This is the first in a series of articles that will explain the prerequisite knowledge each brand should have before getting started on Amazon. Most of the sections in this article are simplified overviews of complex topics. In the upcoming weeks, we’ll be breaking out these sections for a closer and more in-depth look.
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Amazon is the single largest online marketplace in the US. Consider this: In 2019, it was estimated that 82% of American households have an Amazon Prime membership, and that number has likely grown since the start of the pandemic.
Since the outbreak of COVID-19, Amazon’s sales have skyrocketed. In its most recent earnings report to investors, Amazon CFO Brian Olsavsky characterized the last few months as “highly unusual.” They were unusual because what is typically Amazon’s lightest quarter has been its biggest ever in terms of retail sales.
Peak season is on its way. In a recent survey by Criteo, 88% of surveyed consumers said that they plan to do their holiday shopping online. Much of those online sales will happen on Amazon. Time for procrastination is running out.
Getting started on Amazon
There’s a lot that needs to happen behind the scenes before a brand can effectively take on the digital shelf. If a product is popular, then most likely it’s already on Amazon, but pricing and presentation are oftentimes unorganized and a total mess. Taking control of what’s already on Amazon is the first step.
Getting control is mostly a distribution issue. Too often, distribution is done blindly. Brands don’t know who their sellers are or how they’re being represented to their customers. This lack of understanding is exactly what leads to brand control issues on Amazon.
Before launching their official presence on Amazon, brands need to get a clear understanding of their distribution and lay a strong foundation for taking control on Amazon.
Margins, what you need to know
Margins can be slimmer on Amazon compared to DTC or traditional brick-and-mortar retail. That’s mostly because Amazon takes a cut, and there are warehousing and fulfillment fees to consider.
Another reason margins are slimmer is because it’s more expensive to do business on the marketplace. For instance, packaging costs are much higher. Packaging on Amazon needs to be durable. The average product on Amazon goes through approximately 25 touchpoints before reaching the customer. Traditional brick-and-mortar packaging only goes through four or five.
Choosing a model: 1P vs 3P
There are two ways to sell on Amazon, 1P and 3P. In a 1P relationship, the brand wholesale supplies to Amazon, and Amazon sells directly to shoppers. In a 3P relationship, the brand or a retail partner manages an Amazon account to sell directly to shoppers.
A little bit about 1P
In a 1P relationship, brands sell directly to Amazon at wholesale. As the seller, Amazon takes care of a lot of the heavy lifting, making 1P a fairly straightforward solution for many brands. Amazon will place bulk purchase orders, optimize product detail pages for you, and charge a flat fee for participation in their program.
However, with simplicity comes a lack of customization and control. Brands that sell via 1P may find themselves wanting greater ability to determine content, set pricing, and plan for demand shifts. While 1P is a great plug-and-play solution for many brands, others may be more attracted to more customizable alternatives.
A little bit about 3P
With 3P, a third party seller uses Amazon to sell to consumers. Selling via 3P allows brands to have more control over how they are represented on Amazon. With 3P, brands can ensure their content, pricing, and customer experience are on-brand, but it’s a lot more resource intensive for brands trying to do everything themselves. Some brands manage their own 3P account or rely on their retail network to sell their products on Amazon.
On the other hand, many brands leveraging 3P on Amazon choose to work with either an Amazon agency or retail partner. A partner can handle the actual management of the brand’s Amazon account — listing creation, catalog organization, brand protection, marketing, and supply chain — leveraging expertise and efficiencies found from working with many brands.
Understanding your competitors
Brands that have been in the game a while know their top competitors like the back of their hand. They appeal to similar audiences, weigh in at similar price points, and occupy shelf space in the same retail stores.
A store shelf offers a limited environment for competition, specifically in retail stores that cater to niche audiences like Whole Foods or REI. Earning a spot on the shelf presents a competitive boundary that keeps the brand pool fairly shallow.
On Amazon, it’s a different story. Any brand can find its way onto the digital shelf and compete, which blurs the lines of competition. Competing with everyone isn’t an effective strategy. Just like on the physical shelf, brands need to focus their competitive efforts on similar brands reaching a similar audience. Getting that focus requires brands to redraw their competitive lines using the following criteria:
- Define the competitors in your category. Category might be something like premium water bottles. Or it might be more specific, like premium insulated water bottles made from recycled materials. If a category is too specific, there won’t be enough shoppers to go around. If a category is too broad, there’s a big risk of getting lost in the crowd.
- Limit your competitors by price point. If you’re a water bottle brand selling $30 water bottles, you’re probably not competing with brands selling $5 dollar water bottles. Keep your competitive pool limited to brands with a similar price point.
- Evaluate company values. Most premium brands have a story and a set of values. On Amazon, you’ll want to narrow your competition by identifying brands with an equally strong set of stories and values.
- Consider the quality of the product. Quality sets apart generic offerings from premium offerings. Most every product has a generic counterpart, but these aren’t necessarily your brand’s serious competitors. You’ll likely still have to defend against generic offerings, but it’s more important to focus your competitive efforts on brands that have a similar quality product.
Managing returns on the marketplace
Returns are just a part of doing business, especially if your business is online. Return rates are typically higher on e-commerce by as much as 17%. There are lots of reasons for that higher return rate, but one of the main ones is that there’s a greater degree of separation between the shopper and the product. Shoppers don’t have an opportunity to physically interact with the product until it’s bought and shipped to their door.
There are many things brands can do to reduce return rates online, but returns are still going to happen. It’s important to have a reverse logistics plan in place that can handle the high return rate, re-inject all eligible inventory, and create value wherever possible.
Fees, fees, fees
Selling on Amazon gives brands access to a seemingly endless pool of shoppers, but not without a cost. Depending on a multitude of factors, including whether your brand is working with 1P, running your own 3P account, or working with retail distributors, fees are going to look dramatically different. Put simply, the fees incurred by selling on Amazon are typically higher than DTC or traditional retail, but can be well worth the cost in exchange for access to Amazon’s customer base. For an in-depth look, Amazon offers this pricing page.