eCommerce business owners must decide if they will list their products on ecommerce marketplaces such as Amazon, Walmart, and eBay. Amazon is the most prominent of these marketplaces, but all of them have similar advantages and the same disadvantages.
The advantages of selling through Amazon are huge scale, consumer trust, website functionality and simplicity of operations. Disadvantages include the fees, customer service rules, competition, price wars, cost of advertising, competition from Amazon itself, minimal control and a distant customer relationship.
Table of Contents
- Huge scale of Amazon
- Consumer trust for Amazon
- Amazon website functionality
- Simplicity of operations when selling on Amazon
- Amazon seller fees
- Amazon customer service rules
- Competition on Amazon
- Price wars on Amazon
- Cost of advertising on Amazon
- Competition from Amazon itself
- Minimal control on Amazon
- Distant customer relationship
Huge scale of Amazon
197 million people per month visit Amazon.com (Source: BigCommerce) and it accounts for 49% of all ecommerce spend in the US, with 55% of these orders through Amazon's third party sellers (Source: Statista). This gives sellers access to a huge number of potential customers for their products, no matter how niche the category.
Huge scale - Advantage
Consumer trust for Amazon
Amazon is the second most trusted brand (Source: Morning Consult) in America. Consumers trust Amazon even if they do not know the third party seller selling on it. Due to their familiarity with Amazon and it enormous reach, most consumers already have an account with Amazon, have address book and payment methods stored and are comfortable with the checkout process.
This all contributes to a higher likelihood, compared to the seller's own website, that a customer considering a product purchase will actually go on to buy it on Amazon.
Consumer trust - Advantage
Amazon website functionality
For consumers, the Amazon website is very fast, reliable and easy to use, further improving customers' willingness to buy.
For sellers, Amazon's comprehensive Seller Portal provides the ability to manage the product catalog, inventory, pricing, shipping rules and rates, and view comprehensive statistics about the operations of the business.
Website functionality - Advantage
Simplicity of operations when selling on Amazon
Sellers that only sell through Amazon and other marketplaces do not need to select, implement and maintain an ecommerce platform to run their own website. They have no responsibility for complex processes such as website security, payment services and fraud detection.
Amazon also provides its Fulfillment By Amazon (FBA) program, where Amazon holds the seller's inventory in its warehouses. This removes the need for a seller to fulfill (store, pick, pack and dispatch) orders, further simplifying the seller's operations.
Simplicity of operations - Advantage
Amazon seller fees
Amazon charges fees to a third party listing and selling its products on Amazon.com.
There is a $39.99 monthly fee for being a professional seller, on top of which Amazon levies a percentage of both the gross merchandise value (GMV) of goods sold AND the shipping charges, which varies depending on the category of product sold, from 6% for personal computers up to 45% for Amazon device accessories.
For sellers using FBA, Amazon also charges storage fees and order processing fees as well as taking the shipping income from each order - at least $1.97 for the very lightest order. The storage fee of $0.75 per cubic foot per month increases to $2.40 per cu ft for the peak trading months of October, November and December.
Sellers doing their own shipping can set their own shipping rates to charge customers, except for categories such as books, music and DVDs, in which case Amazon dictates the shipping rate (starting at $3.99).
Fees can make profitability of a customer order much harder to achieve when selling on Amazon, compared to a seller's own website.
Fees - Disadvantage
Amazon customer service rules
Amazon has strict customer services rules, some of which mean refunds (which the seller pays) are more readily given in the case of problems with an order, including those which are not necessarily the seller's fault. This enables Amazon to keep its position as a trusted retailer, while passing the costs on to the sellers that use its site.
Customer service rules - Disadvantage
Competition on Amazon
Each Amazon seller must compete against the huge number of other sellers also using Amazon. Amazon itself is often a competitor, selling identical or similar products to its third party sellers.
Competition - Disadvantage
Price wars on Amazon
As a result of the competition between sellers on Amazon, there is a consequent risk of price wars breaking out, where a seller's established business can be disrupted by a new seller offering similar or same products at a lower price. If this is defended by the original seller by a price reduction of their own, this risks a price war. Price wars are good for consumers but also for Amazon. If Amazon is able to sell products at low prices, it attracts more customers. Amazon still receives fees from the sellers, no matter how cheap the price gets.
Price wars - Disadvantage
Cost of advertising on Amazon
Amazon sellers may find their products do not appear near the top of a customer's search, or even at all. Amazon provides a mechanism for sellers to advertise their products on Amazon.com - boosting the prominence of their products in the search results. This is a valuable additional revenue stream for Amazon, which means it has a commercial interest in not showing some sellers' products in search results.
Cost of advertising - Disadvantage
Competition from Amazon itself
If a seller creates a successful business on Amazon, the data that is gained by Amazon about that success could be used to create new products that directly compete against the seller. While this is not supposed to happen according to Amazon company policy, CNBC reported a Wall Street Journal investigation that revealed this practice does apparently occur, stating "Amazon executives had privileged access to data on individual third-party sellers, which was then used to develop the company’s own products".
Competition from Amazon - Disadvantage
Minimal control on Amazon
The success of a seller's brand, where that seller is selling purely through Amazon, is tied to the success of Amazon itself, and their continued willingness to host the seller's products. There is no contractual, legal or moral obligation for Amazon to continue to allow any particular seller to sell on its site. Terms and conditions, fees and services offered can be changed by Amazon in any way they choose. The seller has no control over any of these changes, or their timing.
Minimal control - Disadvantage
Distant customer relationship
Sellers on Amazon have a relatively distant relationship with their customers. Consumers on Amazon perceive themselves to be customers of Amazon, not of the seller. Amazon limits how a seller can communicate with its customers, for example its customer services rules state "you may not provide links or messages that prompt users to visit any external website". Amazon prevents sellers from placing advertising material in customer order packages that encourage a direct relationship with that consumer.
Distant customer relationship - Disadvantage
In summary, while there are many advantages and disadvantages to selling on Amazon compared to selling on the seller's own website, there are ways to reduce the negative features, and selling on Amazon remains a fantastic business opportunity. If a seller can find a winning combination of product and price and source goods at a low enough cost price to pay for the Amazon fees profitably, they can scale an ecommerce business on Amazon and be very successful.