In short:
- Many small sellers complain that Amazon uses data on their sales to compete — some even charge outright IP theft
- CFOs can help keep a handle on margins and suggest ways to battle disaggregation from customers
- Here’s how to use Amazon’s size and deep data insights to your benefit
The fight to reach Amazon’s massive customer base while protecting margin, intellectual property, brand awareness and customer loyalty is real. So much so that some major brands are throwing in the towel. Nike has already walked away, and it’s not the only company to do so. The realization that it’s time to take defensive measures keeps growing for retailers large and small.
“Amazon has a long history of copying bestselling designed products across technology, home goods, fashion, accessories, interior décor and furniture, so it’s understandable why brands like Ikea are pulling out and why J. Crew fired its old CEO for participating,” said Misha Kaura, founder and chief artistic officer of Darlinghurst Enterprises, a luxury holding company.
Perhaps not surprisingly, much of the wrangling is over customer insights.
“What Amazon does is use the data from your top-selling products to their advantage,” said Yungi Chu, owner of HeadsetPlus.com. Chu’s business began as a niche company, selling office VoIP headsets and related products to business buyers.
“Once Amazon discovered our products sell in volume and make a nice profit, they added themselves to the product listing as the ‘Amazon Prime seller’ and basically became a competitor,” Chu says. “This has happened with many of our top-selling products. What’s really unethical in my opinion is that we cannot remove a product we listed. It becomes a permanent listing on Amazon.”
Amazon’s Dual Approach
Amazon, in theory, functions as an open digital marketplace or mall. Merchants who sell their wares there pay a commission on each transaction. That’s a price many are willing to pay to gain access to a huge audience of consumers.
It’s proven a lucrative strategy. Amazon is the world’s most valuable brand, ahead of Google, Apple, Microsoft and Samsung. According to a Statista report, 2019 net sales totaled $280.5 billion, with retail products the biggest revenue segment by far. Amazon’s global retail e-commerce market share is also on an upswing, rising from 38.3% in 2016 to 52.4% in 2019.
Third-party seller revenues are the second biggest contributor to the company’s coffers, followed by subscription services and Amazon Web Services (AWS) cloud services.
And, Statista reports Amazon has 150 million devoted Amazon Prime subscribers worldwide, with per-person annual spending averaging $1,400 last year.
It’s not just Prime benefits, such as free shipping and streaming video and music, driving customer stickiness. Another factor attracting and retaining shoppers is continued downward price pressure — which means merchants must accept lower margins to compete. Meanwhile, Amazon also acts as a retailer in its marketplace. This positions it as both digital landlord and direct competitor.
Merchants feel at a disadvantage given the potential for conflict in that dual role and Amazon’s unfettered access to everyone’s customer information, product details and transaction data.
For some, the situation has become untenable. Nike started a pilot program on Amazon to sell its footwear and apparel but ended it just two years later. Although the brand is one of the best known in the world, the company felt Amazon was standing between it and its customers — especially notable considering that Nike acted as a wholesaler to Amazon in the pilot program, a position that typically does not involve direct interaction with consumers.
“As part of Nike’s focus on elevating consumer experiences through more direct, personal relationships, we have made the decision to complete our current pilot with Amazon Retail,” the company said in a statement to Bloomberg.
Then in November, Nike hired John Donahoe, a former eBay CEO, as its own head honcho — a sure sign that the company is aggressively seeking to up its online sales game.
Also to Bloomberg: “We will continue to invest in strong, distinctive partnerships for Nike with other retailers and platforms to seamlessly serve our consumers globally.”
Bloomberg went on to report that, in anticipation of a Nike pullout, Amazon increased its efforts to recruit merchants carrying Nike gear so that those products would remain available on its site.
It’s one thing for Nike to jump ship. It’s a big brand with deep pockets. It’s quite another matter for a smaller vendor or brand to follow suit. Most retailers won’t fare as well as Nike if they just take their bats, or headsets, or kitchenware, and go home.
But they also worry they may lose everything if they stay.
Too Big To Fail? Not So
Merchant nervousness is partly due to the prevailing assumption that Amazon doesn’t fail. But is that really so?
“It’s true that Amazon does use data to create and buy its own private label brands,” said Shannon Roddy, an Amazon consultant and founder of Marketplace Seller Courses. “Fortunately for brand owners, a majority of those tend to fail. That’s largely because they have no brand story and no way to authentically engage the audience.”
Some merchants have already crafted a means to sidestep Amazon’s penchant for recreating and competing.
“We stopped listing our best-selling products on Amazon’s site,” said Chu. “We stay low profile, so Amazon doesn’t become our competitor. We’re also reverting back to the niche seller that we once were.”
But merchants like Chu aren’t outright breaking up with Amazon, either. Many simply can’t afford to.
“With Amazon raking in 50% of all eCommerce sales in 2019, selling on Amazon is no longer optional for most brands,” said Roddy.
Again, it’s all about the data.
“When brands sell on Amazon they are selling to Amazon’s customers, not their own,” he says. “They don’t get the email address, and they're not allowed to retarget.”
