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The Pros and Cons of Selling on Amazon

February 7, 2020

Erin O'Donnell

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Selling your product on Amazon seems like a no brainer, right? Enormous customer base, maximum exposure for your product, ease of use – is there a catch? Before choosing to sell your product on Amazon, consider whether it’s the right decision for your business. Here’s a look at the pros and cons of selling on Amazon:

PROS OF SELLING ON AMAZON 

It is hard to disagree that Amazon provides a much broader reach to potential customers than any other online marketplace. The fact is, Amazon has approximately 300 million active customers (according to Statistica)- most of whom visit Amazon ready to make a purchase. 

Fulfillment options
Sellers have the ability to allow Amazon to fulfill its sales orders (known as fulfillment by Amazon) or to self-fulfill sales orders (known as fulfillment by merchant).

Fulfillment by Amazon (FBA): When choosing the FBA option, sellers ship their product(s) directly to Amazon to be stored in one of their warehouse locations until a customer order is placed. At that point, Amazon will handle the sales processing and shipping and handling of that order from its warehouse. By choosing this fulfillment option, sellers are able to utilize and rely on Amazon to handle all sales orders. The FBA option also lets sellers benefit from Amazon’s customer service center, which will handle all customer returns. This can be beneficial for small business owners who do not have the personnel to handle customer service- related tasks. However, the FBA option allows for convenience to the seller, there are various fees associated with this fulfillment option that potential sellers should be aware of such as: fulfillment fees, monthly inventory storage fees, long-term inventory storage fees, inventory disposal fees, returns processing fees, and unplanned service fees. Due to the added services provided by Amazon under this option, associated fees tend to be higher than the fulfillment by merchant option, as further described below. As such, these fees will eat into sales margins. 

Fulfillment by Merchant (FBM): When choosing the FBM option, the seller handles all inventory storage and fulfillment responsibilities on sales orders received. While the convenience of FBA is not available, business owners electing the FBM option are able to maintain their own inventory at all times and control the shipping and packaging of their products for added brand and quality control. It is also important to note that, with this option, sellers are typically not eligible to sell to Amazon Prime customers immediately. While FBM sellers may eventually obtain Prime eligibility, it is difficult to do. FBM sellers must maintain excellent seller metrics to be approved by Amazon to self-fulfill sales orders to Prime customers. 

Account options
Amazon offers its sellers different account setup options, including the following account types: Individual Accounts, Professional Accounts, and Business Accounts. Sellers can change their account status depending on their business needs and company life stage. This allows business owners flexibility in the constantly changing landscape of online retail based on the needs and demands of their business. The various account types also allow for low barriers to entry for potential sellers when entering the Amazon marketplace. 

Advertising
Amazon can help with brand advertising. Amazon’s professionals can assist with various marketing services such as ad setups, ad visibility, ad placements, etc., and allow for worldwide advertising to sellers.

Reporting
A great benefit is the access to Amazon’s reporting tools. As an Amazon seller, business owners have access to Amazon’s financial tools, which allow them to manage their sales and related costs. As Amazon has various fee structures, depending on the seller’s choice of account set up, Amazon also has revenue calculators and fee estimators so sellers can determine whether selling certain products makes economic sense and will result in the desired margins.

Quick payment
Amazon allows for quick and easy payments to it sellers. Accounts are settled every seven days, and sellers are paid the net of their applicable Amazon fees. With the account settlements handled by Amazon staff, business owners can focus on their core operations and building their business.

CONS OF SELLING ON AMAZON

Buy box
A ‘buy box’ is applicable to all sales listings for products with multiple sellers, which tends to be the case with most sales listings on Amazon. The buy box is the white box on the right side of the Amazon sales listing that includes the ‘Add to Cart’ button, with the seller named in small print below. The buy box is directly linked to a sales posting by a third-party seller or by Amazon, if they are a seller themselves, and is constantly shifting between product sellers. The seller that is awarded the buy box is the seller that has the best metrics, based on an Amazon-calculated algorithm. The calculation of this algorithm is customer centered and therefore favors sellers with low prices and high selling metrics (i.e. customer rating and related reviews, brand optimization, prime eligibility, etc.). As prime eligibility is a factor in the buy box award, sellers that utilize the FBA option tend to be those that receive the buy box on their sales listings, as FBM sellers are not prime eligible. As the majority of product sales are made by Amazon shoppers on listings with the buy box, due to the convenience to the customer of searching and directly adding the item to their cart, it is extremely important for sellers to work to obtain and maintain this buy box. 

Competing with Amazon
If you choose not to sell through Amazon, you run the risk of competing with Amazon. While Amazon allows third parties to sell products on its online platform, Amazon can also be a seller of products themselves (i.e., Amazon basic products). In such instances, it is extremely difficult for third-party sellers to beat Amazon’s pricing, due to Amazon’s economies of scale. With Amazon offering the lowest prices, the buy box will typically be maintained with Amazon and sales traffic will mainly be directed to its product offering, resulting in decreased sales for all third parties selling the same product. 

Fees
Amazon’s fees result in reduced margins. In addition to FBA fees, as previously mentioned, Amazon also charges its sellers referral fees. These fees are assessed per item sold and are based on the selling price. The fee percentages assessed by Amazon for each sale varies by category of product sold but mainly ranges between 8%-15% of the sales price. If the fee percentage is less than Amazon’s minimum referral fee per product sold within a product category, the minimum referral fee is assessed.

Product category restrictions
A seller can be restricted from selling within certain product categories. Amazon has strict rules as to which sellers can sell which products within certain product categories. As an example, a seller with an individual account is restricted from selling products within the following categories based on Amazon guidelines: industrial & scientific products, automotive & power sports, sport collectibles, grocery & gourmet foods, and fine art. In order for a seller to sell its products within a restricted industry/category, they must request approval from Amazon directly, which may not return a favorable result for the seller. It is important for sellers to research all account options in addition to product categories before making the decision to sell on Amazon.

Bad reviews
Negative customer reviews can significantly impact a seller’s account. Negative customer reviews directly impact a seller’s metrics, which decreases its ability to maintain the buy box on its sales listings. When negative customer reviews are posted, whether they are false or have been resolved directly with a customer, they cannot be removed by the seller or by Amazon only the customer that left the negative review can remove it. In order to potentially reduce the chance of negative customer reviews, utilizing the FBM option may prove to be more beneficial due to the amount of control the seller has over the product before it is shipped to the customer.

Whether or not a seller decides to use Amazon to sell its products, it should be wary of brand building through Amazon. Before placing items for sale on Amazon, business owners should consider building their brands beforehand. By doing so, a company can ensure it has a customer base prior to expanding with an Amazon footprint in the event selling on Amazon is no longer lucrative to the company. Sellers can also diversify the products sold through Amazon when compared to products sold through their own stores or directly from their own websites. Business owners should consider selling their key or flagship items directly, and selling secondary items through Amazon to preserve brand imaging while still reaping the benefits of selling to Amazon customers.