Should Your Business Be Selling On Amazon?
In 2017, Amazon accounted for 44% of ALL e-commerce transactions in the US, and that number is expected to pass 50% in the next few years. Competing with Amazon has always been extremely difficult, but the bigger problem for store owners is the fact that more and more people are STARTING their search on Amazon. That means they are bypassing Google and the other search engines all together, which means they will never find your site or your products. Selling your products on Amazon helps solve both of those problems, but it doesn’t come without headaches and downsides.
How Does Selling on Amazon Work?
Before I get into the pros and cons, let me walk you through how selling on Amazon actually works. The general idea is that you list your products for sale in one of Amazon’s approved categories, and the customer can purchase your items exactly as they can any other item on Amazon. If you are selling a product that multiple people sell, you will be competing with all of those sellers for the product, as well as Amazon in many cases. Here’s an example of an Oculus Rift headset that is sold by Amazon and multiple third-party sellers:
This main page is called the ‘buy box’ and if Amazon sells the product themselves, they will generally get the main listing. If you are the sole vendor for your own product, you will of course get the buy box. If you make your own product or if Amazon doesn’t sell the product, the vendors all compete to see who gets listed in the buy box. Many factors contribute, including price, reputation, ratings, etc. As you can imagine, having the main listing for a product will result in significantly increased sales, as many people don’t even notice the little ‘Other Sellers on Amazon’ link below. Clicking on that will list all of the vendors who sell this item:
There are a number of factors for the customer to consider on this page, and naturally they are going to choose the one that gives them the best deal, and instills the most confidence in buying:
- Price – obviously most people will take the best price if possible, so the guys listing this for $469 and up don’t stand a chance
- Prime – the ‘prime’ flag means that the item will be shipped via Prime, which is free 2 day shipping for Prime members. If you are a Prime member, you almost always go for a Prime option when possible.
- New/Used – typically used options are cheaper, and there are a number of used quality levels, from poor to like new
- Shipping and Tax – you always need to factor these to costs in to the final price, so offering free shipping and no tax will give you an advantage
- Fulfillment by Amazon – this means the item is shipped by Amazon directly for the vendor. We’ll go over this option below.
- Arrival Date – no one wants to wait for their package, so if your arrival date is weeks later than your competitors, you won’t get any sales either
- Rating – the star rating tells you how satisfied users are with this vendor. If you aren’t in the 90% range as a seller, chances are you aren’t going to get any sales, and if you are a new seller with few ratings, buyers may not take a chance on ordering from you either
How Much Does it Cost?
Amazon obviously isn’t going to sell your products for free, and the fee structure varies depending on how you list your products.
Professional Plan – Most businesses will want the ‘Professional’ plan which has a minimum requirement of 40 orders/month and costs $39.99/month. This gives you access to additional product listing categories, and allows you to bulk-upload products to the Amazon system. Amazon also charges referral and closing fees, which usually amount to about 15% of the sale. Professional sellers can also offer gift wrap on their products.
Individual Plan – This plan is for new or smaller businesses who can’t hit the 40 order/month threshold. The cost of this plan is $.99/listing, with the same 15% commission on the sale.
Obviously if your products have a 5% margin, paying 15% to Amazon for each sale is not a smart business decision no matter how much volume you do. So make sure you run the numbers before you dive in.
How Does Shipping Work?
There are two ways to handle shipping of your products, and each has its pros and cons.
Ship it yourself – this is the easiest method where you simply grab the order from Amazon, pack and ship the item as you would any order from your web site. This allows you to use your own branded packaging, send your own invoice and include your business card or flyer. The idea is that the customer knows about your main web site, they may come back and buy from you directly the next time rather than go through Amazon. The con here is that your products won’t be eligible for Prime shipping, so you may lose out on the sale to another seller who does offer Prime. You can also automate your shipping from all of your sales channels using a service like ShippingEasy or Webgility.
Fulfillment by Amazon (FBA) – This is where you send a large quantity of product to Amazon and they pack and ship it for you. This allows your products to be shipped via Prime, and guarantees that the customer will get the item fast as they distribute your products throughout their warehouse system. Customers also have a more positive perception of products being shipped via Amazon, so they are more likely to buy. You also have the option of shipping Internationally much cheaper, as Amazon will simply send your products to a warehouse in the countries you want to sell to.
The cons are that you have no control over the branding or packaging. The products come in an Amazon box like any other product, with a generic Amazon receipt. The chance they will even notice your company name is slim. It can also be expensive, as you have to not only pay for the bulk shipping of your products to Amazon, but the shipping charge to the customer, packaging, and storage of your product in their warehouse as well. Finally, you will be responsible for collecting and filing state sales tax in each state that has an Amazon warehouse with your inventory in it. Note: FBA is available as a service whether or not you sell your product on Amazon.
How About Customer Service, Returns and Reviews?
Here is the biggest complaint that most Amazon sellers have – turning over customer relations to Amazon. When you run your own site, you deal with customers one one one, have full control over your product reviews, returns and everything having to deal with your customer. If they are unhappy, you do everything you can to make them happy. When you sell on Amazon, you give a lot of that control over to Amazon, and it doesn’t always go very well. For example, lets say Amazon screws up and sends your package to the wrong address, or breaks your product in their warehouse and sends it to the customer that way. The customer doesn’t care that Amazon screwed up, they blame it on you, and you then have to deal with a crappy review and possible return. Since you don’t control the product, shipping or review process, you can’t really do a thing about it, and this is a deal-breaker for many businesses.
Another potential issue is that if you get enough negative reviews, returns or complaints, Amazon can terminate your listing or even your entire seller’s account without any warning. I’ve heard my share of horror stories about 7 figure businesses losing millions because of a fake bad review or copyright complaint that got their Amazon account suspended. Amazon almost always takes the side of the customer, and it can sometimes take weeks to appeal their decision and get your account back online.
Competition Can be Brutal
If you sell a product that other vendors can also sell, the competition can be brutal, and even unethical to get that coveted buy box. There is also always the possibility that Amazon will take notice of your product and decide to sell it themselves, and I don’t need to tell you that they can out-price you due to their buying power. if you manufacturer your own product, you run the risk of cheap Chinese knock-offs suddenly showing up to compete with your listing. Fake reviews are also a huge problem, including the new trend of ‘brushing‘ where a seller will send their products to random people who didn’t even order them simply so that they can leave a 5 star review on their own product.
So Should You Sell on Amazon?
There isn’t a simple yes or no answer to this question, as it will vary greatly depending on what you are selling. In general I think it would make a lot of sense if your products:
- Are manufacturerd/made by you and/or you are the sole vendor
- Have a high enough margin to justify the Amazon fees
- Have a high enough margin to be able to aggressively price your products
- Are popular categories/search terms on Amazon with a lot of potential
- Have quality that far exceeds your competition
Products that probably aren’t a good idea to sell on Amazon:
- Products that are available from hundreds of other vendors
- Products sold by Amazon already
- Products that rely heavily on branding or image (custom packaging, high-end reputation, fanatic customer service, etc)
- Unique or ‘one off’ products such as art or made-to-order products
- Products that have a high risk of being stolen/cloned
- Trendy products that have short lifespan (fidget spinners, fidget cubes, etc)
I would also never suggest using Amazon as your only sales channel. It is just too easy to have your account shut down whenever Amazon feels you are not a quality vendor.
Amazon is going to continue to own the E-Commerce market in the US (and beyond) for many years to come. There is a ton of potential here for third-party sellers, but you have to make sure your products are a good fit and that it won’t do your company more harm than good.
Questions? Drop us a line!