Does Amazon crush small sellers underfoot or give them a leg up?

Business, Money

Small businesses, and even some really big ones, have figured out that there’s no beating Amazon. Following the adage “If you can’t beat ‘em, join ‘em,” so many small businesses have joined Amazon’s third-party seller program that close to 50 percent of the units purchased on Amazon now come from third-party vendors. The partnership between Amazon and small sellers is hugely successful, but it’s a rocky relationship fraught with risk for both the vendors and the American economy.

Small business and e-commerce on Amazon

Amazon’s monopoly – on the US economy

“We’re in an era where 50 percent of US households are Prime members, and over 50 percent of searches for consumer products start on Amazon. Brands – large and small alike – can hardly afford to ignore Amazon,” says Kiri Masters, author of The Amazon Expansion Plan and owner of Bobsled Marketing, a company that helps consumer product brands grow their sales on the Amazon marketplace. A recent article in The Atlantic argued that unlike monopolies of the past, which dominated a single industry or product type, Amazon has a monopoly on the American economy.

“I think of Amazon as serving almost as the essential infrastructure for the American economy at this point, when it comes to commerce. And that affords Amazon a lot of power and control,” Lina Khan, a fellow at the New America think tank, told The Atlantic. “Americans love to think about their economy as open and competitive. But when a growing share of the economy is contained by Amazon, it’s a form of centralization. Owning your own business used to be a way for Americans to build assets and pass on wealth inter-generationally. But if you look at any sector where Amazon is a dominant player—you’d be somewhat crazy to enter there.”

Small sellers grow on Amazon

But with Amazon dominating so many markets, online sellers might be crazy not to pair up with Amazon. A recent survey reports that 86.2 percent of small businesses selling products on marketplaces like Amazon and receive half or more than half of their online sales from these sites, with more than half of sellers choosing Amazon as their platform because of its potential for high sales volume.

“Increased sales and reach is one reason [to sell through Amazon]. But there are others including logistics simplicity, social proof and, ironically, more brand control. Logistically, it actually can be simpler and more cost-effective. Just last week, our orders doubled due to a promotion experiment we were testing. This would have logistically been a challenge if we had to pick, pack, and ship this increased volume and either would have resulted in delivery delays or the need to hire more seasonal staff,” says Paul Springer, a former Amazon employee who now owns the small gourmet foods company, Sea Salt Superstore, based in Everett, Washington.

“The other reason we’re starting to see is that you get real social proof coming in from reviews and customer feedback. As physical retailers figure out their strategies for competing in an Amazon world, shelf space becomes more scarce, and buyers want increased confidence that your products will sell. Being able to share a ‘voice of the customer’ and demonstrate that your products already have real demand from real customers, is one way to address these concerns,” he adds.

Can Amazon be trusted?

“Amazon delivers on what they promise consumers: value, convenience, and selection. Amazon doesn’t promise to be ethically or environmentally conscious, or even a good and fair partner to brands,” says Masters. In 2014, research from Upstream Commerce revealed that Amazon tracks third-party sales on its site and uses that data to sell the most popular items in direct competition with marketplace members, a practice that only seems to have become since, as discussed in this Wall Street Journal video.

Amazon’s policy is to match the lowest price available anywhere, including price offsets like coupons and club discounts. Direct competition with vendors and price-matching policy often create channel conflict. Amazon sells products below brands’ MAP (minimum advertised price) that other vendors are required to follow. When selling wholesale to Amazon, product pricing can be out of a brand’s control.

The flip side of actively selling and being brand-registered on Amazon is that it can improve brands’ control in relation to other third-party sellers. “Prior to the past year, we had third-party sellers who would list our products, often marking them 20-30 percent above our MSRP and then occasionally dropping the price dramatically to move volume. The information on the detail pages, the images, and descriptions were limited or inaccurate, and we couldn’t adequately address the concerns of some of our physical retail partners. By taking over the brand, we were able to load up high-quality images, add detailed descriptions, enhance brand content, and control standard retail pricing. This not only brought prices down for our customers who wanted to buy our products on Amazon but also removed channel conflict we had offline. The lesson here is that it’s almost always better to control your brand on Amazon than to have it controlled by other marketplace sellers,” says Springer.

Amazon values customers, not sellers

Amazon’s commitment to the customer often ends up costing small businesses. In October, Amazon began requiring all third-party sellers to offer the same returns policy Amazon does. Buyers can now print a prepaid return shipping label via Amazon’s online return center without contacting the seller first, and sellers have no choice but to pay for shipping.

Masters describes the case of a client who makes dental hygiene products: A customer complained in their review that they received a product which appeared to have already been opened. Amazon suspended all sales of this product, even though the most likely cause of the issue was that an Amazon fulfillment employee had re-stocked a customer return without properly inspecting it.

Another example is the recent case of the couple who defrauded Amazon for over a million dollars in phony product returns. Brands and suppliers absorb the cost of returns from customers – both in return shipping fees as well as “lost” inventory – whether the returns are legitimate or not.

“Some of the tools are not very user friendly for the non-technical sellers and the terms of service rules continue to evolve. You have to stay on top of things, including new features, selling tools, reporting, etc. In a small organization, that can be a challenge given the myriad of hats that we wear,” warns Springer.

Helpful tips for small business owners

Amazon’s disruptive business practices have had a well-documented, devastating effect on  the retail industry. But the good news is that small businesses are less affected than big industry players, especially SMBs that specialize in niches which do not compete directly with Amazon.

Springer offers some hard-earned advice to those trying to build their online business. “Iterate and test different approaches but start with a strategy in mind,” he says. “Leverage the plethora of seller tools that are available – some free, some paid – and subscribe to some of the advisory email newsletters that are out there.”

Masters adds, “Brands using Amazon to sell their products and access hundreds of millions of customers around the globe should not look at the [Amazon] marketplace as a silver bullet. Brands still need to take the time and effort to effectively merchandise their products, create exposure for their brand, and diversify with other sales channels.” If that proves too difficult, Amazon’s new headquarters is expected to employ up to 50,000 people, at least some of whom are likely to be former small business owners.