Products placed in a loading bay at an Amazon fulfillment center during Prime Day on Tuesday, July 11, 2023 in Melville, New York, USA.
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Amazon may be the epitome of a large company, but more than 60% of the giant company’s revenue last year came from small and medium-sized businesses. Small businesses rely on Amazon for its reach and breadth, but Amazon needs independent sellers to list their products on its site.
But relationships can be fraught. Sellers are complaining about the rising cost of selling on the site. Meanwhile, the Federal Trade Commission’s antitrust lawsuit against Amazon accuses the e-commerce giant of exercising “monopoly power” to jack up prices, stifle competition and provide poor service to shoppers. are doing. The lawsuit also accuses Amazon of forcing sellers to pay high fulfillment and advertising fees, leaving them with little choice but to rely on the e-commerce giant to stay in business.
“The same strategies are repeated over and over again,” said Scott Lieberman, an e-commerce consultant and founder of TouchdownMoney.com. Companies are initially “very friendly” towards small businesses in order to attract traffic. The rules have since changed, making it increasingly expensive for companies to operate on the platform.
Nevertheless, many small businesses rely on Amazon as an important part of their e-commerce strategy. Some sellers recently interviewed by CNBC had a sense that the FTC’s lawsuit is “long overdue,” but they don’t necessarily agree with all of the FTC’s claims. And I’m not sure there will be any major changes in their relationship.
“The power that Amazon has over sellers is significant and I think it’s definitely worth considering,” said Scott Needham, who sells on Amazon and provides tools to other sellers. told CNBC. “But I don’t know if this will actually change the situation.”
Amazon‘s success has inspired other companies to follow suit, allowing independent sellers to reach consumers on more e-commerce platforms. A recent study by product marketing specialist 1Worldsync found that the amount consumers shop on major marketplaces like Amazon and Walmart will increase by 30% in 2023 compared to 2022. % increased. Globally, sales from third-party online marketplaces will be the fastest growing retail channel over the next five years, leading to global e-commerce sales growth, according to market research and consulting firm Edge by Assential. is expected to account for 60% of the total. .
The shift to third-party sellers, such as online bazaars, is changing the retail landscape and creating more jobs for small and medium-sized businesses. When selling to first-party sellers, small businesses may deal with buyers, ship in bulk, and then receive compensation based on how well the product sells. Companies often have little control over how their products are listed and marketed. But to do well in third-party marketplaces, companies need to be more hands-on with pricing, placement, advertising, and more. Just being present in the market is not enough.
Succeeding on Amazon and the broader world of e-commerce comes at great cost and complexity, and here are the keys that experts say small business owners need to know.
Compete with yourself on pricing
Amazon’s “anti-discount strategy” tracks online prices and removes sellers who sell their products cheaper elsewhere from the coveted “Click to Buy” box. punish with The FTC alleges that Amazon’s “anti-discounting strategy” is hindering the growth of rivals. E-commerce consultants say pricing is difficult and the pressure to keep prices at the lowest on Amazon makes it difficult for small businesses to balance relationships with other e-commerce platforms. There is.
Phil Masiello, Founder and CEO of CrunchGrowth Revenue Acceleration Agency.
Selling on Amazon has significant costs, almost half of the listing price. It costs 15% for listing, another 10-15% for Amazon’s fulfillment service, and 15% for advertising. However, competing platforms such as the seller’s own website, Target, and Walmart come with their own cost structure challenges. Companies often have no control over how their products are priced on other platforms. Businesses that sell directly to consumers must pay to store inventory and package and ship their products. Advertising costs must also be paid. All these factors affect wholesale and retail prices.
Randy Mercer, chief product officer at 1WorldSync, which helps sellers market their products, said small businesses that sell on multiple platforms are increasingly “forced to compete with themselves.” “This is strange for a small manufacturer,” he says. It can be difficult to withstand pricing pressure from Amazon and other third-party marketplaces. Mercer said more small businesses are using analytics platforms to track where their products are being sold and at what price.
An Amazon spokesperson said the company’s approach is to grow the success of its third-party sales partners over the long term, thereby increasing choice for customers. He said third-party sellers set their own prices and Amazon provides optional tools to help third-party sellers offer low and competitive prices. said. The vast majority of millions of featured items are priced the same or better than competing retailers, and when Amazon learns that a competitor is selling the same item for less, it Even if the “Add to” button is removed, the product will still be available for purchase.
Expensive, but possible high profit margins
As Amazon has grown, so have its costs to sellers. The FTC’s lawsuit focuses on pressuring sellers to keep prices low while also paying fulfillment and advertising fees. Consultants say that while costs may be higher, the cost structure is no different from that of traditional brick-and-mortar retailers. The fees may be higher, but so is the reach. For those who create and sell their own products or branded products, it’s important to remember that “you can reach a lot of people, and that’s how many people you have to spend to reach or direct them to your website.” The amounts are going to be huge,” said Joe Camberato, CEO and founder of National Business Capital, a fintech marketplace.
Many businesses are surprised by the amount of effort required to succeed on third-party marketplaces like Amazon. “Many brands and startups, even established brands, don’t understand the economics of their products,” Masiello says. Many customers want to find ways to negotiate listing and fulfillment fees, he said, but the only way to lower prices is through better supply chain management. Companies need to keep product costs below 30%, including FBA costs, advertising and overhead, and most successful Amazon sellers should aim for a 10% profit margin, he said.
Amazon claims that sellers choose to purchase optional services from Amazon because they provide more value than other services. For example, sellers who choose to buy Amazon ads are willing to do so because they can better reach their customers, an Amazon spokesperson said. He said fulfillment by Amazon is still 70% cheaper on average than two-day shipping options offered by other major third-party logistics providers.
The days of amateurs are over with Amazon.
There was a time when even amateurs could make money by listing and selling products on Amazon, but those days are long gone. Amazon has now become one of the largest advertising platforms on the Internet, second only to Meta, which owns Google, Facebook, and Instagram. Listing your products on Amazon requires expertise, similar to Google’s search engine optimization.
“You have to understand how Amazon works, the algorithms, and in some cases, you have to pay to sponsor your product as one of the first few product listings and get it to the top of the first page. “,” Canberrato said. “I don’t think you can win against Amazon, and I don’t think you can win against Google. You really need to understand these algorithms and how to manage your budget around them,” he said.
