With Amazon growing an unprecedented amount during 2020 and the pandemic forcing businesses to create or accelerate plans to move online, it isn’t surprising that many companies are looking to Amazon as a ‘quick and easy’ solution to developing an eCommerce presence.
Amazon has a market power that cannot be argued with. In fact, a recent report – Investigation of Competition in Digital Markets (ICDM) – looks at whether or not Amazon (and other selling sites, including Apple, Google, and Facebook) are monopolies and should be regulated as such.
The ICDM report concluded that yes, Amazon is a monopoly – and in light of the findings, we wanted to break down the pros and cons (or the good, the bad, and the downright terrifying) of using the platform for your eCommerce shop.
Selling on Amazon: The Good
A Ready-made Audience – and a Large One at That
If you’re considering setting up an eCommerce platform to sell your products, one of the biggest drawbacks to having your own online store is this: it’s harder for people to find you. Amazon has a customer base bigger than any business in the world and by using Amazon you automatically harness a portion of that power for your own business, avoiding the need for months and years of building power and authority for your own domain.
The ICDM report says: ‘As the dominant marketplace in the United States for online shopping, Amazon’s market power is at its height in its dealings with third-party sellers. The platform has monopoly power over many small- and medium-sized businesses that do not have a viable alternative to Amazon for reaching online consumers.’
It goes on to say that ‘hundreds of thousands of businesses rely on Amazon as their sole source of income.’
With well over half of global product searches now happening on Amazon, it is impossible to ignore its status online. Amazon has a large, ready-made audience (it’s the third-largest search engine in the world, after Google and YouTube) which means there are more than enough people who are ready and, assuming you have a good product at a competitive price point, willing to buy your stuff.
Can that audience actually find you easily? That comes down to how well you understand the platform’s algorithm – and how good you are at populating your content with the keywords and phrases people are using.
Low Set-Up Costs
Want to reach your intended audience without having to fork out a larger sum of money upfront? Amazon could be your platform. Initial set-up costs are low, while setting up your own eCommerce site is a far more costly project.
Not only is it cheap to set yourself up on Amazon, but there is also a dedicated team of people who will help you to get your basic listings set up. Plus, if you use Amazon FBA, you don’t have to worry about warehousing or shipping.
Reduced Admin and Legislation
If you sell on Amazon, you don’t have to worry about PCI compliance, payment gateways or security for financial handling. Amazon takes care of all that for you, as well as managing anything remotely techy.
What that means for you is there will be no maintenance costs, no hosting – and nothing that can ‘go wrong’ with your platform of choice.
On top of that, people trust Amazon to deliver what they ordered and protect them if it’s faulty, so they’re more likely to find your store as they’re probably already using it daily, as opposed to a new or ‘untrusted’ eCommerce site.
Selling on Amazon: The Bad
While there are lots of hints and tips-based articles out there to help you set-up on Amazon, you will undoubtedly face stiff competition when trying to shift your products on the platform.
The fact is this: anyone can sell on Amazon – and not just UK-based businesses. The marketplace is saturated with cheap Chinese products shipped into the UK, in bulk, and at ridiculously low prices. With nearly two-thirds of the accounts selling on Amazon UK originating with businesses in the Far East, pricing is cut-throat.
To sell anything, you may well have to significantly drop your own prices and even then, it will probably be a struggle to stand out amongst thousands of other items.
Amazon immediately takes 15% of any sale you make as well as a monthly flat rate seller fee. You will almost certainly have to factor into your prices relevant postage fees (people hate to pay shipping and, statistically, consumers are far more likely to choose a more expensive product with free shipping over a cheaper product where they have to pay a shipping fee, even if the end prices are the same) so platform will take 15% of your shipping costs too. Add to that FBA rates and you may find your profit margin drops rapidly.
Amazon raised its fees as of September 2020, countering the Digital Services Tax, imposed in an attempt to counter their famous tax avoidance tactics, by simply passing the cost onto the seller.
Amazon might seem like an easy option but it takes a lot of time investment – along with specialist knowledge – if you’d like your products to be found on Amazon without paying additional costs for Amazon advertising. It’s vital that you are up to date with the Amazon algorithm, paying constant attention to competitor listing and pricing and that you A/B test aggressively to climb up through the Amazon rankings.
