Selling your product on Amazon seems like a no-brainer, right? Enormous customer base (approximately 300 million active customers, according to Statista, most of whom visit Amazon ready to make a purchase), maximum exposure for your product, ease of use — is there a catch? Before choosing to sell your product on Amazon, consider whether it’s the right decision for your business. Here’s a look at the pros and cons of selling on Amazon.
PROS
Fulfillment Options
Sellers have the ability to allow Amazon to fulfill its sales orders (known as fulfillment by Amazon, or FBA) or to self-fulfill sales orders (known as fulfillment by merchant, or FBM).
When choosing the FBA option, sellers ship their product(s) directly to Amazon to be stored in one of its warehouse locations until a customer order is placed. At that point, Amazon will handle the sales processing and shipping and handling of that order from its warehouse. By choosing this fulfillment option, sellers are able to utilize and rely on Amazon to handle all sales orders. The FBA option also lets sellers benefit from Amazon’s customer service center, which will handle all customer returns. This can be beneficial for small business owners who do not have the personnel to handle customer service-related tasks. However, even though the FBA option allows for convenience to the seller, there are various fees associated with this option that potential sellers should be aware of, such as: fulfillment fees, monthly inventory storage fees, long-term inventory storage fees, inventory disposal fees, returns processing fees and unplanned service fees. Due to the added services provided by Amazon under this option, associated fees tend to be higher than the fulfillment by merchant option, as further described below. These fees will eat into sales margins.
With the FBM option, the seller handles all inventory storage and fulfillment responsibilities on sales orders received. While the convenience of FBA is not available, business owners electing the FBM option are able to maintain their own inventory at all times and control the shipping and packaging of their products for added brand and quality control. It is also important to note that, with this option, sellers are typically not eligible to sell to Amazon Prime customers immediately. While FBM sellers may eventually obtain Prime eligibility, it is difficult to do. FBM sellers must maintain excellent seller metrics to be approved by Amazon to self-fulfill sales orders to Prime customers.
Account Options
Amazon offers its sellers different account setup options, including Individual Accounts, Professional Accounts and Business Accounts. Sellers can change their account status depending on their business needs and company life stage. This allows business owners flexibility in the constantly changing landscape of online retail based on the needs and demands of their business. The various account types also allow for low barriers to entry for potential sellers when entering the Amazon marketplace.
Advertising
Amazon can help with brand advertising. Amazon’s professionals can assist with various marketing services such as ad setups, visibility, placements, etc. and allow for worldwide advertising to sellers.
Reporting
A great benefit is the access to Amazon’s reporting tools. As an Amazon seller, business owners have access to Amazon’s financial tools, which allow them to manage their sales and related costs. As it has various fee structures, depending on the seller’s choice of account set up, Amazon also has revenue calculators and fee estimators so sellers can determine whether selling certain products makes economic sense and will result in the desired margins.
Quick payment
Amazon allows for quick and easy payments to it sellers. Accounts are settled every seven days, and sellers are paid the net of their applicable Amazon fees. With the account settlements handled by Amazon staff, business owners can focus on their core operations and building their business.
Competing with Amazon
If you choose not to sell through Amazon, you run the risk of competing with Amazon. While Amazon allows third parties to sell products on its online platform, Amazon can also be a seller of products themselves (i.e., Amazon basic products). In such instances, it is extremely difficult for third-party sellers to beat Amazon’s pricing due to the company’s economies of scale. With Amazon offering the lowest prices, the buy box will typically be maintained with Amazon, and sales traffic will mainly be directed to its product offering, resulting in decreased sales for all third parties selling the same product.
CONS
Buy Box
The buy box is the white box on the right side of the Amazon sales listing that includes the ‘Add to Cart’ button, with the seller named in small print below. A buy box is applicable to all sales listings for products with multiple sellers, which tends to be the case with most sales listings on Amazon. It’s directly linked to a sales posting by a third-party seller or by Amazon (if they are a seller themselves) and is constantly shifting between product sellers. The seller that is awarded the buy box is the seller that has the best metrics, based on an Amazon-calculated algorithm. The calculation of this algorithm is customer-centered and therefore favors sellers with low prices and high selling metrics (i.e. customer rating and related reviews, brand optimization, prime eligibility, etc.). As Prime eligibility is a factor in the buy box award, sellers that utilize the FBA option tend to be those that receive the buy box on their sales listings, as FBM sellers are not usually prime eligible. As the majority of product sales are made by Amazon shoppers on listings with the buy box, it is extremely important for sellers to obtain and maintain it.
Fees
Amazon’s fees result in reduced margins. In addition to FBA fees, as previously mentioned, Amazon also charges its sellers referral fees. These fees are assessed per item sold and are based on the selling price. The fee percentages assessed by Amazon for each sale varies by category of product but mainly ranges between 8% and 15% of the sales price. If the fee percentage is less than Amazon’s minimum referral fee, the minimum referral fee is assessed.
Product Category Restrictions
Amazon has strict rules as to which sellers can sell which products within certain product categories. As an example, a seller with an individual account is restricted from selling products within the following categories based on Amazon guidelines: industrial and scientific products, automotive and power sports, sport collectibles, grocery and gourmet foods, and fine art. In order for a seller to sell its products within a restricted industry/category, they must request approval from Amazon directly, which may not return a favorable result for the seller.
Bad Reviews
Negative customer reviews can significantly impact a seller’s account. Negative customer reviews directly impact a seller’s metrics, which decreases its ability to maintain the buy box on its sales listings. When negative customer reviews are posted, whether they are false or have been resolved directly with a customer, they cannot be removed by the seller or by Amazon — only the customer can remove it. In order to potentially reduce the chance of negative customer reviews, utilizing the FBM option may prove to be more beneficial due to the amount of control the seller has over the product before it is shipped to the customer.
Whether or not a seller decides to use Amazon to sell its products, it should be wary of brand building through Amazon. By building a brand before expanding to Amazon, a company can ensure it has a customer base in the event that selling on Amazon becomes unprofitable for the company. Business owners should consider selling their key or flagship items directly and selling secondary items through Amazon to preserve brand imaging while still reaping the benefits of selling to Amazon customers.
