Chapter 3 Is Your Business a Good Fit for Amazon?
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Amazon has made its marketplace welcoming for newcomers. New sellers will find a platform where it takes only minutes to sign up, and a few more minutes beyond that to get product listings live on the site.
With Amazon’s intent to attract as much selection as possible to the marketplace, it makes sense that Amazon wants to make it functionally easy for anyone to start listing products on its site. Yet, the decision to sell on Amazon should not be based just on ease of signup. Sellers also a need a clear understanding of what it takes to have a realistic chance of being successful on Amazon.
While Amazon still attracts general merchandise resellers that offer the same products as many other companies, the long-term success of those sorts of companies is very much in question. In a battle of margins and trying to differentiate in a meaningful way, sellers may end up working harder and harder each year to generate the same top line sales, and possibly not the same bottom line revenue.
Before we dive in to discuss which types of businesses are most likely to be successful on Amazon, let’s first review a few fundamentals about the Amazon marketplace to help you determine product fit.
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What Sellers Need to Know About Amazon
Almost anyone can list products for sale on Amazon
Unless a brand has tight distribution controls over its product, it’s not unusual to find dozens – if not hundreds – of resellers offering the same products on Amazon. This crowding creates price competition, as well as incentives to cheat MAP/MSRP pricing policies or to divert products at low margins, just to get some margin out of holding a particular brand.
Amazon sets the rules of its own marketplace
Amazon has given itself the advantages of collecting massive amounts of customer search and customer purchase data, with which it shares only the minimum amounts with sellers. This compendium of information gives Amazon’s first-party business – Amazon Retail, i.e. private label – a huge advantage of picking winners over and over when targeting products that it should sell itself on the marketplace.
Furthermore, Amazon Retail will almost always win the Buy Box, which is the mechanism through which sellers competing on the same product will get ranked to determine who gets the sale when the customer clicks the “Add to Cart” button. So if a seller is competing head-to-head with Amazon on a product, it’s not likely the seller will get many sales, given that Amazon Retail has the Buy Box advantage.
Amazon Retail also has sophisticated re-pricing software which allows it to lower prices to match prices already lowered by competing sellers. And, with Amazon Retail content not making any money (or even losing money) on a sale, it is not likely that a competing seller will either get the sale from Amazon Retail or make any margin from the sale.
Bottom Line: Competing directly on the same listings that Amazon Retail offers is not likely to be an effective business model long-term.
Amazon wants its sellers to use “Fulfillment by Amazon” (FBA)
FBA is Amazon’s fulfillment program that’s offered too all third-party sellers. Sellers put their products into Amazon’s network of fulfillment centers, and when a customer places an order, Amazon does the individual order fulfillment, rather than the seller.
Such products in FBA are eligible for Amazon Prime / Amazon Super Saver Shipping, two programs that have consistently been found to improve most sellers’ customer conversion rates. While a seller may have world-class fulfillment capabilities of its own, this FBA advantage is granted as part of Amazon’s efforts to ensure the highest quality, consistent shopping experience for Amazon customers.
When a seller on Amazon gets orders, it does not own the customer relationship
Each sale is viewed as a one-time transaction, and sellers aren’t allowed to market to these customers after the sale. So while sellers may have sophisticated CRM capabilities for their non-Amazon channels, almost all of that skill and technology is irrelevant for customers generated through the Amazon marketplace.
Amazon makes clear that it is exclusively the responsibility of the brand to secure its distribution
Namely, Amazon will rarely get involved in helping brands to remove unauthorized resellers, thereby implicitly encouraging anyone to sell any product on Amazon, as long as it is a legitimate product where no harm inflicts the Amazon customer.
Every seller on Amazon is required to answer customer inquiries within 24 hours
This requirement applies to any day of the year. And Amazon holds every seller to the highest industry standards regarding shipping times, confirmation emails, order cancellation rates and a slew of other criteria. For many businesses new to Amazon, these standards may well be beyond what they can handle, and hence the Amazon marketplace may be too much for them to handle.
So with these conditions in place, let’s discuss how different sorts of businesses are likely to do on the Amazon marketplace.
How Different Business Models Work on Amazon
The Reseller: No Exclusive Sourcing Relationships
Unless a reseller with no exclusive sourcing relationships has a significant pricing advantage, it’s not likely that this type of seller will be able to get any more than its fair share of sales from Amazon.
