The Benefits & Cons of Selling on Amazon, 10 Factors to Consider

Woman using computer while sitting at a desk
 

By Tricia McKinnon

From small businesses to global juggernauts the question of whether to sell on Amazon is a pressing issue. Amazon is the first channel consumers turn to when conducting a product search online ahead of even Google.  40.4% of all eCommerce sales in the United Sates are now generated on Amazon’s platform and Amazon has more than 200 million monthly visitors. For any business regardless of size those are impressive numbers. 

The good news. Third party sellers now compromise 60% of Amazon’s eCommerce sales. There are about two million small to medium sized businesses that sell on Amazon and the average third party seller makes $200,000 per year selling on Amazon.

The bad news. Selling on Amazon comes at a cost. From counterfeit products to the loss of control over merchandising, for some the disadvantages of selling on Amazon outweigh the benefits. Nike is an example of a high-profile retailer that decided to stop selling on Amazon in 2019. 

If you are struggling with whether to sell on Amazon or if you already sell on Amazon and are wondering if you should stay on the platform then consider these 10 factors to help inform if whether Amazon is the platform for you. 

The good news….

1. Amazon has a large and growing marketplace 

There is something to be said about Amazon’s amazing reach. More than 200 million people shop on Amazon each month.

Chart of the monthly unique visitors for the top retailers in the United States

For 85% of brands selling on Amazon, the main reason for selling on the platform is customer acquisition, with 72% wanting to “serve my customers where they are.” As Amazon has grown, its third-party marketplace has become a key driver of growth with approximately 60% of Amazon’s eCommerce sales coming from third-party sellers. There are now about two million small to medium sized business that sell on Amazon’s marketplace. During Amazon Prime Day in 2020 third party sellers generated $3.5 billion in sales. These sellers had record sales that were up 60% over 2019. Amazon did not disclose third party sales for Prime Day in 2021. 

For a smaller retailer deciding to sell on Amazon may be the activity that kick starts your growth. One of the most difficult aspects of growing a small business is making the transition from being unknown to known. A business can try its best to drive awareness of its brand and product but in the early days it often needs to leverage someone else’s brand to grow its own. For smaller retailers looking to scale platforms such as Amazon can provide exposure to a customer base they would not be able to access on their own. On average a U.S third party seller on Amazon makes $200,000 annually. Only one percent of sellers on Amazon make $1 million in sales or more.

2. Brands have found success on Amazon

Even large and well-established retailers who generate significant traffic can benefit from selling on Amazon. Amazon’s traffic easily trumps that of any other retailer and it is important to have a presence where your customer is. If there was a mall where most customers shop, think of the biggest mall in any city, wouldn’t a retailer want to be located there? Amazon is the equivalent of the biggest mall you have ever seen in the United States.  

The Children’s Place started selling on Amazon back in 2003. Commenting on the company’s Amazon business on a third quarter 2021 earnings conference call, Children’s Place CEO Jane Elfers said: “with respect to wholesale, we remain laser-focused on strengthening our partnership with Amazon, and they continue to experience very strong sell-throughs on our product. We've recently launched a new storefront on Amazon. We are significantly accelerating our investments in brand marketing, and we're projecting accelerated growth with Amazon for the balance of 2021 and beyond.”

Adidas has also directly sold its merchandise on Amazon since 2014. Speaking about the partnership with Amazon in 2019, Adidas CEO Kasper Rorsted said: "we're working intensely with Amazon to ensure that we have a good partnership, which we have today, but we don't [want to] jeopardize the brand based on the drive for the lowest cost.”  Rosted also said that he wants to ensure that: "we don't tarnish the brand and we don't [want to] make price the most important parameter in how the product is being sold [because] the moment you do that, you don't have a brand anymore.” Rorsted has also said: "Amazon is the best, without any comparison, transaction platform in the world."  

Speaking about its partnership with Amazon, in 2019 Levi’s CFO Harmit Singh said: "Amazon is a great customer for us and we've been working with Amazon brilliantly for the last couple of years.” “So we don't compete, you know, we work together, but importantly we have brands.” “We have a direct-to-consumer business that's growing and we have a wholesale business that is growing.”  

