Small Retailers and Competition on Amazon
I would think that just about every third party seller on Amazon has read the article on the Wall Street Journal about Amazon and third party sellers. As a happy third party seller on Amazon myself through my company I have some thoughts on this one that some other third party sellers might agree with, or disagree with, yet in the longer run, what Amazon does, and what other third party sellers do greatly influences the products we put up for sale on the site.
Our buying decisions are simple, see something we think is neat, check the prices on Amazon, check the number of merchants offering the same product, check the pricing model to see what the discount rate is online, and then see if we can be competitive for that product. If we can’t we don’t purchase it, if we can, then we do get it from our distributor.
The biggest thing in my mind is that Amazon has become the low cost leader; they are the online equivalent to Wall-Mart. When you go into a category that Amazon has, you are competing not just with Amazon, but with their pricing structure. Some companies simply ask for the retail price and it will sit on their shelves for about two to three years before Amazon decides and the low ball sellers decide the product is not worth carrying, or it has gone out of print. It is the longer tail of retail or better prices that an Amazon seller who wants retail will need to think about if they are selling on the site. This is something we do, we will sit on products for a year or two before they finally sell, but then I also get the retail or a little over to make up for that time in storage.
We also do a lot of conventions, so we often sell our products there regardless of what is happening on Amazon. Sometimes we will sell out of a product long before it ever hits Amazon because we do both physical conventions and online sales.
One of the issues not addressed in the Wall Street Journal article is that an Amazon third party seller is also competing against other third party sellers. If the seller happens to purchase something and needs retail prices to make up for the fees charged, they are going to wait and sit on that product because some third party sellers sell well below the wholesale cost of an item just to get it off their shelves. You can see this in toys, and especially during the slower summer months.
Let take the Doctor Who Nano Recorder as an example. The wholesale price I pay for that item runs about 19 dollars, the retail price is about 38, 39 dollars depending on which supplier/distributor you believe in for pricing. The current low cost item for that is 12.99, the average price for that is 21.38, the high price for that item is 39.99. Most people are priced in around 21 dollars for the item, it is not popular, and it sells slowly. The average overhead for selling on Amazon is around 25% of the cost of the item. By overhead I mean the cut that Amazon takes, plus shipping overage because it is classic that the weight of the item and shipping costs are not always covered by the amount of money you get from Amazon to ship the item. Because it weighs over a pound, your average parcel post shipping is going to be around 9.50, of which you get 4.99 from Amazon, and the person who bought it. The other fun thing is that Amazon takes some of the postage as a service fee when selling toys to go along with that, so you actually get less postage depending on what shipping services you chose. Ebay does the same thing, so this is just another cost of doing business online.
Some quick math here,
12.99 + 4.99 = 17.98 (rounded), less shipping of 9.50 = 8.48 take home, then less Amazon fees of about 15% or about 2.70 wholesale cost of 19, roughly I would be in the hole or in the red no profit of about 13.22. I lost money, now if that is your business model that is awesome, go for it, you will not be in business long.
And that is the rub, if your business model is to liquidate items on Amazon and make sure you are always the lowest price, or the “Wall-Mart-ization” of the site, then that is awesome for customers. Customers will buy a lot of things for a penny, or discount toys, or anything under liquidation prices. This is also good for Amazon, they take money off the top, and they will always get paid regardless. It is up to the Third Party merchant to figure all this stuff out and decide what their business model is. By the way, Amazon does not directly sell the Doctor Who Nano Recorder either, these prices are independently set by other third party merchants.
Some of the Third Party merchants are huge and buy in enough quantity that they can do their own version of Amazon competition where other smaller merchants cannot do the same. These bigger merchants can and do and will reduce prices just to unlock anything from the items they are carrying, and often provide rock bottom pricing across the board, and some of those unpopular items are going to take a while to clear out of the warehouse. Prices will always be low until they are gone, even if the Third Party merchant is losing money on the deal. Other items will help make up for that loss by averaging out the total profit and loss across all their products.
Amazon is a tricky beast with many quirks that Third Party merchants needs to understand before they start selling there. There are actually better venues out there in terms of what you can charge for an item, but Amazon is the king of e-commerce right now and you would be foolish to bypass it. You simply need to know what you are getting into before you dive in. The good part is that there are awesome books on the subject (even I have written one), tons of online advice, the Amazon sellers forums, and other sites that can help you out. In the meantime, regardless of what the Wall Street Journal says, you run your own business your way, competitors come and go, your job is to sell enough stuff quickly enough in a niche so that you can make a profit.
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Amazon, Merchant, Price, Sales, Shipping, Wall Street Journal, Walmart