The increasing dominance of Amazon has many merchants scratching their heads, wondering how exactly to work with that company, and how that company will impact their own businesses.
I recently spoke with James Thomson, a former Amazon executive, to discuss the Amazon marketplace, the Fulfillment by Amazon program, and the Prosper Show, a conference co-founded by Thomson to help merchants sort through it all.
Practical Ecommerce: Should ecommerce merchants focus on selling via their own websites or on Amazon’s marketplace?
James Thomson: We have to separate out different types of merchants. Let’s look at the merchant who is a straight reseller of someone else’s products, and then we’ll talk about the merchant who has his or her own private label products.
If you are a reseller, unless that brand is not selling on Amazon, then the likelihood of you being able to attract customers to come to your site is getting harder.
Amazon bids very aggressively on pay-per-click ads on Google, and because they have so much traffic to their overall site, their product listings of a particular brand are likely going to show up much higher in pay-per-click or SEO than a merchant might be able to do with its own website.
You’ve also got the power of Amazon’s Fulfillment by Amazon program, and whether a merchant is able to offer free shipping or overnight shipping or something that is comparable to Amazon’s FBA promises. Amazon already has 60 million-plus customers today who are Prime members, and that number continues to grow.
The private label model [wherein merchants sells their own branded products] works fine as long as the merchant is happy with the amount of traffic and the amount of sales that it’s getting on its own website. If the merchant is looking to continue to grow its business 30, 40, 50, 100 percent year over year, that’s likely going to involve making very significant investments in pay-per-click and looking for ways to drive traffic to the website.
To take it to the next level, you’ve got to spend a lot of money on advertising, or you’ve got to find some other way to get a lot more customers looking at your product.
Many brands end up making the difficult decision to start selling the product on Amazon.
PEC: What are some of the obstacles that merchants encounter on Amazon’s marketplace?
Thomson: You have to use Amazon’s FBA program, meaning you’re going to ship product in bulk into Amazon’s fulfillment centers and Amazon’s going to do the individual order fulfillment.
That’s great in the sense that you don’t have to staff up during busy times of the year because Amazon will take care of that. However, you risk triggering the sales tax nexus in all of the states where Amazon has fulfillment centers.
Selling on Amazon through FBA has its risks, but they are completely manageable if you get registered in the appropriate states and you make sure that you remit the taxes appropriately.
The other big ugly issue is the fact that there is an incredible amount of competition on Amazon. While you may have a product that solves a certain problem for customers, chances are there are lots of other good alternatives on Amazon, other people selling products that are also trying to solve the same problem.
Also, there’s a lot of irrational selling behavior on Amazon — sellers that don’t understand their cost structures, and companies selling product that actually lose money. You end up competing against companies that might not really be making any profits. So how do you compete against somebody that long-term doesn’t get it?
PEC: Why does a merchant have to use FBA?
Thomson: Most customers on Amazon are searching for products by some generic term. If a Prime customer is signed in to Amazon when she makes that search for dishwasher detergent, Amazon is going to show her the Prime-eligible products first. Products that are in FBA are Prime-eligible.
Data would suggest that products that are available in FBA convert at a much higher level than products that are not available through FBA. When I left Amazon about three years ago, I had done some research looking at this. We were seeing almost triple-digit growth for products moved from non-FBA shipping to FBA shipping.
As a seller choosing to get onto Amazon and thinking about whether to use FBA or not, if the economics work in terms of paying for the FBA fees, then definitely I would encourage sellers to use FBA.
Amazon recently, in the last six to eight months, rolled out a program called “Seller-fulfilled Prime,” which is still very much in test mode. It is a program for sellers that have done a lot of order fulfillment themselves.
It’s an expensive program, but if you’re fulfilling these orders yourself out of your own warehouse, the sales tax nexus issues can be a lot simpler.
PEC: Expensive in what way?
Thomson: It’s expensive because you’re still expected as a merchant to be able to ship the product to a customer within two days. If you’re, for example, based on the East Coast and you’ve got a customer on the West Coast, you’re not going to be able to ship that by truck. You’re going to have to ship that by air.
I’m not trying to be a cheerleader for Amazon. But if sellers have something differentiated, they spend the time and they build proper listings, they keep the product in stock, the product price is comparable to other types of products on Amazon, the sellers can do quite well.
However, there is a good use for sellers having both types of channels [their own websites and Amazon]. A lot of sellers, they use Amazon as a place to sell discontinued inventory or to sell excess inventory that they would otherwise be interested in selling on their own website.
The Profitable Seller: Mastering Amazon FBA in 2023
PEC: Tell us about the Prosper Show.
Thomson: It is a continuing education conference for Amazon sellers. It’s specifically designed around helping sellers understand what the key issues are, so that they can become better informed around what solutions are out there to help them improve their business.
The conference runs March 22-23, 2017 — a few weeks from now. It’s at the Las Vegas Convention Center.
We currently have lower-priced ticketing through the end of January. Beginning February 1, our prices go up. We’re at $699 per person now. That includes a number of meals, networking events, and video recordings of all of the show.
PEC: Anything else?
Thomson: Amazon is here to stay. We’ve all got to figure out how does Amazon play into our businesses as sellers, as brands, as manufacturers. It’s a very challenging time to stay on top of all the changes, and Amazon continues to evolve.