Navigating various sales channels, inventory, and pricing exposure when Amazon makes the rules
Amazon is a behemoth in B2C distribution, and is growing their B2B business. If you compete in this space, then you have experienced their wake or could soon. Trying to fight or beat Amazon is likely a losing battle. But there are ways to align your business to work and thrive in Amazon’s world.
Differentiate from Amazon
One option is to try to differentiate yourself from Amazon. Amazon can get products to customers quickly and usually at a very competitive price. Amazon knows the market’s pricing, and pressures their supply chain to allow them to beat your price.
There are different ways to differentiate. Can you offer additional information to support your product that is not available through Amazon? If you are a manufacturer, you could exclude your product from Amazon’s site or resellers who use Amazon’s marketplace. You might have additional services or subscriptions that you could offer. Or could you customize your product for your customer? Amazon does too much volume to effectively customize the product offered on their site.
Beating Amazon on price or delivery-speed is not likely a winning business model but figuring out how you can serve your customers in a different way can be a way to thrive.
Work with Amazon
Another option which many distributors are using is figuring out how to work successfully with Amazon. You can maintain your direct line to the customer but also add some additional revenue to fill the gap as Amazon takes some of your business.
- Create your own Amazon Marketplace store front
- You can create one or many store fronts on Amazon. Here you can list your products and set your prices. You can either fulfill these orders directly (merchant fulfillment) or send your products in bulk to Amazon and have Amazon fulfill the individual orders (fulfilled by Amazon – FBA)
- Caution – using FBA gives certain powers to Amazon and can be costly. It is effective when their network can support fast delivery to customers that you would not otherwise be able to reach.
- Bulk sell directly to Amazon’s warehouses
- You can sell in bulk directly to Amazon. Amazon will list the products, set the retail price and fulfill the orders. You will often be competing with other distributors and experience pricing and inventory challenges – more detail on this below. If you are Amazon’s primary or even secondary supplier, you can pick up significant business this way.
- Beware of Amazon going direct to the manufacturer. When Amazon enters a new product space, they often work with distributors for a couple of years. But eventually they will try to develop a relationship directly with the manufacturer and switch to purchasing directly from them with little or no notification. This can leave you in a difficult inventory position. If you are able to create a relationship with the manufacturer to be the sole Amazon supplier, you will create some leverage for yourself with Amazon.
- Distribute for Amazon
- Another option is to fulfill for Amazon. You can turn your distribution center into a mini Amazon distribution center. You will have to update Amazon daily on your inventory and they will send customer orders to your facility to fulfill directly for the end customer. This is a good option if your distribution center is set up to process small customer orders. If you typically ship out large pallet size orders, this process can put significant strain on your picking, packing, and shipping capacity.
If you decide to sell directly in bulk to Amazon’s warehouses you need to understand some of the challenges that you will face. Amazon does not forecast demand well, but they have extremely high expectations for their suppliers. Amazon also pushes their suppliers extremely hard on price – getting a price increase through Amazon can feel like an unwinnable battle.
Amazon typically sends out large weekly orders at the beginning of the week with smaller orders coming in throughout the week. Amazon expects you to have the product on hand to meet their short lead times. If you do not have the product on hand, they will take the demand you could not fulfill and order from their other suppliers (a.k.a. your competitors). Carrying significant stock to support Amazon, however, is a risky bet. You could be stuck with excess inventory for months before Amazon orders again – or they may not ever order again, and you will be stuck with the inventory until you find an alternative channel. Note, if you sell in bulk to Amazon, you should also set up your own stores on Amazon’s marketplace to develop a direct channel to customers and move excess inventory (if possible).
When working with Amazon directly, it is important to know if you are a primary supplier. Sometimes your buyer will tell you if you are the primary supplier, otherwise you can gauge based on their historical order patterns. If they order specific products weekly from you, it is likely you are their primary supplier for those products. In this situation it is a little less risky to stock products in anticipation of their weekly orders.
If you have not seen consistent weekly demand from Amazon, and suddenly you receive very large order, this is an indication that the primary supplier does not have stock to fulfill their demand. You may not have enough stock to meet this demand either – beware of purchasing to fill this demand because likely the demand will be offered to the primary supplier before you in the future. In these situations, we recommend building demand slowly to support this volume and seeing how the orders come in for several weeks before stocking significantly more than your other customers require.
Pricing is important to Amazon. If your prices are too high, they will likely move to the next distributor and you will not win the business. But be careful about setting your prices too low. Amazon applies large fees and chargebacks which can quickly make doing business with them unprofitable. On top of that, increasing your price with them even just annually can be extremely difficult.
When setting your initial prices make sure to understand your full coop fees to ensure your prices cover all your costs plus these fees. It may be beneficial to build in a buffer for chargebacks knowing that it is much easier to drop your price in the future than to raise your price if you realize the business is not profitable.
We have seen several clients have to turn products “off” (make them unavailable) in their Vendor Central accounts because their pricing was unprofitable, and Amazon would not accept a price increase.
There are many reasons why you may need to increase your price – increasing costs from manufacturers, tariffs, increase labor costs, etcetera. For certain reasons you may need to provide significant documentation, potentially from the manufacturer, to support your price increase. We recommend building a relationship with your buyer if possible. Your buyer will try to push back on any price increase, but if you are able to build a line of communication, they can be extremely helpful in navigating this process.
If you would like to talk more about distribution in an Amazon world please e-mail me at email@example.com