Should I sell on Amazon?
As one of the largest companies in the world and easily the most dominant online retailer, the role of Amazon in your distribution plan as a startup is one of the most important questions in forming your go-to-market strategy. The choice is largely binary: to sell or not to sell on Amazon? Or is it?
In this article we will walk through the pros and cons of selling on Amazon, then we will share our distribution strategy with you and our reasoning behind it. Hopefully, this will help you find the right questions you need to be asking yourself as you formulate the best distribution strategy for your company.
- Access - nearly every consumer in the US, Canada and Europe shop on Amazon. It is impossible to replicate this type of reach using any other platform unless you are already a multi-billion dollar company. Even then...
- Amazon Prime - this has become the standard in e-commerce delivery timelines and something that most consumers now expect in any e-commerce shopping experience. Amazon Prime is so influential that it helped drive us to invest significant resources into our internal infrastructure and combine it with our amazing partnership with FedEx to make it happen and match Amazon Prime 2-day service.
- Convenience - Amazon is the king of convenience and customers love convenience.
- Policies - you don't need to spend any time or resources developing, implementing, and administering your own return procedures and policies because Amazon has done it for you.
- Fulfillment/Infrastructure - this should not be underestimated as standing up your own fulfillment capability is doable, but far more difficult, costly, and complex than most people realize.
- Speed - selling on Amazon gives you instant access to a huge market.
- Scalability - Amazon fulfillment can scale with your business with no upfront investment or lead times. This is huge.
- Intellectual Property - instant access to a huge marketplace also means instant exposure to Chinese and other foreign companies who may attempt to copy or steal your IP, especially if you have a hit product. This happened to us just a few months after we launched IcePlate Classic. According to the Wall Street Journal, intellectual property protection is so bad on Amazon that nearly all of the world's greatest luxury brands avoid selling on the platform.
- Fees - Amazon charges you for absolutely everything, as they should given their extraordinary infrastructure investments and accomplishments. The prices are reasonable, but they are extensive. Nothing is free. The fees add up quickly and before you know it, they consume more margin than you might think.
- Hidden Costs - Amazon has a number of fees that are conditional, like Storage. If you maintain inventory relative to sales velocity at a ratio dictated by Amazon, you can largely avoid these hidden costs, but they are difficult to find and predict ahead of time unless you have lots of time on your hands. If you have a hit product on your hands, the last thing you'll have though is free time.
- Control - you are subject to Amazon rules, you can't set your own policies to create and implement your vision for the experience you want your customers to have.
- Uniformity - Amazon doesn't care about your brand, they care about how much you sell vs how many returns you have. They care about their fees. This is their job. It also means the platform is setup to neutralize differentiating characteristics of a company like brand, merchandising and design for every Amazon listing. For commodities, this is excellent as it levels the playing field and keeps costs down to focus on price. However, this is sub-optimal for innovative brands because Amazon wants you to fit into a box...a box they own and define. They don't want you to stand out unless you pay them to stand out.
- Customers - Amazon customers aren't your customers. They are loyal (somewhat) to Amazon, they are not loyal to you and aren't looking to be loyal to you either. Just ask yourself how many products have you purchased on Amazon where you went on to buy directly from the company after you made your first purchase on Amazon?
- Data - Amazon owns all of the customer data and they don't give you permission to use it for anything except shipping orders, depriving your company of a vital resource for growth and depriving your customers of the ability to get the full value of your vision and scope of the curated customer experience you want to create for them.
- Commoditization - Amazon is increasingly becoming a place where people simply shop for commodities. Commodity shopping is mostly done on price, so if you sell your products on Amazon, you are accelerating the commoditization of your product, even if you have the most innovative and proprietary products in your space
- Communication - you don't control the interactions and conversations with your/their customers. You are required to use Amazon portals on Amazon terms, making communication cumbersome.
- Content - you have very limited control over the type and amount of content you can put on your product listing or store. If your product(s) need or greatly benefit from explainer videos or animations, you are out of luck until Amazon grants you access. Even when you do gain access to more content controls, you will not be able to curate your customer experience at the same level as you will on your own website.
- Learning Curve - the Amazon backend is learnable, but it is complicated and time consuming if you want to do it correctly. This is time you could be spending growing your own company: marketing, branding, social media, website merchandising, etc.
- Brand damage - platform commoditization is creating a place where premium brands are at increasing risk of damage. Because of this, we see some of the best and most sought after brands avoiding Amazon altogether. One such example is All Birds, the wool running shoe startup who grosses over $1B annually via their direct to consumer model built on a standard Shopify site.
Our Amazon Strategy
We experimented with Amazon when we first launched our business, but that is all it ever was: an experiment. When I was a kid, my father shared many stories with me about how Wal-Mart owned too much of the distribution on which his company (Eagle One Industries) depended. Wal-Mart controlled roughly 47% of Eagle One's distribution the year my father sold his company (1998) and that level of risk concentration was dangerous for Eagle One. It is one of the main reasons he sold Eagle One. As a teenager, these lessons hit home for me. They were burned into my memory.
When J.D. and I started Qore Performance, I shared these stories with him. Being the math genius he is, J.D. intuitively understood concentration risk. We applied this skeptical approach with Amazon to make sure they would never become our Wal-Mart.
Given the totality of these circumstances and all of this information, what did we decide to do?
Our Amazon Strategy
- No new releases, previous generations only
- Only products with issued patents
- Limited color selection, no flagship products
- Entry-level products only
- priced to compensate for Amazon fees
This is the Amazon strategy that we feel works for us as of October 2020, four years after we launched IcePlate Classic. Like any good business, we must remain flexible and agile to respond to ever-changing market demands. However, right now we believe the most important assets we have are our customers and our brand (the Chinese cannot copy our brand). This means being as Amazon-independent as possible to protect and provide for both.
Was this article helpful for your and your business? We'd love to know what Amazon strategy you are implementing. Let us know in the comments below!