Lack of Control
Amazon has very stringent rules: you have to maintain a return rate under 1%. UK’s Consumer Contracts Regulations, means almost anything can be returned, for any reason, if it is bought unseen, making a 1% returns rate a borderline impossible task, particularly if your order volume is low. There are also rules around late dispatch and late delivery – and if you fail to meet any of these goals, Amazon can and will suspend your account without warning, essentially closing down your entire business overnight.
In addition to the potential for your eCommerce business being closed down overnight and having to endure a lengthy appeals process to get it back (if you can get it back at all) businesses also have little to no access to any customer data. Normally, an eCommerce manager would use customer data to remarket, make product range decisions, upsell, cross-sell and otherwise nurture their audience. This is an option that is simply not available if you choose Amazon as a platform. Customers, and all the data pertaining to those customers, belong to Amazon and they not only have no loyalty to the business they purchased from on Amazon, they most often cannot even recall the name of the seller.
Selling on Amazon: The Terrifying
Losing Your Competitive Edge
Perhaps the most concerning aspect of selling on Amazon, particularly for manufacturers, is the persistent rumours that Amazon actively encourages third party selling in order to avoid having to do their own R&D in a sector. Amazon are accused of using their sellers to build an audience for particular product types on their platform, mine the associated customer data, analyse product trends and then ruthlessly swoop in with their own products and wipe out whole companies in the process.
The ICDM report provides an example: ‘We heard from a small apparel company that makes and sells what they call “useful apparel” for people who work on their feet and with their hands, like construction workers and firefighters.’
The business discovered and started selling a unique item that had never been a top seller for the brand: ‘They were making about $60,000 a year on just this one item. One day, they woke up and found that Amazon had started listing the exact same product, causing their sales to go to zero overnight. Amazon had undercut their price, setting it below what the manufacturer would generally allow it to be sold so that, even if they wanted to, they couldn’t match the price.’
As the ICDM report states: ‘Much like a network effect, data-rich accumulation is self-reinforcing. Companies with superior access to data can use that data to better target users or improve product quality, drawing more users and, in turn, generating more data—an advantageous feedback loop.’
It goes on to say: ‘…a dominant platform can mine commercially valuable information from third-party businesses to benefit its own competing products’.
There are countless examples of businesses that have been forced out of business after trading successfully on Amazon for a couple of years and suddenly finding they are undercut and replaced by Amazon’s ‘own-brand products’ that bear a striking resemblance to their own offering.
Amazon – owing to a series of workplace accidents and fatalities – has been included on the National Council for Occupational Safety and Health’s 2019 Dirty Dozen List of the most dangerous employers in the United States.
Add to that the fact that the company, run by Jeff Bezos – the world’s richest person, no less – is highlighted in a report by tax transparency campaign group Fair Tax Mark, as the worst offender when it comes to tax avoidance.
‘It said the group paid just $3.4bn (£2.6bn) in tax on its income so far this decade despite achieving revenues of $960.5bn and profits of $26.8bn.’, states this article in The Guardian.
If you are a manufacturer with a strong reputation looking to branch out to eCommerce, is this the kind of reputation you want to associate your business with?
As previously mentioned (and while they deny it), it’s strongly believed that Amazon also uses its sellers’ data to determine whether the site launches its own products within a specific sector. They use it to determine the pricing, the positioning, what sells, and what doesn’t, before launching products that will ultimately take the market share. This forces sellers to either sell directly to Amazon at rock bottom prices or go out of business. In addition to this, they are accused of completely ignoring EU anti-competition laws: ‘buying’ market share by procuring product and selling it below cost, forcing smaller competitors out of the market with predatory pricing.
Weighing up the Pros and Cons:
Ultimately, while the initial costs may be larger, you have more control, and the potential for considerably more revenue by investing in an eCommerce platform of your own. Plus, you retain control of your company’s reputation and avoid associating your brand with some very worrying ethical situations.
If you enter the Amazon marketplace – and people have made a lot of money doing just that – be aware that Amazon’s end-game is global dominance by way of turning its sellers into its suppliers. Or driving them out of business completely.
However, it is important not to ignore that Amazon is a phenomenally strong platform for sales – and if done right with a carefully planned strategy, it can be used to build a product reputation and be a real benefit.
If you need support with strategic planning to get your business selling online, want support with setting up an Amazon shop or want an eCommerce platform of your own, we can help. Get in touch with our team today. We can’t wait to learn more about your business.