In other words, if this type of seller is competing against nine other resellers, this individual seller isn’t likely to get more than 10% of the sales –– unless it’s willing to undercut everyone else on price. A race to the bottom on price eventually lowers margins to an unsustainable level, making it pointless to be selling on Amazon. For the general retail business considering offering some of its products on Amazon, this channel is likely to be only a secondary channel if all of your catalog is readily available to any number of other retailers.
As an Amazon reseller, it’s critical for you to have paperwork that shows a clear provenance of where you sourced product.
While some gray market sellers may do well on Amazon, once Amazon’s Seller Performance team challenges them – asking them to provide paperwork showing where the product came from – the seller may not be able to address a claim of selling counterfeit or inauthentic product.
And, even for sellers with solid paperwork from manufacturers or authorized distributors, Amazon may still give the seller a hard time if too many customer complaints come in about the legitimacy of the product.
The Reseller: Exclusive Sourcing Relationships
If the seller has negotiated exclusive sourcing relationships from specific brands with decent control of their distribution, preventing any number of unauthorized or gray-market sellers from also selling on Amazon, then this seller is likely to do well as it doesn’t have to compete with other sellers for the “buy box.”
While the principle of an exclusive sourcing relationship makes a lot of sense for sellers, few brands understand the dynamics of the Amazon marketplace well enough to be willing to limit who can sell on Amazon. This lack of understanding can potentially result in less product sold to retailers in the short-term.
Such sellers typically have to agree to represent the brands well on Amazon, by way of improving listing content, ensuring MAP/MSRP prices are in place, and keeping inventory levels adequately stocked for the Amazon customer demand.
With the advent of the FBA program, it is becoming easier for brands to go direct-to-consumer with their own seller accounts on Amazon, cutting out resellers altogether. For brands that are willing to handle some day-to-day operational responsibilities (or outsource these responsibilities to agencies), they can make retail margins selling direct-to-consumers on Amazon, rather than securing only wholesale margins selling to retailers/resellers that will, in turn, sell on Amazon.
The Seller of Oversized or Hazmat Products
While Amazon does allow sellers to offer oversized and hazmat products to Amazon customers, the cost or FBA restrictions may be such that it doesn’t make financial sense for such companies to sell on Amazon.
If you are such a company, we encourage you to do extensive research on Amazon before signing up to be an Amazon seller.
The Private Label Seller
In the past five years, there has been a huge increase in the number of sellers on Amazon that are building their own brands (often through inexpensive overseas sourcing, e.g., Alibaba).
Combing Amazon product reviews and sales rank data of national brands, these sellers identify product or price gaps that they believe they can fill with their own, newly-developed private label brands. Typically, these sellers can enjoy 3-6 months of decent sales before their products do well enough to be identified by other private label sellers to target for their own private label versions.
If the private label seller becomes effective at evolving its catalog quickly and capitalizing in the short-term on its newly launched products, such a seller can do reasonably well on Amazon.
The National Brand
If a brand has created decent customer awareness, chances are some share of 300 million Amazon customers have already been looking for the brand on Amazon. Unable to find it, they move on to a competitor brand.
For such a national brand, it makes a lot of sense to be evaluating Amazon as an incremental sales channel. If the brand launches a seller account, using high-quality content in its listings coupled with some advertising budget to drive awareness of its presence on Amazon, such a brand can build its Amazon business into a decent channel.
Yes, there may be some cannibalization from its other channels, but we have found that the vast majority of sales on Amazon are incremental, given just how many Amazon customers there are, and how few of them are likely to have shopped on the brand’s own website.
For brands that have a regional awareness, it will take more time to build up a business on Amazon, but the underlying distribution control is most critical to the brand being able to sell its product on Amazon, without plenty of other resellers competing for the same sale. If a brand is successful with the Amazon channel, then the benefits of incremental sales at retail margins should produce solid financial results for the brand.
Any brand of any size on Amazon must recognize that it will earn certain rights on Amazon if the brand has a registered trademark, GS1-sourced UPC codes, and branding on both the packaging and physical product. For many brands new to Amazon, they are surprised to see that Amazon will not always respect the brand’s efforts to legitimize itself as a brand unless it has secured these aforementioned product and legal characteristics.
Also, the day-to-day operations of running an Amazon seller business must be properly addressed, given how high the performance standards are to which Amazon holds its sellers.
In subsequent chapters, we’ll cover how to meet these requirements and put operational processes in place.