- Holiday shoppers are expected to spend $144 billion online this year, according to analytics from Adobe, and half of all US e-commerce happens on Amazon.com.
- Third-party sellers made $160 billion in sales on Amazon last year, and that number is growing twice as fast as Amazon’s first-party retail business. And Amazon recently recognized three of its sellers in the first-ever Small Business of the Year awards.
- Some sellers say partnering with Amazon has tripled their sales and enabled them to focus on their core products. On average, sellers using Fulfillment by Amazon see a 30% to 50% increase in sales over Fulfillment by Merchant.
- Business Insider spoke with experts who said the platform can be a double-edged sword that SMBs should approach with a careful strategy. They say selling on Amazon can be an expensive proposition with tighter margins, but increased scale could offset those costs.
- Visit BI Prime for more stories.
Last year, third-party sellers made 58% of the sales in the marketplace, with more than $160 billion, according to the company’s annual report.
Much of Amazon’s third-party sales are driven by small and midsize business partners, or SMBs, of which Amazon has 1 million nationwide.
Those numbers are growing, and CEO Jeff Bezos is paying attention. “Third-party sellers are kicking our first-party butt. Badly,” he said on the first page of his 2018 letter to shareholders .
More than 50,000 SMBs made over $500,000 in sales last year, and half of those merchants topped $1 million. In 2019 so far, Amazon has rolled out a suite of tools and services for SMBs, debuted a trio of SMB awards, and appointed its first vice president of small business.
Amazon’s scale comes with great opportunity, and risk, for business owners who should consider the costs and benefits carefully before determining where Amazon fits in their strategy.
To help you navigate, we’ve rounded up reports, reviewed the data, spoke with experts, and boiled it down into this handy guide. Here’s what SMBs need to know when working with Amazon.
Business Insider is especially interested in the firsthand experiences of owners, managers, and employees of small businesses working with Amazon, so please get in touch to share your story at firstname.lastname@example.org.
Let’s start with some basics. Amazon lists products from first-party “vendors,” who are wholesale suppliers who provide inventory for Amazon to sell directly to customers, and from third-party “sellers,” who maintain their own stores and channels on the platform.
The vendor relationship is similar to any other large retailer, like Wal-Mart or Target, but Bloomberg and Digiday have reported the rules are changing in ways that will push vendors toward the sellers program. This guide focuses on sellers.
Amazon’s marketplace is open to third-party sellers who set up an individual or professional account through the “Selling on Amazon” website. (In fact, anyone can open an account, even a small-business reporter).
Individual accounts can list and sell products on a per-item basis, but SMBs need a pro account to fully access the available tools and benefits.
The ideal level for an SMB’s engagement with Amazon depends on the business that you’re in and what you’re trying to accomplish, says Mike Farrell, senior director of market and customer intelligence for a multichannel e-commerce service called Sidecar.
“Retailers need to start making decisions about how they’re going to integrate that Amazon piece of their business into their overall ecommerce business, and I think there’s a lot of nuance there,” he says.
Tools and services: Fulfillment by Amazon
The most powerful service is probably the Fulfillment by Amazon program that rolled out in 2006. It enables sellers to store and ship inventory through Amazon’s extensive logistics network. The company says that sellers using Fulfillment by Amazon have seen an average sales increase of 30% to 50% from using the service.
In addition to converting a greater number of sales, Amazon handles returns and other customer-service issues, freeing up valuable time, space, and human resources for sellers. That has proved indispensable for Pittsburgh-based seller Sweet Water Decor, a hand-lettering design company featured on Amazon’s Handmade channel.
“Fulfillment by Amazon is great because it takes off a lot of customer service on our side, and they house it at Amazon, so we don’t have to pay for that warehouse in Pittsburgh here,” says owner Melissa Horvath, who personally designs each product she sells.
“Our sales actually grew three to four times just from being on FBA, so if we use fulfilled by merchant our sales are basically three or four times less,” she says, emphasizing Amazon’s ultralow shipping rates and merchant support.
Tools and services: search and sales data
Amazon also makes its extensive search and sales data available to its seller partners, allowing them to see how customers are discovering and purchasing products on the platform.
A 2016 study from BloomReach found that nine out of 10 online shoppers compared prices on Amazon before making a purchase, and sellers can gain insights from the largest online marketplace to inform their product development and marketing strategies.
The openness of that information is a double-edged sword because sellers cannot control who sees how their products are performing on the platform, as they would using their own closed systems.
Tools and services: sponsored product listings
Sponsored product listings are an advertising option that place individual products at the top of a relevant search result, ahead of the organic results for specific key words.
