Selling on Amazon: The Benefits and Risks

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From small businesses to global juggernauts the question of whether to sell on Amazon is a pressing issue. Amazon is the first channel that customers turn to when conducting a product search ahead of even Google.  49% of all eCommerce sales in the US are now generated on Amazon’s platform and Amazon has more than 250 million monthly visitors.  For any business regardless of size those are impressive statistics.  While Amazon’s traffic and popularity is a compelling value proposition the challenges of selling on Amazon leave many wondering if it is worth the risk.   

The case for selling on Amazon

Online marketplaces are becoming more popular.  According to an eMarketer report, US digital shoppers are twice as likely to prefer shopping on an online marketplace than on a retailer’s website.  More than half of digital shoppers also prefer to shop within an online marketplace because of the ability to compare and find the lowest prices.   At the end of the day sites like Amazon make it easier for customers to shop and as long as Amazon continues to innovate its popularity will only increase.  

Even large and well-established retailers that generate significant traffic can benefit from selling on Amazon. Amazon’s traffic easily trumps that of any retailer and it is important to have a presence where the customer is.  If there was a mall where most customers shop, think of the biggest mall in any city, wouldn’t a retailer want to be located there?  Amazon is the equivalent of the biggest mall you have ever seen in the United States.  

While there are many big-name retailers that sell on Amazon including Adidas, Calvin Klein and Tommy Hilfiger, many brands especially luxury brands have decided not to sell on Amazon.   However with brands such as Nike and J.Crew deciding within the last year to sell on Amazon many more brands will likely follow.

For a small retailer deciding to sell on Amazon may be the activity that kick starts its growth.  One of the most difficult aspects of growing a small business is making the transition from being unknown to known. A business can try its best to drive awareness of its brand and product but in the early days it often needs to leverage someone else’s brand in order to grow its own.  For smaller retailers looking to scale sites such as Amazon can provide exposure to a customer base they would not be able to access on their own. Amazon has said that there are 140,000 businesses with more than $100,000 in sales that sell on Amazon. Additionally, according to Recode 19% of Amazon's merchants generate more than $1 million in sales.

Fulfillment by Amazon is another benefit of choosing to sell on Amazon.  By selling on Amazon businesses can also leverage Amazon’s vast supply chain capabilities.  If an organization decides to enter Amazon’s Fulfillment by Amazon (FBA) program they send their inventory to Amazon then Amazon manages storage of the inventory within its facilities, shipping and customer service (including returns).  Under this program a seller’s items can qualify for expedited two-day shipping under Amazon Prime which is a highly valued feature by customers.  The goal is to make the experience for Prime customers no different than if an order is sourced from Amazon’s own inventory.

The risks of selling on Amazon

The ease of becoming a marketplace seller has also enabled the proliferation of counterfeit products. Once a product is sold on Amazon, the added exposure can attract counterfeits. In the US federal investigators reviewed 47 products sold by third party sellers on five sites: Walmart, Amazon, eBay, Sears and Newegg.  Twenty of those products were deemed to be counterfeit including products claiming to be from Urban Decay and Nike. In situations such as this both the retailer and the customer lose.  A poor product experience can tarnish a retailer’s brand and the customer may not be aware that they have purchased an illegitimate product. 

Retailers such as Birkenstock have decided to stop selling on Amazon due to counterfeits.  In a letter to its retail partners Birkenstock’s CEO, David Kaha, wrote: “the Amazon marketplace, which operates as an 'open market,' creates an environment where we experience unacceptable business practices which we believe jeopardize our brand. Policing this activity internally and in partnership with Amazon has proven impossible.”  

The very practice of selling counterfeit goods on Amazon’s website, while a thorn in a retailer’s side can be the very thing that compels a retailer to set up shop. It gives the retailer the ability to reach customers that are interested in buying their product in that channel.  It can also help to minimize the commoditization of a product if a higher quality product is offered from the original brand instead of a number of lower quality and priced alternatives.

Using someone else’s platform can be risky as many businesses who were dependent on Facebook for traffic learned when Facebook changed its algorithm earlier this year.  That kind of loss of control has been a challenge for sellers on Amazon.  According to a report by the Wall Street Journal last year, Amazon briefly reduced prices by third party sellers by as much 9% without telling them.  Amazon absorbed the discount which meant that sellers received the same amount as if the discount was not applied. However, this poses issues for brands that want to maintain tight control over pricing.  These types of practices are particularly worrisome for luxury retailers that maintain strict control over all aspects of their branding.  

Retailers are also concerned about competition from Amazon itself.  Since the beginning of 2017 Amazon has released more than 60 of its own private label brands mostly within the clothing, shoes and jewellery categories.  Mickey Drexler, Chairman of J.Crew has feared that Amazon would “take every bestseller and put it into their private label collection” creating direct competition for sellers on the platform.  Shoppers have also reported that while shopping on Amazon they have noticed a link at the bottom of a listing that says: "Similar item from Our Brands". After clicking on the link, the shopper is taken to a page where customers find Amazon’s private label products.  Amazon is a business which means conflicts of interest like this exist.

What is the best strategy? Sell or do not sell on Amazon?  Perhaps the answer is somewhere in between.  Consider a test and learn strategy.  Test selling a limited selection of goods on Amazon and track the results.  See what is working and what is not and then find the best path forward.

Check in weekly for articles on digital transformation and customer experience innovation to learn what strategies businesses are using to accelerate their sales growth.

Sources

https://techcrunch.com/2018/07/13/amazons-share-of-the-us-e-commerce-market-is-now-49-or-5-of-all-retail-spend/

https://www.fool.com/careers/2018/05/31/usat-518-how-1-million-small-businesses-are-using.aspx

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https://www.recode.net/2018/5/23/17380088/amazon-sellers-survey-third-party-marketplace-walmart-ebay

https://www.businesswire.com/news/home/20180110005439/en/Shopping-Local-Amazon-300000-U.S.-based-Small-Medium-Sized

https://www.cbsnews.com/news/amazon-walmart-newegg-third-party-sellers-sell-counterfeits-report-gao/

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https://retail.emarketer.com/article/more-product-searches-start-on-amazon/5b92c0e0ebd40005bc4dc7a

Tricia McKinnon