Selling on Amazon is Over

Just last week an acquaintance of mine said to me, “Dude… selling on Amazon is over.” As humans are want to do, my first reaction was emotional. I quickly said “No, it’s not.” a bit too quickly and defensively and moved on. My visceral response was based on the fact that I own a business that sells on Amazon and I also run a membership site, Ecomm Elite, that teaches people how to create and build an Amazon business. If ‘selling on Amazon is over’, I have a lot to lose. But after having some time to think about the original point and taking emotion out of the equation, I still firmly believe that being a seller on Amazon is a highly profitable venture.

Briefly, what does it mean ‘sell on Amazon’? Most people assume that Amazon is a big retailer akin to Wal-Mart, Sears or Target. Yes and no. Amazon is the global leader in e-commerce and internet retail, but it is much more similar to eBay than Wal-Mart. Amazon is actually a marketplace – a portal, if you will, to allow manufacturers to show off their goods to potential buyers. Over 47% of the units shipped by Amazon right now are sold by third party sellers (source: Statista.com and Amazon). Although Amazon does not say exactly how many third party sellers are currently selling on Amazon, a number that is often assumed is two million sellers. Some of these sellers run very large businesses selling through Amazon. As an example, Inc.com has an article about Pharmapack, a $70Million per year business that leverages the Amazon platform.

The way third party sales work is that I set up an account on Seller Central, Amazon’s seller portal. I find a product that I want to sell; I buy it from a wholesaler or a manufacturer; I send it to FBA (fulfillment by Amazon) and Amazon does all the work from there. They handle the merchant processing/credit card transactions, shipping to the customer, the returns, etc. This is where it gets interesting. I can find a branded product, let’s say this four pack of floor mats from Armor All. What many people don’t know is that when you hit the ‘Add to Cart’ button, one of a few different sellers may get that sale. If you were to look at that listing you will see the prominent ‘Add to Cart’ button in the upper right hand corner of the page, but not too far down, and directly under that button is a list of ‘Other Sellers on Amazon’. At the time of publication there were seven other sellers selling exactly the same product. Depending on pricing, whether a product is FBA or shipped from a third party seller’s warehouse, availability, etc. the buy box will rotate through sellers and a few of those seven sellers will share in those sales. There are a myriad of reasons and a great deal of science that goes behind the how and why of who actually gets the ‘buy box’ (the actual sale when a customer hits the add to cart button), but that is the very short description of the business model.

The next logical question would be “Well… what would it take to get 100% of those sales? I don’t want to share the buy box with anyone.” Great idea, but one that has massive implications. Because Amazon’s algorithm is closed, nobody truly knows how many, exactly, of any item sells at any given time. But there are some super smart folks in the world that have developed tools that can estimate pretty closely the number of monthly sales and revenue potential of a product. Continuing with our floor mat example, it is estimated that those mats sell roughly 2,375 units per month (of the four pack) and at $19.99 each will generate $47,476.25 in sales each month. You may be sitting there and asking yourself… wait… so one little package of floor mats selling for twenty bucks does over a half a million dollars in sales?! Yes, that is exactly what that means.

Because the numbers in the previous example are so compelling, savvy sellers quickly learned that being a private label seller was even better. If you could go out there and find your own floor mats to sell on Amazon (you ‘private label’ them under your own brand) you could have a six figure business in very short order. And the bulk of the ‘work’ is done by Amazon and their hugely successful and efficient FBA program. Third party sellers do pay Amazon a fee for this work, but it is simply the cost of doing business. Roll those costs into your calculation and charge the customer accordingly. Keep in mind a third party seller does not need a warehouse, credit card processing service, staff for shipping and returns – virtually none of that. Their overhead is significantly lower than a typical brick and mortar store. If done correctly, a seller could never touch or see the products that make up a bulk of their revenue. They could work with suppliers to ship direct to Amazon fulfillment centers, and Amazon does the work from there.

So back to the topic at hand – why did my acquaintance claim that the private label model is dead? If that business is so lucrative and it is as easy as it seems, why would that train ever stop rolling? As with most things, people will quickly flock to an opportunity if the barrier to entry is low and the upside is high. This is why there is not a few hundred thousand astronauts. The training, brains, and mental toughness needed to fly in space is so great that it excludes a staggering number of people right at the start. Becoming a third party seller on Amazon is as easy as buying an item on sale at Target and selling it on Amazon (that’s technically retail arbitrage and it is a model that is very hard to scale… but that is yet another conversation). The point is that selling on Amazon is extremely easy.

