profitable.
Brands acting as direct-to-consumer resellers on Amazon are better able to cut retail prices and remain profitable, creating an advantage over resellers.
So, it becomes harder for a reseller to bring meaningful value to customers if:
- There is no real limit to how many resellers could offer the same products
- Resellers are having to undercut one another to win the Buy Box
- They don’t often understand their all-in cost structures
- The very brands that make product available to them are now able to compete side-by-side as resellers
Only those resellers having an exclusive sourcing relationship with its brands, where the brands also agree not to become resellers themselves, have much luck with this route. Even so, as more brands realize the opportunity on Amazon, fewer brands are willing to make such a deal.
In response to these many changes, we have seen two major shifts in the past 3-4 years occur among the base of resellers on Amazon:
- Resellers are aggressively courting brands to become their exclusive resellers on Amazon
- Resellers are developing private label brands of their own so that they can become exclusive resellers of their own brands.
With so many new private label brands surfacing, there is no longer just competition across national brands or between national brands and private label brands, but now also between private label brands operating in the same product spaces.
So if you’re about to get started on Amazon as a third-party seller, it’s critical to understand what sourcing/distribution advantages you will have, as those gains are likely to be short-lived.
It’s critical for third-party sellers to continuously evaluate their product sourcing advantages and expect that the products making the seller profitable today will need to evolve into a different mix of products within six months.
How Amazon Wins on Amazon
There are more than two million third-party sellers operating on the Amazon marketplace.
And yet, Amazon has all the data, including but not limited to:
- Which products customers search for
- What they actually buy
- How much they buy at what prices
- Where they can’t find the brands they were searching for
Although Amazon is a publicly held company, it’s investors have tolerated years of razor-thin margins, which has partly played out by way of Amazon selling products at next to no profit or even at unprofitable levels.
Amazon would make more profit in the short-term by letting third-party sellers earn the sale. However, the company has taken the approach, in each category of products, of pursuing all of the strategic brands it believes need to be in the catalog to attract Amazon customers to shop first on Amazon over any other site –– online or offline.
To do this, Amazon has made a number of sourcing agreements with brands to acquire products at prices that don’t allow Amazon to make any significant profit. This is because the objectives here are for Amazon to bring the right selection at prices consistent with or lower than market prices, available all of the time to Amazon customers. To make these objectives possible, Amazon has chosen selectively to forgo short-term profits in pursuit of long-term customer loyalty.
For the third-party seller competing head-to-head with Amazon Retail, these differences in objectives often creates situations where Amazon lowers its prices to a point where, rightfully so, the third-party sellers competing against Amazon can’t figure out how Amazon Retail is making any money.
The answer is that Amazon isn’t making money, at least in the short-term, and it’s entirely comfortable with that.
I have also seen third-party sellers frustrated that Amazon doesn’t increase its prices in times of scarcity, such as popular toys being sold right before Christmas. In these situations, while Amazon may put limits on how much product any one customer can buy, it maintains prices at stable levels to help Amazon customers avoid apparent price gouging that can happen otherwise in such situations.
Let’s just say that Amazon’s runway is a lot longer than any of the other sellers on Amazon.
Finally, for FBA sellers whose products end up competing directly with Amazon Retail, these sellers often get frustrated that they rarely win the “Buy Box,” even though their products are also Amazon Prime eligible (by being FBA products) and sold at the same prices as Amazon or even slightly lower.
Yes, as long as Amazon is in stock on an item, it will almost always win the Buy Box, even if another seller appears to have a better price and equal Amazon Prime designation on its offer. At some point, another seller can lower its prices below a threshold that Amazon Retail has set for itself, but that point is usually well under water for all sellers.
This information isn’t to scare you away from Amazon. In fact, it’s here to do exactly the opposite.
Knowing how to operate your business within the Amazon ecosystem will better help you to win in this massive global channel. Competing directly with Amazon Retail isn’t necessarily a winning strategy, but there are plenty of other strategies to double down on or modify your approach.
The rest of this guide will expand on each of those.