3. Access to world class logistics 

Fulfillment by Amazon (FBA) is another benefit of choosing to sell on Amazon. By selling on Amazon businesses can also leverage Amazon’s vast supply chain capabilities. If an organization decides to enter Amazon’s FBA program they send their inventory to Amazon then Amazon manages storage of the inventory within its facilities, shipping and customer service (including returns).  

Under this program a seller’s items can qualify for expedited two-day shipping under Amazon Prime which is a highly valued feature by customers. The goal is to make the experience for Prime customers no different than if an order is sourced from Amazon’s own inventory. Logistics are hard for even the savviest of retailers. If you have great products and haven’t built out your supply chain yet then Amazon can be a great option. Think about this. Amazon spent morethan $61 billion on shipping costs in 2020 up from nearly $38 billion in 2019. Although using FBA comes at a cost it still enables you to take advantage of the world class logistics network Amazon has created and continues to invest in.

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4. Selling on Amazon provides a fairly easy way to get started with eCommerce

Its relatively easy to start selling on Amazon. You don’t have to host your own website, create a logistics network or stress as much about getting your products to customers on time. Instead of having an elaborate website, it is your product listing pages on Amazon that represent your store on the site. Perhaps the sight of Amazon’s minimalistic product pages makes you faint of heart. Well at least everyone is in the same boat. 

If logistics are not your cup of tea then FBA could be a good option for you. If you like the service you receive when shopping on Amazon then why not provide your customers with a similar level of service? Imagine starting an eCommerce business 20 years ago it would have been a herculean task but companies like Amazon as well as Shopify make it much easier to do so.

If your products are ready and you want to start selling online relatively quickly Amazon may be the right platform for you. 

The bad news….

1. Lack of control over storytelling, merchandising and ultimately branding

Owning your own distribution channel gives you the opportunity to tell your story. Think about a brand like Warby Parker. Part of what helped Warby Parker take off in its early days is the brand’s story. Warby Parker wanted to make buying glasses inexpensive after Dave Gilboa, one of the founders, lost his glasses during grad school. It cost too much to replace his glasses so Gilboa spent the remainder of his first semester squinting, unable to see properly prompting him to think about how to provide a low cost way to buy fashionable prescription glasses. That’s a memorable story consumers can relate to. It’s impossible to tell a story like that on Amazon. How much do you know about the stories behind the third-party sellers whose products you buy from on Amazon?

“Brands today are like media companies.” “Ten or 15 years ago it was really just about making great clothes. Today it is about telling a story, reaching your customer and engaging that customer in more dynamic ways,” said Alice + Olivia CEO and creative director Stacey Bendet. Selling on Amazon tends to commoditize brands by stripping them of the very differentiators that make them unique. How often have you made a purchase on Amazon and do not even notice the third-party seller’s name? Amazon decreases brand awareness by shifting your focus from brand name to customer reviews. But what happens if Amazon changes its algorithm or advertising on the platform becomes cost prohibitive? In that situation if your brand has limited name recognization you are in trouble.

If your brand’s identity is crucial to your customer acquisition efforts then setting up a site on Shopify or another eCommerce platform where you have more control over branding is a better option. Or you can have a presence on Amazon as well as having your own website. When you think of the most successful brands how many of them were built solely on Amazon? I can’t think of many.

2. Lack of rich customer data 

One of the benefits for brands selling thru their own channels is the ability to collect better customer data, data brands wouldn’t normally have access to if they were selling through Amazon. Rich customer data can be used, for example, to provide customers with more personalized products and services. When U.S. digital device users were asked what action they were likely to take as a result of personalized brand content the top answer was: make a purchase (51%), followed by become loyal to the brand (49%) and recommend the brand to others (46%) came in third place. Rich customer data which brands turn into actionable insights can be a game changer.  

Digital native beauty brand Glossier is an example of a brand that essentially crowdsourced data about what type of beauty products readers of its popular blog Into the Gloss wanted and turned that data into the launch of a successful beauty brand.

3. Amazon often competes with its own merchants 

Amazon is accused of using data from top selling merchants to create similar products that are then sold at lower prices. Take a look at AmazonBasics and you will see that many items are replicas of products that already exist on the platform. Keep in mind this is no different than the tension that exists when retailers create private brand products that are essentially knockoffs of best-selling items sold by other brands in their stores. 