E-commerce expert James Thomson, who was a senior manager and later a business head of Amazon Services from 2007 to 2013, understands the marketing challenges well: he was responsible for recruiting third-party sellers to the platform and responding to issues that arose in their business.
Now Thomson is a partner at Buy Box Experts, a consulting firm that specializes in marketplace management for Amazon sellers.
“If you’re a brand-new product with no reviews and no sales, nobody will find and buy your product,” Thomson says. “You need to spend on ads to keep adding rocket fuel to generate interest in your product.”
“This is absolutely not ‘if you build it, they will come,'” he adds. “You need eyeballs, and that’s not really something most retailers know how to do.”
Product listing advertisements convert three and a half times as well on Amazon as on Google, according to research by Merkle, largely because of the nature of each platform’s user base. Google searchers are more typically looking for general information, whereas Amazon users are more often looking to buy a product.
Unfortunately, this makes those few featured spots that much more valuable, and can kick off an expensive arms race between sellers to control the top spots.
“It’s almost becoming a requirement that they opt in to sponsored ads,” Sidecar’s Farrell says, “not just to try to help grow the revenue on the platform but also to protect the organic revenue that they’ve naturally gotten since they started running the marketplace.”
Amazon’s ad revenues topped $10.1 billion last year, more than double the year before, and eMarketer forecasted Amazon’s US ad business to grow more than 50% this year. To help Amazon sellers capitalize on that expansion, Sidecar recently rolled out an expanded set of AI-powered tools.
“We’re at a turning point right now, where it’s becoming more of a necessity to run sponsored ads on Amazon versus a nice-to-have,” Farrell says.
Tools and services: brand registry
The globalization of e-commerce on Amazon and beyond has led to a significant growth in the problem of counterfeit and unauthorized products in the marketplace that won’t be solved any time soon.
In response, Amazon revamped its brand-registry tool in late 2017, which it says will enable intellectual-property owners to flag imitators and slow the encroachment of fake listings on the platform.
“We have a zero-tolerance policy when it comes to counterfeit and abuse on Amazon,” Denissen, the Amazon VP, says. “Both on behalf of our buying customers but also on behalf of the sellers who conduct their business on Amazon.”
It is unclear whether the brand-registry tools will be enough to stay ahead of motivated black- or gray-market sellers, and the company admits that, given the free transfer of goods, there’s little it can do to prevent legal competition in the form of near-imitation products and brands.
A further complication arises when those tools are turned against legitimate sellers, according to Chris McCabe, a former investigator at Amazon and the founder of a consultancy that helps Amazon sellers whose accounts have been suspended.
“It’s hard to sort the good apples from the bad,” McCabe says of the growing armies of black-hat operators who target successful products and flood the system with false complaints, leading to huge headaches for sellers.
The brand registry is still fairly new and open to any IP rights-holder. Amazon says the program is “rapidly evolving” and could serve as a complement to other regulatory registries like the US Patent and Trademark Office.
“Unfortunately, the criminal energy is out there, and it’s really just [a question of] staying ahead of that game,” Amazon’s Denissen says.
Branding challenges and opportunities
For some sellers, the brand-development tools are just not there yet. Upmarket swimwear brand Andie has specifically decided to avoid listing products on the platform, opting instead to sell exclusively on its own site.
“Amazon is a great place to buy products, but it’s not a home for brands,” Andie founder and CEO Melanie Travis says. “Business owners looking to build strong brands probably won’t get the best experience out of Amazon. But if it’s just a product play, there’s probably no better place to sell.”
News of Nike’s departure from the marketplace in November 2019 prompted experts to weigh in on LinkedIn about the challenges brands face when it comes to selling on the retail giant’s platform.
“A brand may ‘choose’ to leave Amazon, but that doesn’t change the fact that its products continue to be sold by third-party sellers, requiring an active Amazon strategy of some sort from the brand itself,” Buy Box Experts partner Jim Thompson said.
Mike Farrell, from the multichannel e-commerce service Sidecar, framed the question similarly.
“Whether it be from a merchandising perspective or an advertising perspective, retailers are struggling to decide if Amazon is a valuable partner or competitor,” he said.
Emerging tools and services: loans and storefronts
Also of interest to SMBs are a pair of programs that Amazon offers on an invitation-only basis but are likely to expand in coming years.
Starting in 2011 Amazon began notifying select sellers of their eligibility for loans ranging from $1,000 to $750,000 to finance inventory or just about any other business expenses, including product development. SMBs borrowed more than $1 billion through the program last year alone.
And last year, Amazon selected 20,000 SMBs from across the US to launch its Storefronts initiative, a portal with videos and stories that feature individual businesses and brands.