There’s also an element of boiling frog syndrome, which CFOs can often spot before the situation gets dire.
“I’ve been selling on Amazon for about 10 years, and the platform has really changed in that time,” said John Frigo, digital marketing lead at My Supplement Store. “It used to be much less competitive, much more open, fewer rules, but also much less necessary for sellers to have a presence.”
Moreover, the hit isn’t just to margin. Costs are significant as well.
“Amazon sellers like myself, while we are sellers, in a sense we’re also customers as we pay Amazon tens of thousands of dollars per year for advertising, final value fees and fulfillment fees,” said Frigo. “
Amazon kind of wants to have their cake and eat it too.”
What’s a Retailer to Do?
If your business is well established and turning over a steady profit — and even sometimes if it’s not — you don’t need to sell on Amazon and may be disadvantaged by doing so, says Polly Kay, senior marketing manager at English Blinds. But you might want to stick around and try to make the relationship work by following Amazon’s example and essentially baking your own cake.
“You can still make Amazon work for you by using it to help you understand your competitors and customers better and build your own market share,” said Kay.
For one, Amazon’s search doesn’t work the same way as other search engines. Its results are skewed by factors such as number of sales and number of reviews. Kay says merchants can leverage this information, often with analytical help from finance leads.
“By running searches for goods similar to those you sell, you can identify which competitors are making bank on Amazon, and then go on to explore why,” she says.
CFOs of retailers should also ensure that their marketing teams are taking advantage to the full extent possible without running afoul of rules. That requires a holistic strategy of distribution enforcement, MAP (minimum advertised price) monitoring, and a commitment to learn the platform inside and out to take full advantage of the opportunities Amazon provides, while staying in line with policy and avoiding getting shut down, said Roddy.
There are some common missteps that merchants can avoid or correct to gain a more profitable relationship with Amazon.
“The rookie mistake is to offer Amazon the same pricelist as your other retailers,” says Peter Wilfahrt, known for his startup ventures and bestselling book Cracking eCommerce. “It really depends on your product, but if you’re the manufacturer of your product you should never, ever offer the lowest price to Amazon.”
Wilfahrt, who is currently serving as chief digital officer for several companies, advises retailers to always add 10 to 20 extra points to ensure margin and long-term profitability.
“If you’re selling as an Amazon Vendor, you’ll experience a huge win in revenue, but don’t get addicted to it,” he says.
A better bet: Follow up with buyers to let them know they can save by buying direct from your site or physical store.
Another misstep is assuming a new or unknown brand will become a household name more quickly because it’s listed on Amazon. More often, upstart brands find themselves in a costly price war and are likely to bleed money before gaining serious brand recognition.
A better strategy may be to favor profit over fame. If your marketing team wants to use low price to gain brand recognition, be aware of the risks. Consider defining one or two “loss leaders” and go for a sustainable profit on other products.
“The only way to win on Amazon is by using a private label,” said Vanina Delobelle, a digital transformation strategist at VD Innovation. “If the brand owns a private label and sells it on Amazon, it works because it does not have to face the competition of the other sellers.”
The number of private labels is on the rise, according to Delobelle, and will grow substantially in 2020 as more companies seek to circumvent competition. General retailers like Amazon buy private label products, she said, because they are making less and less money on the other brands they carry.
However, a plethora of private labeled goods further cements Amazon’s position as the top brand globally. The company takes steps internally to keep that top ranking solid and growing, too.
“Amazon creates its own private label version of your best-selling product and undercuts you on price, using inside sales data on your business, and then when it comes to the algorithm, who do you think Amazon chooses to put at the top of the rankings — you, a third-party seller, or their own private label product?” said Frigo. “Amazon has admitted they show search results based on profitability, so they list their own products at the top of the search rankings, of course.”
This can have some rather nasty, albeit unintended, side effects for other brands and resellers.
“Some manufacturers and brands even make the decision not to sell on Amazon at all in order to preserve the relationship they have with their resellers and allow them to make a decent profit,” said Delobelle. “Brands in the [medical] scrubs industry, for example, made the formal decision to not sell on Amazon.”
Hacked and Hijacked
Not all of the challenges that etailers face come directly from Amazon. Some come from fellow sellers on the site.
Frigo cites dishonest sellers hijacking your brand or listings and says it’s an ongoing problem that Amazon doesn’t have control over.
“Every marketing and ecommerce conference I’ve been to recently had half-day seminars about how to combat this problem, which is basically impossible,” he says. “There are also issues with competitors leaving negative reviews with certain keywords that will instantly get your listing taken down, like ‘fake,’ ‘counterfeit.’”
Frigo says his company pulled off Amazon because of many of these issues, only to return recently. This time around, he’s containing risks by drop-shipping only a few select products direct from the manufacturer.
Some merchants are attempting to mitigate these risks themselves, while others hope Amazon will take a more proactive role in protecting them.
“Amazon could improve by getting rid of some of its marketplaces that sell counterfeit luxury foods, hire more ethical people in its fashion division, and generally allow brands to ‘own’ their client more,” said Darlinghurst’s Kaura, an author, artist and luxury fashion designer whose ball gowns start at over $71,000.