Another problem that crops up whenever there is huge monetary potential is abuse of the system. Review manipulation is a serious issue at Amazon and in recent weeks they have cracked down on fake reviews and review clubs. The idea of reviews is fantastic – it provides social proof to potential buyers and in theory it should give a broad range of buyer experiences with, hopefully, legitimate discussions of the pros and cons of an item. A seller would ultimately wish to experience a much higher number of five star reviews over one star reviews which would give buyers a good sense that the product in question is of high quality. Because of the aforementioned revenue potential, the upside of a product selling well in a top spot is extremely high. In just our floor mat example the possibility of hundreds of thousands of dollars in sales is not a stretch… on one, single SKU! Human behavior being what it is, the temptation is high to game the system in order to edge out competitors. This is exactly what has happened with the review system on Amazon.com. Having a large number of reviews is beneficial to your Amazon listing, so savvy sellers took to looking for or creating their own review clubs. This allowed them to provide deeply discounted (and at times, free) items in exchange for ‘unbiased reviews’. The unbiased reviews were always met with a wink. In order to be sure that you remained in the review club and you continued to receive super discounted or free product, you needed to be sure you left a review and it was assumed that you were going to leave a four or five star review or just leave no review at all if it was a poor quality product. This system flies a flag directly in the face of the intentions of the review model. The folks at Reviewmeta.com did a deep dive on why incentivized reviews are, on average, reviewed higher than their ‘organic’ counterparts and why it is particularly bad for consumers.

So what did Amazon do about the manipulation of the reviews system? They took a scorched earth policy as a solution. They used an algorithm that was able to detect reviews that came from clubs or could simply read the standard disclaimer ‘This unbiased review was provided in exchange for a deeply discounted item’. Quite literally overnight tens of thousands of reviews disappeared from sellers’ listings. Many sellers took this as yet another sign that the sky was falling and Amazon was closing in on the gold rush that is selling on Amazon.

Yet another concern for third party sellers is the recent change in the fourth quarter of 2016 that halted new sellers from sending new inventory to FBA. If you had not yet sent your first shipment by the middle of October you had to wait until December 17 before you could ship inventory. This basically excludes any new sellers from cashing in on the massive rush of traffic and sales during the holiday season. This is the first time in the history of the FBA program that Amazon has asked sellers not to ship inventory for any period of time. For those claiming that the third party seller revolution is over, this was the proverbial last straw.

Here are my thoughts on the issue. I am an emotional person by nature, but with issues related to business I can be quite logical; Yes or no, black or white and for my binary code friends, one or zero. There is just no room for emotion in business and the only information that I see from the “The jig is up! Selling on Amazon is dead!” is based on speculation and emotion. Let’s instead look at a few facts.

 

We will start right at the top. Third party sellers are a key to the continued success and growth of Amazon.com. In the Q1 shareholder letter sent out in April of 2016:

“With marketplace, Bezos played up the importance of third-party sellers on Amazon, which now account for nearly 50% of the goods sold on the site. More than 70,000 sellers make more than $100,000 a year on Amazon, he said, and some have grown though Amazon Lending, a small business program that has provided short-term loans totaling more than $1.5 billion to date.” Source: forbes.com

Let that sink in for a second. Nearly half of all items sold on Amazon.com come from third party sellers. As discussed earlier, Amazon earns a 15% commission on every sale. They earn a pick and pack fee, shipping, labeling, etc. on most sales as well. They earn advertising dollars from sponsored ads for sellers utilizing Amazon Marketing Services. This one fact should squelch virtually every ounce of skepticism regarding the closing of the doors on third party sellers. Do you think that it is in Amazon’s best interest to shut down that gravy train of revenue? Amazon sells hundreds of millions of dollars in goods. Amazon is now the default search engine beating the long time juggernaut, Google! Thirty eight percent of shoppers start with Amazon versus thirty five with Google. From a dollars and cents perspective, Amazon sells all of this merchandise without taking an inventory position – the third party sellers do that. Amazon has built the marketplace, the logistics and the name, while third party sellers take the risk and leverage capital to buy inventory. Amazon just takes the fees. Does it sound very logical that Amazon would want to disrupt that system? It is absolutely in Amazon’s best interest to grow the FBA program. Keep making money leveraging other people’s capital.

A few more quick facts:

Amazon recently purchased eleven Boeing 767-300 jets with the sole purpose of getting products to customers faster. Jeff Bezos is showing no signs, whatsoever, that he is taking his foot off the gas of the rapidly growing Amazon.com e-commerce giant.

Amazon just took its first steps in to the $350 Billion sea shipping market as Jeff Bezos applied for a license to operate as a freight forwarder. This would clear the lanes for a much needed direct route for products purchased anywhere in the world to efficiently and cheaply make their way to FBA locations worldwide.

E-commerce is expected to continue its double digit growth worldwide. Given that Amazon pretty much owns the e-commerce space, you can do the math.

At the time of publication, third party sellers can use Amazon’s FBA program in 11 countries with 109 fulfillment centers with buying customers in 180 countries.

Do you like charts? Do you like charts with upward trends?

chris-chart

I hope that with the evidence provided you take a hard look at the opportunity available to you on Amazon.com. Selling on Amazon is not ‘dead’. It isn’t even slowing down. In fact, if you are involved in retail or e-commerce at all, or if you have the slightest inclination to build a business on your own, Amazon should be the first place you look. Amazon has taken the brunt of the heavy lifting of getting a business started. The website, the branding, the traffic, the logistics, merchant processing, shipping, returns, etc. are all handled by Amazon. Don’t listen to the naysayers – make your own decision from the overwhelming evidence that suggests that Amazon should be the first place you start when starting an online business.

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