Combined with a new Small Business of the Year Award program, Amazon is investing heavily in building the brand narratives of its SMB partners and establishing itself as the place for small-business e-commerce.
“We wouldn’t be where we are today without having our items on Prime,” Horvath says of Sweet Water Decor. “It has really helped us grow our business and we have a ton of people now on our team.”
“The sky’s the limit now,” she adds.
Costs, benefits, and risks
All of Amazon’s benefits come with a predictable downside: It’s expensive. In addition to ad fees, sales commissions tend to run about 15%. Competition on the platform is fierce, driving down margins.
Individual mileage may vary on the cost-for-value of Amazon’s commission relative to its benefits, but the marketplace’s competition is not for the faint-hearted.
To one side there is an ever-growing number of other third-party vendors with their own supply agreements and business costs, and on the other there is Amazon itself.
Well-performing products have always become targets for competitive attack, but never at the speed and scale now possible with e-commerce. Even a direct-to-consumer seller could see its winning idea become adapted and sold on the platform.
Amazon raised eyebrows when it introduced a wool sneaker that looks a lot like Allbirds’ offering. In fact, a search for “Allbirds shoes” on Amazon returns a lot of similar products, though Allbirds does not sell there.
Seasoned e-commerce sellers will also have to adjust to Amazon’s close-to-the-vest handling of customer information.
Denissen says that’s partly by design: “We really make sure our customers’ privacy wishes and desires are maintained and met.
“Whatever is required to complete the transaction the seller is part of, and if for any reason the customer wants to engage beyond that with a brand, we do offer tools and possibilities for that.”
Amazon customers reward the company with a high degree of loyalty: Prime members spend an average of $1,400 a year. But that loyalty doesn’t necessarily extend to third-party sellers, according to Farrell at Sidecar.
He also adds that the platform’s exclusive focus on the transaction leaves little room for added-value interactions and experiences that could reinforce a brand’s identity.
Key strategy: Win the buy box
Everything on Amazon comes down to the “buy box,” the little yellow button that connects customers with purchases through Amazon’s proprietary algorithm. Staying ahead of the game there can be a significant ordeal for resellers, where the smallest difference in price or delivery speed can make all the difference in winning the sale for identical products.
“A big part of running a successful campaign or business on Amazon is winning the buy box — and there’s a lot of things that go into winning the buy box,” Farrell says. “Pricing, shipping, reviews … all of those things need to be managed very effectively in order to get that prime position on Amazon and have success.”
Sellers using FBA are automatically qualified for inclusion in the buy-box algorithm, but qualifying is not the same thing as winning.
Amazon says it is strengthening its tools to help sellers optimize their listings and fulfillment strategy to win the sale, and the Seller Central dashboard shows a seller how it’s performing on the most important factors.
“The best way to maintain eligibility and be able to win the buy box is to ensure that their account metrics are all green and that they have competitive prices,” Denissen says.
The battle over the box is certainly more pitched for popular products than it is for highly differentiated ones, but the risk is always there.
“To win on Amazon you need to have differentiated products, lower costs, or some unusual ability to promote your products better than anybody else,” James Thomson of Buy Box Experts says. “That third one is not going to happen, so that leaves differentiated product and lower prices, and lower prices are hard.”
There is now an entire subindustry of online-only sellers with razor-thin margins and patchy adherence to brands’ quality control or minimum advertised price agreements. Thomson recommends that such sellers be more selective about what they list from their broader catalog.
As Birkenstock was surprised to learn when it tried to bar its retailers from selling its footwear on Amazon, a company’s decision to not list its products on the platform doesn’t necessarily mean someone else out there isn’t making the sale using its name (or some misspelled variant).
The ease of creating a profile means that a company could wake up one morning to see sales of its once exclusive products populating another seller’s account.
Amazon is taking steps — with the brand registry, for instance — to address the threat, but Amazon isn’t the only side that is evolving. Sales poachers are adapting too.
Key takeaway: Inform yourself on the many factors, and figure out how Amazon fits your business
The sellers and consultants we spoke with generally agreed that for all of Amazon’s potential, SMBs would be wise to avoid over-reliance on the platform.
“It’s kind of a double-edged sword, and I think it really depends on what kind of business you are, what kind of scale you’re getting, and whether or not you’re having a hard time driving the type of growth that you’re looking for,” Mike Farrell, the senior director at Sidecar, the online retail service, says.
“Amazon can serve as a really large distribution network for people that are manufacturers of products and trying to get them out the door.”
With Amazon’s resources and ubiquity, the right answer to the Amazon question will vary from business to business.
Whether your business is all-in, all-out, or somewhere in between, the experts’ recommendations have one thing in common: Having no Amazon strategy is no longer an option.