Nowadays, Amazon is the largest retailer in the world.
Additionally, in September 2019, over 150 million mobile users accessed the Amazon app, making it the most popular shopping app in the U.S. By comparison, Walmart was in second place with a mere 76 million users.
However, if you work for a smaller ecommerce business, you’ve likely struggled against the Goliath that is Amazon. If your products or services don’t rank at the top on Amazon, it’s easy to get lost in the mix — but avoiding Amazon altogether isn’t a good strategy either, since the majority of consumers turn to Amazon first when shopping online.
To help you boost sales and exert brand control on Amazon, I sat down with James Thomson, former Business Head of Amazon Services who now consults brand executives on how to optimize their distribution strategy on Amazon marketplace. Thomson spent over five years at Amazon, and recently published the book Amazon Marketplace Dilemma: A Brand Executive’s Challenge Growing Sales and Maintaining Control.
Here, let’s dive into Thomson’s advice for selling “on” versus “to” Amazon, how small brands can succeed in the crowded marketplace, and the biggest lesson he learned as an Amazon executive.
1. In your book, Amazon Marketplace Dilemma, you mention this dilemma most brands face — to sell “on” or “to” Amazon. While I know it’s a complex topic, could you start by providing me with a sense for what determines whether a brand should choose one option over the other?
For many brands that have traditionally only wholesaled their products to retailers and/or distributors, the idea of wholesaling product “to” Amazon appears logical as that’s the only way brands know how to go-to-market.
However, for other brands that have some experience selling direct-to-consumer (B2C or DTC), selling “on” Amazon as the seller of record isn’t as much of a stretch for them.
Additionally, there are brands that have never sold direct-to-consumer, and find that Amazon’s fulfillment services offered to third-party sellers are more than adequate to entice the brands to try selling direct-to-consumer. As a result, the brands can make typically >50% margin by being the seller of record rather than just wholesaling to a retailer or distributor.
While there are at least two dozen considerations to evaluate whether to sell “on” vs. “to”, we start by looking at the trade-offs of how much control the brand has around pricing, branding, inventory levels, selection available in the catalog, and advertising activities on Amazon, and how much daily involvement the brand needs to have in order to manage the specific distribution option it selects.
If the brand is wholesaling products “to” Amazon, Amazon will control inventory levels, selection, retail pricing, branding, and may direct advertising spend decisions. If the brand is the seller of record, it has much more control over these same issues, including pricing (which we view as the most important short-term issue for the brand), and branding content (which we view as the most important long-term issue for the brand).
As for daily involvement, if the brand is wholesaling to Amazon, there is very little daily involvement by the brand beyond reviewing and filling purchase orders as Amazon submits them. If the brand is the seller of record, then the brand is dealing with all customer inquiries, handling inventory management/forecasting issues, listing creation and optimization issues, managing catalog issues related to duplicate listings, and typically filing plenty of service tickets with Amazon to address any outstanding account issues related to product reviews, financial payments, catalog issues, etc.
Fortunately, brands can outsource all of the day-to-day work to consulting agencies — there is a whole industry of such companies (including one that my business partner and I run, Buy Box Experts).
One important qualifier — if a brand is already wholesaling at least $10 million of product per year (wholesale prices) to Amazon, the brand isn’t going to have much success pivoting to becoming the seller of record itself, as Amazon will block the brand from doing this.
2. Nowadays, both small and large businesses sell products on Amazon — but I want to focus on small businesses and start-up ecommerce shops. What’s your advice for smaller brands, looking to succeed on the platform or stand out in a crowded marketplace?
For retailers that carry other companies’ brands, the process of adding Amazon as a sales channel is often very difficult because most brands are already on Amazon, and more likely than not being sold by at least a few sellers that are not bound by any minimum pricing policies implemented by the brands.
With low price usually driving the winning seller on a competitive Amazon listing, traditional retailers are at a disadvantage unless they also drop their retail prices.
If a retailer has exclusive access to a brand, and can get permission from the brand to be the exclusive reseller of the brand on the Amazon channel, that model can be productive.
Then, the retailer needs to learn how to manage an Amazon seller account to the level of performance required by Amazon (including answering all customer emails within 24 hours, 24/7/365; understanding how to handle inventory management to ensure no stock-outs on Amazon; developing careful P&L analysis for every single SKU sold on Amazon, and ensuring some basic profitability for each item sold).
Should a retailer decide to play on Amazon, one big change will be the need to invest in traffic-driving activities — either spending money on Amazon advertising, or sending traffic from outside Amazon to the Amazon listings (e.g., through email campaigns, or social media advertising).
Given that most product searches on Amazon are unbranded (a.k.a. people searching for “men’s running shoes”, not for “”Reebok men’s running shoes”), having your products show up on the first page of product search typically involves a lot more attention to driving traffic than what traditional brick-and-mortar retailers are used to.
3. You worked at Amazon from 2007 to 2013. I’m willing to bet 2007-Amazon looked vastly different than 2013 Amazon, and looks vastly different today, as well. Can you speak about any lessons you learned at Amazon — about innovation, culture, and/or what it takes for a company to “make it big”?
The most important lesson I learned at Amazon is the critical importance of understanding and focusing on the most important levers of growth.
If you don’t use data to develop a clear understanding of what key levers most impact one’s ability to grow one’s business, you’ll never have time to try all the levers.
At Amazon, our growth goals were often well over 40% per year, which is a level that requires a clear understanding of where to focus one’s time (that is, no one is going to ‘luck into’ that level of growth by standing around!). So being willing to test out a lot of ideas around the key levers helped me identify how to grow at seemingly impossible rates.
4. Amazon’s marketplace enables third-party sellers to sell another brand’s products. Do you think this poses a threat for bigger brands, or do you think it’s simply enabling more people to enter/compete in the ecommerce industry as a whole?
Practically anyone can show up with most any brand and sell it on Amazon (there are a few restrictions, but very few in general … I would estimate well over 90% of all brands that exist can be sold by anyone who has inventory to sell).
So, if you have Amazon recruiting literally hundreds of thousands of unauthorized sellers who aren’t held to any pricing policies from the brands, then price competition and erosion happens quickly, leading to lower prices — which is good for Amazon customers, but terrible for brands.
The bottom line is brands must control distribution much more tightly in order to avoid price erosion and channel management issues with authorized sellers that complain they are fighting against unauthorized sellers who aren’t held to same pricing policies.
So, yes, this is a huge threat to brands … yet brands have usually only themselves to blame: their sales teams are incentivized to “sell, sell, sell”, rather than to sell while also protecting distribution/branding.
This results in the brand’s own sales team selling to people who will divert product onto Amazon, messing things up for everyone else (yet the sales person still gets paid his/her commissions…). This issue of channel control is the central topic of our new book Controlling Your Brand in the Age of Amazon: The Brand Executive’s Playbook For Winning Online.
5. Are there any brands you think do particularly well on Amazon, and any you think should avoid Amazon altogether?
Apple and Sonos have done a very good job of controlling distribution, and hence tightened up pricing on Amazon. Almost every other national brand has some level of problems with unauthorized products showing up on Amazon.
As for brands that shouldn’t be on Amazon … that’s a trick question. In reality, any brand with a decent level of customer demand will find its way onto Amazon, and the question brands should be asking themselves is how does the brand plan to control branding on Amazon, and eventually control distribution on Amazon, so as to minimize prices on Amazon that are inconsistent with prices in every other channel where the brand is being sold.