Amazon & Marketplaces

5 Tradeoffs for Selling on Amazon

For six years I worked for Amazon, most recently as head of Amazon Services, that part of Amazon that recruits 100,000 new sellers to the Amazon marketplace each year. During my tenure, feedback from sellers mostly involved two themes: (a) Amazon offers a huge opportunity to increase their sales, and (b) this opportunity comes at a high cost to most goals that sellers have in other channels.

If you start by recognizing that Amazon’s goal to become the destination where consumers can find any product, always in stock, at the lowest price, then it is easier to understand why Amazon behaves the way it does. With such a marketplace so attractive to shoppers, each seller must ask if it is willing to deal with the impact of Amazon’s efforts to meet this goal.

If you start by recognizing that Amazon’s goal to become the destination where consumers can find any product, always in stock, at the lowest price, then it is easier to understand why Amazon behaves the way it does.

Here are five key tradeoffs each seller must consider.

1. Large Customer Base Versus Increased Competition

There are not many sales channels where you can find more than 240 million shoppers of consumer products. While Amazon offers such a staggeringly large customer base, it also is home to more than two million sellers, each looking to present its products to shoppers. Sellers have varying sales and profit goals, underlying cost assumptions, and ability to source products.

With such variability, there is opportunity for flexible sellers with well-understood cost structures and access to large varieties of products or exclusive sourcing of high-demand products. As the number of sellers increases, the pressure on margins increase, and sellers that don’t have some form of exclusive product sourcing or private label branding will find themselves suffering more each year.

2. Cannibalization

The customers on your ecommerce site likely started their shopping search on Amazon or Google. If they start on Google, then when you start selling on Amazon as a third-party seller, Amazon will very quickly start bidding Google keywords that it believes will drive top search results to your product listings on Amazon.

It’s not unusual to hear about private-label sellers that previously did a very decent business on their own websites to join Amazon, only to find they have problems driving new customer traffic to their own websites. That’s because Amazon is competing with you on the same keywords you want to use to drive traffic to your website. Now you are paying more for the same keywords, or losing out to Amazon because products on Amazon usually show up at the top of Google results, ahead of your own website’s listings.

It’s not unusual to hear about private-label sellers that previously did a very decent business on their own websites to join Amazon, only to find they have problems driving new customer traffic to their own websites.

If customers to your ecommerce site started their product search on Amazon, they probably couldn’t find your products there. They likely then went looking for your brand on Google. When you add your products to Amazon, this behavior will stop, thereby reducing traffic to your site, as shoppers can immediately find the product on Amazon.

However, given that more consumers now start the product search on Amazon rather than Google, it’s likely that the net cannibalization effect isn’t going to be too large. Furthermore, this customer preference of starting on Amazon, rather than Google, only reinforces the need for each brand to have some sort of Amazon presence.

It’s worth noting that this cannibalization effect is most impactful if you are bidding on keywords that Amazon doesn’t already bid on through other third-party products already on the Amazon marketplace. If your keywords are the same keywords being bid on by Amazon for competitor products, it is not likely that you will experience much of this cannibalization effect when you start selling on Amazon, as the negative impact to keyword bidding has already happened through other products on Amazon.

3. Who Owns the Customer?

Amazon treats all shoppers on Amazon as Amazon customers. As a third-party seller, any sales you make are to Amazon customers, not your own. You aren’t allowed to market afterwards to them. Thus it’s very difficult to build an ongoing relationship with any of the customers that shop for your products on Amazon.

Sales on the Amazon marketplace aren’t likely to lead a repeat purchase of your products. Moreover, the customer will likely come back to Amazon to shop, but it is highly unlikely the customer will buy specifically from you again, instead choosing whatever seller is the Buy Box winner at that moment.

Sales on the Amazon marketplace aren’t likely to lead a repeat purchase of your products.

Amazon uses the Buy Box algorithm to determine which seller will have its offer added to the customer’s shopping cart when the customer clicks the “Add To Cart” button. Every seller needs to be keenly aware of how its performance metrics, product availability, pricing, and fulfillment choices affect its likelihood of being selected as the buy box winner. More than 90 percent of all sales on non-media products sold on Amazon reportedly come from the Buy Box winner.

4. Fulfillment By Amazon

While any seller can fulfill its Amazon orders, Amazon offers sellers the option of fulfilling individual orders through the FBA service. Sellers using this service ship their products in bulk to Amazon’s fulfillment centers, and hand over the order fulfillment, most customer service inquiries, and the returns process to Amazon.

FBA offers sellers operational flexibility not available on any other marketplaces, freeing up sellers to focus more time on product sourcing, rather than operations. It also gives sellers a Buy Box advantage.

5. Comparatively Easier Growth Opportunities on Amazon

There are few, if any, marketplace opportunities as large as Amazon. This leads to the problem I regularly see: sellers not adequately diversifying away from Amazon. The opportunity for incremental growth is often easier on Amazon than elsewhere. That leads to sellers not diversifying from Amazon, or finding that the effort spent building other channels doesn’t pay off as well as similar time spent building the Amazon channel.

With even the largest, most well-run sellers on Amazon periodically running into short-term problems that cause their accounts to be suspended (or even terminated), the cost of not diversifying can be very high to a seller’s overall business.

Wrapping Up

If you’re contemplating selling on Amazon, work through these tradeoffs carefully. In my experience, sellers that thrive on Amazon typically come in two groups. One has exclusive or semi-exclusive sourcing relationships — including their own private-label brands — and doesn’t expect the Amazon channel to drive sales on their own websites.

The other group doesn’t have exclusive sourcing relationships, and must therefore be flexible about the products — getting in and out of products as the competitive landscape changes, which requires much more work and skillful buying.

But both groups clearly understand their overall cost structures, accept that sales on their own websites will suffer with the development of their Amazon channel sales, and use FBA to win the Buy Box more often.

James Thomson

James Thomson

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