The View from England

Whom do I work for?

One of the attractions to being an independent online retailer is to be your own boss. You supposedly answer to no one and set your own hours. But the reality is different. Take selling on Amazon, for instance.

Say I decide to sell a $20 item on Amazon. I can buy the item at a reasonable cost, say $8.50. I confirm that Amazon permits the product and I create the entry, to sell on the marketplace. I put in a title, a description, and a couple of photos that fit Amazon’s rules. Then I list it.

I soon discover that other merchants are selling this product and are listing it on “my” entry. This drives the price down to, say, $18, including shipping.

So I list at this price to remain competitive, which produces a few sales.

Then I do the math. In the U.K., the sales tax, called VAT, is $3 — this comes out of the $18. Amazon wants its 15 percent, which is $2.70. You have to pack the item and ship it, which could cost another $2.50. Thus, from the $18 sales price, I retain $9.80. But the item costs $8.50, making my gross profit just $1.30.

I have been forced to follow Amazon’s rules. I have been forced to underprice to get sales. I have made the least money in this supply chain, which consists of your company, the tax authorities, Amazon, the shipping carrier, and the supplier. But I have done all the work and taken all the risk.

So, whom do I really work for?

It does not stop there. An Amazon retailer of even medium size tends to use inventory management and order processing software. The retailer could also be using repricing software. The cost of these third-party services keeps increasing. For example, one of my vendors, Linnworks, an order management software provider, has just tripled its price.

You are also at the mercy of these third-party providers, as retailers have to accept any price increase in this pre-holiday period. It is too late to sensibly change key service providers so close to Christmas. Linnworks knows I have to pay the thousands of extra dollars they demand.

In short, ecommerce retailers have become a cash cow. We do, seemingly, all the work, take all the risks, and everyone else takes all the profits. And it is getting worse.

But third party vendors should be careful. If retailers keep getting gouged, we will look to change our business strategy. In doing this we will look to reduce costs whilst simultaneously maintaining or increasing profit margins.

This could include the counter-intuitive approach of drastically reducing the number of items we sell.

If we stop selling the slow moving items, the low margin items, and the dead stock, we may find that focusing on the best 20 percent of stock produces the most profit. Do some math. If we stopped selling the lowest 80 percent and just concentrated on the top 20 percent, what changes could we make? What costs could we cut or even eliminate?

For me, cutting back 80 percent of the dead stock means that I have far fewer items to maintain. I no longer need repricing software. With so few stock lines, inventory control becomes much less of an issue. I could say goodbye to Linnworks and save a couple of thousand dollars. If I no longer need the 80 percent, then I can invest more in the 20 percent. Buying in higher quantities could lower the per-item cost. And I would have room to store more of them, having eliminated the other 80 percent.

It’s a scary idea. But by cutting back my business and reducing my turnover by about 50 percent I could end up working less and making more money.

So, do I significantly scale up my business, hire temporary staff, buy lots of Christmas stock, and work hundreds of hours a week so that all these other companies can profit more than me?

Or, do I reduce my buying by focusing on the 20 percent high-profit lines, cut back on the workload, and take a better share of the profit, with perhaps a slightly smaller total profit?

It is all a risk, but I work to live. It is all too easy to be blinded by scale and assume that growth is good.

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