How to Avoid the Critical Pitfalls & Thrive in the Amazon Marketplace
If you’re an ecommerce retailer, market forces practically demand that you sell on Amazon. After all, nearly half of web shoppers go there directly for every product search. Amazon accounted for 43% of all ecommerce sales in the United States in 2016. But it’s not all rainbows and sunshine for retailers looking to profit from Amazon’s unprecedented influence in the retail universe. Amazon has changed some of its direct selling techniques, to the detriment of many sellers who operate on the Amazon Marketplace.
In order to thrive as a seller in the Amazon Marketplace, you need to understand and prepare to compete by Amazon’s rules and strategies designed to improve their own bottom line, potentially at your expense.
Amazon’s Controversial Business Model
By design, Amazon has a controversial business model. If they weren’t disruptive, they wouldn’t be Amazon, after all. These tactics purposefully reduce the company’s short-term profitability with the goal of capturing massive market share and scale.
This approach has the effect of creating high emotional switching costs for its customers and extremely high entry barriers for competitors.
Ignoring MAP Pricing
Many merchants have complained that Amazon ignores standard manufacturer’s Minimum Advertised Pricing (MAP) policies. Manufacturers established MAP pricing to prevent retailers from selling products at unsustainable, low margins which destroys the manufacturer’s ability to produce products at a cost retailers are willing to pay. They allow products to be sold on service and value rather than through a drastic (and unsustainable) cutting of costs.
Amazon’s extremely low pricing practice regularly violates manufacturer's MAP policies, but manufacturers are almost always reluctant to enforce them or reprimand Amazon because of the high volume of product they purchase. Most unfairly is that manufacturers do enforce MAP policies on other sellers, making it impossible in many instances for them to compete with Amazon on cost.
Amazon’s sheer volume of direct-sale products allows them to sell at very low margins and still make a profit. Smaller retailers can’t survive with such slim margins because their volume isn’t high enough to compensate.
When a product search is performed in Amazon, their aggregators troll their site to bring you back matching results. The problem lies in whose products are typically favored and featured. Are they yours or Amazon’s? If you guessed Amazon, you’d be right.
Amazon Seller Fees
Amazon’s seller fee structure is perhaps the most complicated one out there. Their website only lists four “Selling Fees” on top of the monthly subscription fees:
- Per-Item Fees
- Shipping Fees (Fulfilling Orders)
- Referral Fees
- Variable Closing Fees
But don’t be fooled. There is a complicated fee structure within each of these four categories. Additionally, if you choose to use FBA (Fulfillment by Amazon), the following fees also apply:
- CPA Fees
- Order Handling
- Pick & Pack Fees
- Monthly Storage Fees
- Inventory Placement Service Fees
Conflicting Interests with Fulfillment By Amazon
Amazon has built possibly the most sophisticated logistics network in the world. Handling third-party sellers’ backend operations (storage, fulfillment, and customer service) via Fulfillment By Amazon (FBA) is an easy way for sellers to make their products eligible for Amazon Prime’s free two-day shipping, which increases their sales dramatically.
Sounds great, right? Well, yes. At least, until you factor in some of the conflicts of interest and problems which can take place, unbeknownst to sellers.
Here are a few examples:
- Quality Control Problems: Amazon ships products from whichever fulfillment center is closest to the buyer. If a customer from Arizona buys a product from a Michigan-based seller but an “identical” product is at a center in Colorado, the product from Colorado is the one that will be shipped. This makes it difficult for sellers to guarantee product quality to its customers and can result in negative reviews or liability, through no fault of the seller.
- Sales Tax Reporting Issues: Since Amazon doesn’t tell sellers which facility is sourcing their products, it makes it difficult to remain in compliance by accurately reporting state sales tax. This opens the doors to collection attempts and liability issues.
- Direct Competition: Amazon’s role as both a seller and their sellers’ fulfillment specialist creates a conflict of interest which will inevitably be more profitable for Amazon and detrimental to its sellers.
What Sellers Can Do to Push Back & Preserve Their Profits
While abandoning the Amazon Marketplace isn’t necessarily the answer (especially for sellers who make their own products and control their own brands), resellers of other brands are in a tough spot.
The lure of selling on Amazon is that they do all the marketing for you. If you go out on your own, it’s up to you to market effectively and optimize your conversions...but it can be done!
Consider these alternative opportunities to decrease your risk of losing your profits.
White & Private Label Products
White or private label products are manufactured in mass quantities by one company but available for sale under another company’s individual brand with customized logo, packaging, and marketing strategy. This option lowers the price of innovation, technology, and infrastructure but still offers the ability to customize the product to your branding and marketing.
This profitable opportunity works best when you buy and resell a generic product off of Amazon’s Best-Selling list. For even more profit, select lightweight items for lower shipping costs.
Even Amazon takes advantage of this tactic by selling their own white label products named AmazonBasics.
Your Own Channel
Customers are always looking for unique products for both themselves and as gifts which make these items feel special and stand out from the crowd. That’s why, rather than relying solely on Amazon’s generic brand, you should consider building your own.
Self-hosting an online store can take a lot of time and hands-on work, but it will give you great flexibility and can be an effective way to take control of your own business and earnings.
The Benefits of Third-Party Niche Marketplaces
A great option for diversifying your selling strategies and reducing the risk of lost profits is to sell your products in alternative third party marketplaces such as Newegg, Walmart, Jet, eBay, Etsy, Rakuten, ASOS, and others.
There are a variety of specific benefits this strategy can give you. Other marketplaces may offer:
- A highly customizable design, offering you a unique opportunity to show off your brand and use your own voice.
- A user-friendly and interactive atmosphere, making your customers’ online shopping experience more enjoyable.
- A sense of community by allowing forums and groups for members to ask questions and discuss products.
- Less competition, since there may be fewer sellers and some marketplaces don’t sell their own products.
- Unique and educated visitors that are looking for a hard-to-find product, a better buying experience, or more personal service and are willing to pay for it.
- Access to a loyal and active customer base, such as from a well-known retail store.
- A stricter pre-approval process, preventing scams and counterfeiting which can give honest sellers a bad reputation.
- Better quality control of your own products, as orders will not be fulfilled by any seller other than you.
- Lower fees and commission rates and a less complicated structure.
Because of all of these benefits, it’s well worth your time to do your research and explore alternative third-party niche marketplaces for selling your goods.
Learn more about these third-party marketplaces, organized by industry, by downloading our free PDF guide here.
Being an Amazon seller is a great opportunity for a lot of retailers. You get the exposure, the customers, the marketing, and the fulfillment all taken care of for you. It’s easy and can work very well.
However, in the very near future, this may not be the case. That’s why it’s so important for you to be aware of the Amazon business model so you can prepare yourself, diversify your offerings, mitigate your risks, please your customers, and enjoy a sustainably successful business.