Is Amazon friend or foe? Retailers must weigh the opportunity before tapping revenue gains

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One of the most discussed topics in e-commerce over the past 18 months has been The Amazon Effect. Amazon has been throwing its weight around the industry, threatening to disintermediate retailers from their customers while eating into their profits.

The reality is, Amazon and other marketplaces are not going away. Marketplaces represent approximately half of all e-commerce sales, and Amazon alone drives 40% of e-commerce sales in the U.S. It sells 12 million products across almost every retail vertical, including its private label brands as well as products from more than 5 million other sellers.

Amazon’s growing influence leaves retailers with a primary question: How do we continue to coexist with a 500-pound gorilla?

The answer lies in understanding a few key factors: what Amazon can, and cannot, help you achieve; the risks and rewards of selling and advertising on the marketplace; and best practices to navigate the environment. Selling on Amazon requires a balancing act, but retailers who understand the channel and its opportunities can find success.

What Amazon is and is not

Most retailers that are active in marketplaces run the effort separately from their e-commerce site. That’s because, in a marketplace environment, retailers don’t own the customer relationship. As a result, retailers target different metrics and business objectives for their marketplace operations versus their e-commerce operations.

For instance, within e-commerce, many retailers focus on building brand reputation, attracting new customers, and nurturing those relationships to generate high lifetime value. These tactics often have varying return goals that are more flexible based on a given customer and his/her stage in the purchase cycle.

Retailers, specifically resellers, view Amazon differently because they do not own the customer. They do not receive any customer information that allows them to retarget or nurture that relationship. They cannot drive repeat purchases that justify the acquisition costs over time.

Amazon recently started sharing some demographic data on customers to certain types of Amazon sellers. But to truly own the customer, a retailer would need data for retargeting – such as email addresses. Until that happens, retailers will continue to view Amazon as a way to move product and generate cash flow. They cannot factor it into their customer acquisition strategy.

Weighing the benefits and risks

That said, Amazon continues to provide several benefits, the greatest of which is access to millions of consumers who are ready to buy. Here are some of the main benefits of selling and advertising in the marketplace.

Why Amazon is an asset:

Retailers with strong margins can take advantage of Amazon’s network of customers to move inventory and generate cash flow.
The Amazon customer base is fiercely loyal, with Prime membership at over 100 million consumers and counting. Tapping into that highly qualified audience usually requires more legwork in other channels.
Amazon has become a go-to resource for price comparison, even for non-Amazon loyalists. One study showed 9 of 10 consumers price check on Amazon.
The type and volume of product sold on Amazon can help you understand the demand for products in your catalog. That information can then help inform merchandising decisions for your e-commerce site.
If you are a manufacturer selling on Amazon, brand value can be gained by using Amazon as a distribution network. The size and reach of the audience, combined with its high propensity to convert and provide feedback, can bolster brand equity.

At the same time, these opportunities must be contextualized by the risks that Amazon also presents. From its growing market share to increased price competition, Amazon is a challenge for many retailers.

Why Amazon poses risks:

Amazon’s growing market share and brand loyalty are reducing the available market for non-Amazon loyalist shoppers.
Amazon is setting a standard of expectations around customer service and convenience that is nearly impossible to match. Consider Amazon’s recent move to one-day Prime shipping.
Most customers are savvy enough to price compare, but the Amazon marketplace makes it so easy to do it that a retailer is forced to match or beat the lowest price to be considered. As a result, margins are thin. Many sellers have to use price match tools to ensure they stay competitive.
Amazon carries its private label brands and can give them priority or recommend them alongside a retailer’s products.
Amazon is using the data it collects to pinpoint and refine its private label offerings, creating even more competition for retailers.
Amazon does not share customer data with retailers, so there are no remarketing capabilities.
Amazon now widely advertises in Google Shopping, which is a bread-and-butter marketing channel for many retailers. Amazon’s activity is creating more competition, driving increased costs and reducing returns.

Creating a winning Amazon strategy

For some retailers, the rewards outweigh the risks when it comes to selling and advertising on Amazon. The channel can be a valuable tool to grow revenue, drive merchandising decisions, and control inventory. Here’s how.

The revenue growth strategy

If retailers can turn a profit by selling on Amazon, there is little reason not to do so. First, retailers need to make sure that the marketplace’s fees, typically a 15% commission, and intense price competition don’t eat away at margins. If retailers are still able to turn a profit, the exposure to such a highly qualified and ready-to-purchase audience can bolster topline revenue numbers.

Gaining a competitive edge on Amazon is not just a matter of being price competitive, but also investing in paid advertising. Those who participate in Amazon Advertising often see sales jump significantly after implementation. As a result, retailers are spending more than ever on the platform, increasing ad spend 19% year-over-year for sponsored product ads and 77% year-over-year for sponsored brand ads in Q1 2019. Analysts expect this growth to accelerate as Amazon enhances ad management with new tools and greater platform consolidation.

The merchandising strategy

New product or category launches that may not have high initial demand can benefit from Amazon’s expansive audience. Retailers can sell a new product on Amazon to generate demand, and then eventually pull that product off Amazon as it gains greater recognition and brand equity. The result is that Amazon shoppers who have an affinity for the product will migrate to the retailer’s site to purchase it in the future, though this migration is not always guaranteed.

Conversely, retailers can view Amazon as a testing ground for new products. If a product is well received within the marketplace, it may be worth a larger rollout on the e-commerce site, supported by a significant marketing push.

The inventory management strategy

Retailers who have a unique product offering or competitive advantage in the market may be cautious about selling their entire catalog on Amazon. Instead, they may consider selling products they are trying to move with some urgency. Think end-of-season clearance items, sizes or colors of products that are not selling well, or excess inventory. Amazon is a powerful channel for selling unwanted inventory and minimizing long-term inventory costs.

Amazon is a dominant force in e-commerce retail. Despite Amazon’s growth and innovation, it continues to leave room for other retailers to tap into opportunities to grow their businesses. Whether you see Amazon as a friend or foe, it’s critical to understand the dynamic environment that this giant has to offer, and determine what role it can play in your business goals.

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