Sellling On Amazon vs. Selling To Amazon: How Is It Different And Why Should You Care?
As you may realize, Amazon is a massive online marketplace. Internet sales accounted for 11.7% of overall retail sales in 2017, and Amazon commanded over 40% of those online sales. Reportedly, they delivered over $178 billion in net sales in 2017. Plus, over 100 million Prime Members are paying them $100/year for the privilege (soon to be $119). Their average consumer’s household income is about 25% higher than the average US household income. Clearly, if you sell things online, Amazon is important to you. It is also important to understand the difference between Selling On Amazon and Selling To Amazon.
Selling To Amazon
Selling to Amazon means you convince their corporate buyers to purchase your products and sell them on Amazon.com. This is similar to selling to a Warehouse Club in several ways. Since their overhead is lower, their margin requirements are much lower than a brick and mortar retail chain. The margin also has to cover the cost of affiliate commissions (they collect 8% for this) and outbound shipping (pick, pack and ship – Note: the shipping is not a pure “pass through” from a carrier’s prices, and can change on short notice), but there is virtually no formal “back end” program. They will provide forecasts and let you know which of their warehouses to send your products to (at your expense, so be certain you have accounted for the all of the associated costs of meeting their inbound requirements). Payment terms are similar to most retailers if you are an established brand selling them a proven product. If not, they will push for consignment and dictate the stocking strategy (which equals the amount of risk you will be taking).
They are different from the Club channel because there are a number of sales events you are required to participate in at a cost. On the other hand, the digital marketing levers available to you on their platform are very cost effective. Since their assortment is virtually infinite, smaller, niche products may also be attractive to the buyers. If you are selling to Amazon, your products are automatically eligible for Prime. Of course, this is an advantage on the purchase side due to 1-click and Dash Button purchases, and a disadvantage due to the return policy and associated costs.
Downside of Selling To Amazon
One downside of Selling To Amazon is they have complete control of the product presentation and pricing. They will use your visual assets and draw from the product descriptions you provide, but your brand guidelines are subordinated to their platform optimization. At your expense, you can set up a Retail Brand Store on Amazon to better tell your brand, marketing and product stories. The products here will link to the same ASNs (Amazon Sku Numbers) set up by Amazon.
The biggest risk of Selling To Amazon is that their price engines are very sophisticated, and they will instantly meet or beat any other price online. If you have other online retailers selling your products (including in the Amazon marketplace), a “price engine war” can quickly drive your price down in the market. As a vendor, your ability to control the third-party marketplace sellers on their platform is also very limited. To exert any influence over third party sellers, you need to complete the Brand Registry. According experts I work with (managing tens of thousands of ASNs for dozens of brands), this does not provide the same level of control as Selling On Amazon.
Selling On Amazon
Selling On Amazon means setting up an Amazon Merchant Account, and becoming a third-party seller on the Amazon Marketplace. In my opinion, this is the best way to control your product and brand positioning. You are in complete control of your product descriptions (within the marketplace framework), images, marketing spend, and product pricing. Plus, you can access consumer contact information, and have the opportunity to try to limit returns via direct consumer engagement. You can also choose between using Fulfillment By Amazon or shipping directly to your customers. Let’s explore these benefits a bit.
Customer Returns
This is a huge expense for many product-based companies. In some categories, even top-quality goods can have return rates as high as 9%. Many of the units will likely have nothing wrong with them. Others may be missing an accessory, or have a minor blemish.
If you are Selling To Amazon, the customer can return for any reason and you won’t find out about it until it is too late to intervene and possibly save the sale. Meanwhile, you will lose the sale and be charged for the return shipping from the consumer, the cost of executing the return, and the cost of shipping it back to you from Amazon. You then have the cost of inspecting, refurbishing, and reselling at a discount (if there was nothing wrong with it at all, or if it was missing an accessory); or scrapping it.
If you are Selling On Amazon, you have the opportunity to interact with the consumer before they initiate a return. That might provide the chance to explain something they didn’t understand and prevent a return entirely. Perhaps you can overnight ship a missing accessory. You could offer a discount for a blemish. The point is if you are Selling On Amazon you have the opportunity to prevent the much higher cost and administrative burden of a return, and to establish a relationship with the customer.
Customer Contact
When you Sell On Amazon, you also have access to consumer contact information. You would need to get them to “Opt-In” before you can market to them, but this is very valuable because it enables you to establish an off-platform relationship with the consumer. Depending on the nature of your business, the lifetime value of a customer can be hundreds, thousands, or tens of thousands of dollars. The cost of acquiring a customer is often much higher than the cost of retaining and reselling to a new customer. Therefore, obtaining customer contact information is extremely valuable to your business.
Marketing Spend
When you Sell On Amazon, you have complete control of your marketing spend. You are not required to participate in various events, and can develop and execute your own plans using the wealth of data available on the Amazon platform. For example, you can target people like your existing customers or your ideal customer profile. You can test, measure, and adjust campaigns very much like you can on other digital ad platforms. In addition, the cost is lower than advertising on Google or even Facebook.
Product and Brand Positioning
When you Sell On Amazon, you control the ASN set up and all of the associated content. You decide what is most important to your customers about your brand and your products. You can also set up a Brand Store if you would like to.
Fulfillment By Amazon
Fulfillment By Amazon works very well. They provide recommendations on stocking levels to maintain at each of their warehouses, and your products are automatically eligible for Prime if Amazon fulfills your orders. Warehousing costs are reasonable, and inbound shipping requirements are similar to those of other retailers (note there are penalties for not meeting a retailer’s shipping requirements). Outbound shipping costs (to the consumer) are a bit higher than via common carrier, and can be changed at their discretion. If your company can provide the same level of service to the consumer, you can earn the ability to be eligible for Prime. If your company is not capable of providing a similar level of service to the consumer, you should use Fulfillment By Amazon despite the cost so that you can properly serve Prime customers.
Summing it all up
Amazon is a premier online marketplace. In fact, most US consumers begin their shopping research on their platform. Selling On Amazon is preferable because you have greater control of your brand, your product positioning, your pricing, your marketing expenses, and your customer relationships. You can also influence returns and decide upon the best fulfillment option.