“Amazon is like a mall owner who will open an identical store next to you, sell all of your products at a cheaper price, and try to convince consumers it’s the same thing. That’s not actually a mall owner, that’s a competitor masquerading as a mall owner,” says Loren Padelford, former Head of Shopify Plus. Amazon sellers have similar feelings: “selling exclusively on Amazon would be similar to building an entire brand on Instagram versus having a large email list,” said Deneiro Bartolini, an Amazon seller. “In the first scenario, you are at the mercy of the platform that is hosting you, while the latter allows you to be in control of your network no matter what the host platform decides to do.” 

Amazon has responded to this criticism by saying: “we strictly prohibit our employees from using non-public, seller-specific data to determine which private label products to launch.” “While we don’t believe these claims are accurate, we take these allegations very seriously and have launched an internal investigation.”

4. A proliferation of counterfeit products

One of the biggest issues for brands selling on Amazon is counterfeit items. The low barriers to entry for selling on Amazon is one of the reasons there is a proliferation of counterfeit items for sale on the site. Nike, which is focusing more and more on its direct business, decided to remove its Amazon store because of concerns about the number of counterfeit products on Amazon’s marketplace. Nike does not believe Amazon is doing enough to stop counterfeit sellers. “As part of Nike’s focus on elevating consumer experiences through more direct, personal relationships, we have made the decision to complete our current pilot with Amazon Retail,” said Nike in a statement. “We will continue to invest in strong, distinctive partnerships for Nike with other retailers and platforms to seamlessly serve our consumers globally.”

After taking its products off of Amazon in 2016, Birkenstock Amercias CEO David Kahan said: “the Amazon marketplace, which operates as an ‘open market,’ creates an environment where we experience unacceptable business practices which we believe jeopardize our brand.” “Policing this activity internally and in partnership with Amazon.com has proven impossible.” Just how many items on Amazon are fakes? No one knows for sure but it is a material concern.  

For luxury retailers in particular, the issue is particularly salient as it is estimated that luxury brands lose approximately $30 billion in income each year as the result of counterfeit goods sold on-line. This is one of the reasons why luxury brands generally do not sell on Amazon.  

5. Selling on Amazon can be expensive

Achieving success on Amazon is no easy feat. There are many merchants on Amazon often selling merchandise similar to yours. “Product discovery is an uphill battle on Amazon.” “You have to have advertising and a larger marketing strategy in place if you want consumers to find your products, because if you’re not on the first page of organic search results, you’re going to struggle,” says James Thomson who works at an Amazon management and consulting firm called Buy Box Experts.

Third party sellers are not the only ones thinking about advertising, it is also top of mind for Amazon. In a retail business where margins are thin advertising has emerged as a key profitability driver for Amazon, bringing in billions in profits for the retailer. Amazon now has the third largest share of advertising revenues in the United States after Google and Facebook, generating $31 billion in advertising sales in 2021 alone. Amazon’s booming advertising business has not gone unnoticed by regulators. “Because businesses are increasingly dependent on Amazon, some of them are concerned that Amazon is using its ad business to squeeze more money,” said congresswoman Val Demings. 

It’s not just advertising that third-party sellers have to pay for. It can cost third party sellers as much as 30 to 35 cents from every dollar sold on Amazon in commissions, advertising buys, account management deals and other services says Thomson.

6. You don’t own the platform

Using someone else’s platform can be risky as many businesses who were dependent on Facebook for organic traffic learned each time Facebook changed its algorithm. That loss of control is a challenge for sellers on Amazon. A 2017 report by the Wall Street Journal found Amazon briefly reduced prices offered by third party sellers by as much 9% without telling them. Amazon absorbed the discount which meant that sellers received the same amount as if the discount was not applied. However, this poses issues for brands that want to maintain tight control over their business.  

Ownership is important. Amazon is one of the largest retailers in the world for a reason, it owns its platform and assets. It would not be where it is today if it didn’t build its own assets. Building your assets may seem harder and often takes a longer time but it pays off over time. Who makes the most money off of Facebook? It’s not the small or medium sized businesses advertising on Facebook its Facebook itself.

The largest and most successful retailers whether it’s Walmart or lululemon or Nike do not sell on Amazon for a reason. At the end of day with Amazon it’s like the old saying that goes: “you get what you pay for”. It’s easy to get started on Amazon but in the process you give away control over some of the most important parts of your business. That’s a price not all retailers are willing to pay.

Tricia McKinnonAmazon, eCommerce