Mimic Amazon at your own peril
Amazon is the largest internet retailer. Copy them and you, too, could end up just like them. Do this at your own peril!
In their most recent quarterly results (Q2 2012), Amazon turned in “impressive” results of $7 million in net income on $12.83 billion in sales. That’s the equivalent of making a profit of $5.45 on $1000 in sales.
So, let’s put that in context of most small e-commerce retailers. Assume your yearly gross sales were $750,000. With results like Amazon, you’d take home a whopping $4,087 for your effort.
Thus, I ask, “Why even bother being in business?” The “smart guys” in the room (like Mark Zuckerberg who recently marveled at Jeff Bezos’ “acumen”) would say that Amazon is wisely accepting short term low margins for something “bigger” down the road.
Unfortunately for them, the short term has been Amazon’s entire existence. You don’t want this type of existence. Seriously, if you can’t make money on $12 billion sales, you won’t do it on $30 billion, $50 billion, or $100 billion. In order to determine how to be successful against a giant like Amazon, you must know and understand your competition.
Amazon wants to elbow out online competition by driving its prices unfathomably low. That won’t work in the long term like it has for WalMart because WalMart painstakingly chooses what to sell. I’m not suggesting that Amazon will ever go away. What I am suggesting is that you can survive, excel, and thrive despite their existence.
Amazon, unlike WalMart, will make anything available for sale regardless of its saleability. In order to do that, Amazon must build massive warehouses. They can’t force any kind of uniformity amongst its suppliers or organize themselves efficiently for best-selling, high-margin products. They basically have to handle anything tossed their way. This is not efficient and it is extremely costly. Think of the difference in terms of cost for Amazon to fulfill an order versus you walking into WalMart, finding the products you want, and bringing them to the register yourself.
That’s partly the reason why WalMart makes a 3% profit on sales and Amazon makes 0.5%.
Amazon pays handsomely to offer “free shipping”. Their shipping costs have risen so greatly that they’ve had to build more massive warehouses in order to reduce transit distances. This has the unwanted side effect of forcing them to collect sales tax in more states (something that they unsuccessfully tried to skirt by setting up sham subsidiaries in Texas). Not surprisingly, Amazon supports Congressional legislation to enact a national sales tax so that all online retailers must collect it.
So, how do you counteract something so big and so powerful? Pinpoint their weaknesses and attack. Do not try to copy what they do. You won’t be able to do it and even if you could, you won’t be building your unique brand. You’ll be building a copycat.
Amazon can’t promote the products they sell with any level of acumen because they carry too many products! Create your store with laser-like precision. Become knowledgeable about what you sell and promote your expertise! Provide services that Amazon can’t provide. Get creative.
Offer video how-tos, live chats, and extensive FAQs. Try to build a community by making yourself (yes, you, the owner) the ambassador for your brand. Brand yourself as an expert by being in your own videos. Write articles. Answer customer questions, post them on your site, and make it clear that you answered them. If you sell shoes, you could go so far as to give yourself a name such as “The Shoe Whisperer” (cheesy, yes, but you get the idea). Your customers want to connect with your brand, but it’s hard for them to do that without a face or a persona for your brand.
A big-time fear of many e-tailers is that all of this effort will be wasted. Customers will visit your awesome site, decide what to purchase and then head over to Amazon to place the order.
Yes, that will happen. But don’t whine about. Instead, fight back! Work with your suppliers to setup MAP programs so that you can compete on an even price field. Once you have the price nailed down, you can excel in terms of promotion (how the product is explained and presented), customer service, and support. Furthermore, you could work with your suppliers to create bundles packed with value that aren’t available on Amazon. Perhaps you can offer support contracts. Get creative with your suppliers and you will succeed!
Bottom line: Don’t kill your margins to increase your top line revenue. Build a brand that relies on more than simply being the cheapest price with free shipping. While that may get you some sales, you’ll probably end up broke.
Jagath Narayan says:
Great article. This is a common theme that I hear across the successful ecommerce merchants using our platform. Here is what I would like to add to this article -
- Build your own brand following the advice in this article.
- But also use Amazon and eBay to enhance your ecommerce presence. You should take the products on your webstore, and ALSO list them across these marketplaces. Many of our customers have mastered this strategy of cross-listing, benefitting from the high traffic on these marketplaces, but not falling into the price-pressure trap.
Jamie Salvatori says:
Jagath - I'm not so sure about that. Once you do a serious analysis based upon all of the fees you pay to Amazon, your margins are razor thin. It's really not worth doing. Plus, you're not building any brand loyalty by selling through Amazon. The customer only remembers purchasing from Amazon. They don't remember the MarketPlace seller (you) that fulfilled that order. Worse is using Fulfillment by Amazon. The fees are killer.
Derek Bacharach says:
I always include a postcard (a big one!) with each sale I make on Amazon. Buyers know their purchase is from the Amazon marketplace so making sure they see their purchase came from a website that sells similar products that they bought is key. Same for ebay.
Regarding your article, even Walmart knows you cannot out-Amazon Amazon. It's humbling to realize this when you cannot compete with them on certain product lines. I've learned to let the big box companies fight each other rather than throwing my little hat in their ring.
As for the benefit of selling on Amazon (and ebay), it helps for moving inventory and especially for the holidays.
Michael Brodesky says:
You say "Amazon, unlike WalMart, will make anything available for sale regardless of its saleability. In order to do that, Amazon must build massive warehouses." But this is not really true because Amazon allows 3rd parties to sell on the platform and deliver good to customers without using FBA. They don't have to build massive warehouses to have every item for sale. Third party merchants also bring in a nice margin for Amazon. By offering more products, with reviews then anyone else, Amazon becomes the search engine for products and consumers choose it over google for product search. It's hard to beat Amazon's mobile tools that allow for price checking.
Merchants who can move small items that have a very low FBA cost will benefit because consumer like to search for items in the prime program.