Amazon consistently declines to comment on its strategy to combat counterfeiters, beyond its published guidelines. But as of last month, the Department of Homeland Security is on record calling for reforms.
The new DHS report on Combating Trafficking in Counterfeit and Pirated Goods says fakes comprise a half-trillion-dollar industry and outlines recommendations for both the federal government and industry. These include requiring all third-party sellers to sign comprehensive and stringent terms-of-service agreements, better vetting sellers, enabling quick and efficient notices and takedowns and offering full refunds to affected buyers.
Will recommendations progress to directives? “This report has proposed a set of best practices for private sector stakeholders that DHS believes should be adopted swiftly,” write the authors.
How to Harness Amazon’s Profit Power
As is the case in almost any industry, whether merchants or brands make it on Amazon — and perhaps in spite of — relies almost exclusively on the business acumen of those at the helm.
“Yes, Amazon gets access to your data and even your customers, while taking a large profit cut from your sales at the same time,” said Stacy Caprio, founder of Accelerated Growth Marketing. “However, it can be a great addition to any marketing strategy, because you as a seller are getting access to Amazon's huge audience, and it is another channel you are getting customers and sales from.”
There are specific tactics that retailers can use to come out as much on the upside as possible in terms of better margins, IP protection, brand awareness and customer loyalty.
Here are the top recommendations shared by experts and experienced retailers:
1. Capture and use Amazon’s insights on what your customers want to buy. When you view your product listings, Amazon shows you information on what other customers went on to look at and buy.
“Such insights are designed to help Amazon shoppers and incentivize sales on the platform, but information like this is invaluable to you as it tells you what your target market actually wants, what add-ons to offer and a huge amount more,” said Kay.
2. Leverage Amazon as a new kind of search engine. From a marketing perspective, companies need to see Amazon as a new source of advertising and marketing.
“Advertising on Amazon and buying keywords is a new SEM strategy,” said VD Innovation’s Delobelle. “Amazon needs to be considered part of an SEM strategy to drive traffic to the manufacturer site but should be limited in order to be profitable.”
She says Amazon is like Google in that it gets more expensive to gain visibility for products as they rise in popularity. But Amazon has a few additional quirks. Its rules for a brand to “shop high” (appear at the top of searches) are not based just on how much the retailer pays Amazon, but also if its products “win the buy box,” meaning the retailer offers the lowest price for a given product in that marketplace and thus incentivizes customers to begin the purchasing process by adding items to their shopping carts.
“The strategy, for some specific products, could be for the company to position itself on Amazon, win the buy box, and even lose money but drive customers to their sites and play with remarketing and upsell,” Delobelle says.
3. Raise your price on Amazon. Amazon tries to move stock as fast as possible, to drive as much revenue as possible.
“But always have in mind that Amazon is serving its customers, not its vendors,” said Wilfahrt. “That’s why Amazon will always try to offer the lowest price possible, and that’s why you should plan for it and add some extra points to your price.”
4. Undercut Amazon’s pricing. Or, go in the completely opposite direction. “This one is slightly Machiavellian, but the outcome for you and your customer is the same,” said Ethan Taub, founder and CEO of two financial institutions, Goalry and Loanry. “We have spoken to people who put the bottom price on their products, undercutting Amazon and other marketplace sellers up to 90%. Amazon won’t price match this, and you will appear top in the filter ‘lowest to highest price.’”
The secret to making this work is that you raise the delivery price to cover the total cost you would usually sell it for. “Amazon takes less of a cut of this than they do on the product price, even less if you don’t use their drop shipping,” Taub says.
Beware the effect on Prime customers, however, who have been conditioned to expect free delivery.
5. Use Amazon as an acquisition channel. “The best thing you can do is strongly brand your Amazon page, and send Amazon customers branded material, so they will buy directly from your site the next time,” says Caprio. “Use Amazon as an acquisition channel, and then direct future sales to your main website.” Of course, be cognizant of your terms of service.
There are plenty of guides to building your business on Amazon, even consultants who specialize in that marketing niche. General best practices apply: Carefully craft your brand identity, have an attractive website with your full product lineup for consumers who discover you on Amazon, think carefully about packaging and collateral included with goods and take advantage of the ability to connect with buyers.
And then there’s just being cleverer than the competition.
“To keep Amazon from encroaching on your sales, come up with a novel product, one that Amazon doesn’t offer,” says Taub. That will allow you to monopolize sales for at least a few months.
“Amazon may bring out a similar product,” he says. “By this time, you should have built up a loyal customer base and raised awareness to drive consistent sales just from your branding.”
A prolific writer and analyst, Pam Baker’s published work appears in many leading print and online publications including Security Boulevard, PCMag, Institutional Investor magazine, CIO, TechTarget, Linux.com and InformationWeek, as well as many others. Her latest book is “Data Divination: Big Data Strategies.” She’s also a popular speaker at technology conferences as well as specialty conferences such as the Excellence in Journalism events and a medical research and healthcare event at the NY Academy of Sciences.
