Amazon Let’s Us Pay Them to Grow

mock amazon seller central promo

In my continuing efforts to prepare for the holidays, I’ve spent the last few weeks reviewing and improving our product listings in our Amazon Seller Central account.  We sell on Amazon under the Tastefully Driven name. We list almost everything that’s up on the TD website, but the majority of what we actually sell is either fitness equipment or detailing supplies.

I automated a few of the mundane tasks, added new products (which involved building a bridge to easily migrate products from DI to TD and then to Amazon), and reviewed pricing.  There’s one other thing I’m really excited about that will make a huge difference, but it’s not quite ready to roll yet so I’ll refrain from hyping it up.

The more time I spend working within their marketplace, the more I realize that the system is absolutely brilliant…for them. We pay $39.99/month plus 15% of each sale.  They give us access to selling on the largest online shopping site.  It sounds simple, and seems like an equal trade-off.  But what Amazon does – and I can hardly blame them – is use the seller program to conduct market research on a massive scale, and then uses that data to obtain an even bigger advantage as a marketplace.

Let me explain.

Amazon.com has basically everything for sale.  If you can buy it online, there’s a good chance it’s for sale on Amazon, but not necessarily sold by Amazon. There are thousands of sellers like us that list their products for sale, products that Amazon does not stock or sell.  We make up the “long tail” of products in their marketplace.

Most items are for sale by multiple sellers, all competing for every sale.  Amazon let’s us play a game of limbo with our competitors to see who can afford to lower their prices more.  When you factor in the 15% fee, we’re barely making money on those listings.  We do it because of the volume – we can steal sales directly from our competitors, gain access to new customers who buy our products, and get bigger discounts from our suppliers.

Eventually though, if the competition gets high and the sales volume becomes high, Amazon notices.

From my experiences, they do one of two things when they notice:

  1. They stock the product. They offer Amazon Prime and Free Super Saver Shipping, and the total cost to the customer (product + shipping) is impossible to compete with.  Amazon gets all of the sales. Tough shit. Game over.
  2. They harass the crap out of you to let them fulfill your orders with their FBA (Fulfillment by Amazon) program. I’ve been contacted numerous times by several different reps trying to get us to let them fulfill our products.  They are persistent.  I generally say “thanks but no thanks” and they say “can we schedule a phone call for tomorrow?” or “how about sending us just one pallet of one item?” (the one item they list is inevitably always one of our best sellers).  To which I respond, “no thanks, I’ll contact you if I’m interested”.  And then a month later I’ll get contacted by a new rep.  Rinse and repeat.

Think about this from their perspective.  Why risk stocking a new product?  Why try to pick which model or which brand will sell best? Just let other online retailers pay you to list  all of the products on your site. Collect data on everything.  If the numbers look good, swoop in and start selling the product.  Use your size to get volume discounts on the product, warehouse space, and on shipping.  Take all of the sales away from the seller. If not, let the retailer continue to pay you for a sale here and there.  They actually get sellers to pay them to do their market research.  The data couldn’t be more perfect – it’s in their own marketplace!   It’s not just free data, we pay them the money for our sale and also give them the data.  I wonder which they value more?

So basically, the moral of the story is that Amazon always wins.  Sellers never really quite win, but also can’t afford not to participate on Amazon’s terms.

It’s damn near the most brilliant business model I’ve ever seen.  Can’t fault them for that.

16 comments on Amazon Let’s Us Pay Them to Grow

  1. Nev says:

    Fantastic read!! It put a devious smile on my face!

    By the way, I’m pretty sure within 48 hours of this post Amazon might have you killed. Don’t leave your house on Tuesday 🙂

  2. nethy says:

    Adam,

    Great observations.

    The downside of such a scheme is potentially down the track though. At the moment, all these elements are profitable (I assume). Reseller marketplace 15% of a lot is a lot. It also helps them be the destination for shopping and market research without having to stock items for that purpose alone.

    FBA? Also good.

    Free Data. Good!

    But imagine that the reseller program becomes unprofitable. Complaints go up. They spend lots of resources chasing resellers and keeping the program clean. It’s become a liability.

    But the FBA crowd need the reseller program to fill their telesales lists. You can’t just let it go. You can’t replace something like that. A list of businesses with whom you have an existing relationship and know what they do and how much they sell and what they charge to ship… Businesses come to rely on stuff like that.

    The whole growth strategy has also been built around resellers. How do you pick products to stock without them? how do you make projections about sales volume at various price points?

    I’m not saying this isn’t a brilliant strategy, it is. Figuring out new ways to make money from the stuff everyone else doesn’t make anything on is a serious edge. But complicated relationships between different functions can also get real sticky when one piece goes badly.

    • Adam McFarland says:

      Great point Nethy. I didn’t think of that. Kind of reminds me how eBay is struggling right now with the changes they’ve made to the seller program over the past year. It has the potential to blow up in their face down the road. Amazon gives us an annual survey, which I just took. I expressed my discontent with the fees and a few other things. Overall though, it’s still good for our business to be on Amazon. If that were to change for us and a bunch of others, it could get ugly for them.

  3. Mark W. says:

    Thanks Adam for relating your experiences with Amazon.
    This post reminded me of a place down the road not too far away from me called the Turning Stone. 🙂

  4. Dave says:

    It’s definitely great to use Amazon as a manufacturer! You then can control what Amazon can do, because if they want to sell your product direct, you can control that. I’ve had my own issues which I’ve mentioned here, and based on some of the comments I’m not alone:

    http://www.davepit.com/my-amazon-seller-central-rant/

    Regardless, like you said, they are in the business of making money, and it seems like a genius plan. The only downside as others have mentioned is the tarnished relationships with resellers.

    That’s why if anything I’m glad that they took us off for the products we sell.

    • Adam McFarland says:

      Dave – I remember that post of yours. I can’t believe they closed your account down so fast.

      I agree that it’s mostly great to use Amazon as a manufacturer, but if they become a large part of your buying they’ll start to dictate what you make and when you make it (like Walmart does for so many consumer products, controlling DVD release dates for example).

      Btw, I coincidentally read an article today that both Walmart and Sears are now opening similar marketplaces. It’s surprising it took this long for other sites to try to copy the model.

  5. Adam Gilbert says:

    That’s why I’m bullish on Amazon. Great post!

  6. Dale Ting says:

    Hey Adam, maybe you should take the “when you can’t beat them join them” approach. I’m the proud owner of Amazon stock. Ticker AMZN. 🙂

  7. Robert L. Goodwin says:

    I got a question.
    When someone buys one of your products from amazon thru an affiliate link, do they take that additional 4% to 10% (affiliate comission) out of your cut.

  8. Adam Holland says:

    You think Amazon does this in a big scale? This is NOTHING compared to Google.. ::cough -BIG BROTHER- cough::

  9. Great read! We need to catch up on a lot of this kind of stuff!

    • Adam McFarland says:

      Dude! What’s up! Long time no talk. Ironically I was just on PayMyRent the other day checking out your progress. Writing you an email now…

  10. […] October I wrote a post about how Amazon uses data from sellers like us to gain a competitive advantage. You can pretty […]

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