As published by The Marketing Blog
Due to Amazon’s inherent complexities, many brands are increasingly feeling like they are losing control of how their brand is presented and how their products are sold. Nowhere is loss of control felt more acutely than when it comes to pricing. With far-reaching implications, a brand’s diminishing control of pricing can squeeze margins and negatively affect profits across channels, as well as create channel conflict. When combined with stiff competition on the channel, brands are facing the very real risk of making little, and in some cases no profits on certain product lines.
Profit draining challenges
As part of their business model Amazon, of course, wants to maximise their profit margins. They accomplish this by prioritising and pushing what is selling best. Brands with poorer performing items and less sales often get a stark warning from the marketplace giant that better pricing is needed, otherwise they will pull these products altogether. When Amazon deems a product not-profitable, referred to as “CRaP” (Can’t Realise a Profit), the product faces the very real risk of being dropped, and in many cases Amazon will de-list the item and cease to re-order.
Unfortunately, pricing challenges don’t end there, for brands that sell direct to Amazon (known as 1st party vendor or 1P), Amazon acts as a retailer with the authority to independently implement price adjustments. For example, if the product is available elsewhere at a lower cost, even in a promo on the high street, Amazon can demand a price match. Brands of all sizes can face these pricing challenges, resulting in millions in lost revenue.
Since the onset of the pandemic there has been an increase in demand for certain items, especially in what Amazon deems “essential” goods, and these were prioritised. Brands that don’t sell these items found themselves facing less or even no-orders from Amazon, meaning their products faced being “out of stock”. No stock equals no sales! With dwindling listings, brands struggle to ensure they can meet customer demand.
At a time when customer expectations for quick and flawless online purchasing and delivery experiences are at an all-time high; slow or fragmented experiences are resulting in customer frustration, lost business and reduced profitability. The recent past highlighted and exacerbated these ongoing challenges for brands. More and more brands are now looking at their Amazon strategy and trying to understand what works when it comes to protecting their business today, whilst laying the foundations for whatever tomorrow brings. Although brands are finding themselves under tremendous pricing and profitability pressures, there are ways for brands to protect their business and profitably grow their online revenue.
Taking back control – 1P/3P
Taking back control and protecting your brand can be achieved with a two-pronged (hybrid) approach. The Amazon hybrid sales model refers to selling goods directly to Amazon to be sold on the platform, known as first-party vendor (1P), whilst at the same time selling goods on Amazon via a trusted partner or vendor, known as third-party seller (3P). This complementary sales strategy improves your online presence, helps to position you against (and beat) the competition, and is proven to grow online sales, profitably.
A hybrid model enables you to build up product listings and history, growing sales and margins across 3P, as well as protecting your 1P direct with Amazon, avoiding channel conflict or any “race to the bottom” pricing battles.
Although Amazon will continue to curtail price gouging, whilst maximising margins by pushing best-selling items, the hybrid model provides brands with price autonomy over their products. When it comes to pricing, brands that embrace the 3P sales approach are able to independently make price changes to suit their pricing strategy and profit margins.
Inventory management/ Dropship
The Covid 19 pandemic highlights just how important it is for 100% inventory management accuracy. The hybrid model safeguards against delays to orders or shipping and, more importantly, ensures brands have the products in stock to always meet customer demand. By switching from the FBA (fulfilment by Amazon) delivery model to fulfilment by merchant (FBM)/dropship model, brands have more control over their inventory and delivery, ensuring that customers get the products they want, when they want them.
The coming months are a crucial time as businesses endeavour to maintain current customers and reach new buyers. There’s no doubt many brands are urgently re-assessing their digital commerce operations as now, more than ever, brands need proven eCommerce solutions that will prevail and deliver success in the long run.
With up to 70% of product searches beginning on Amazon itself, ambitious brands know they cannot ignore this channel… but now they have options, a proven alternative. Leading brands are increasingly turning to a hybrid selling and fulfilment model, as it enables them to grow sales and margins, as well as avoid channel conflict and protect existing direct customer relationships.
The world as we know it has changed, and as a result, calls for big changes. Brands need eCommerce solutions that will prevail, and deliver success in the long run. By complementing your Amazon 1P strategy with a reputable 3P partner, you’ll be in the position to gain back control and lessen Amazon’s dominance, whilst reaching new and existing customers on their marketplace of choice.