6 Major Risks of Selling on Amazon in 2023

Leveraging Amazon’s Influence

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Amazon's power and influence cannot be denied. Their significant presence in the world of E-commerce presents a tremendous opportunity to boost both your profits and customer base.

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The global network of 100 million dedicated Prime members is a testament to the immense reach and influence of Amazon. Prime membership offers various benefits, such as fast and free shipping, exclusive deals, and access to streaming services. These perks have garnered a loyal customer base that actively engages with Amazon's platform.

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Furthermore, multiple studies have consistently shown that Amazon.com is the go-to destination for product searches. More than 50% of consumers start their search for products directly on Amazon, bypassing search engines and other online retailers. This trend highlights the significant role Amazon plays as a product discovery platform and showcases the tremendous visibility it offers to businesses.

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For small and medium-sized businesses (SMBs), leveraging Amazon's platform presents a unique opportunity to tap into this vast customer base. By listing their products on Amazon, SMBs can potentially reach millions of potential customers who are already actively searching for products and ready to make purchases. This level of exposure and accessibility is unparalleled, especially for businesses with limited resources and marketing budgets.

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Additionally, Amazon provides a range of tools and services to assist SMBs in navigating the complexities of online selling. From fulfillment services like FBA (Fulfillment by Amazon) to advertising options like Sponsored Products and Stores, Amazon offers a comprehensive ecosystem to support SMBs in expanding their customer reach and increasing sales.

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Given these advantages, it's no surprise that countless SMBs have turned to Amazon as a strategic channel for growth. The combination of Amazon's massive customer base, its dominance in product search, and the array of resources available to sellers make it an attractive platform for SMBs looking to expand their online presence and increase their revenue streams.

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In fact, numerous well-known brands directly attribute their success to Amazon. In 2017 alone, over 20,000 SMBs achieved sales exceeding $1 million through Amazon. Moreover, Amazon has aggressively entered various industries such as industrial, scientific, and healthcare, presenting massive opportunities to replicate their B2C success. Amazon Sellers now have the option to add Amazon Business Seller capabilities to their accounts, providing a seamless experience that attracts new B2B sellers.

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While the vast scale and utility offered by Amazon are undoubtedly enticing, it's crucial to consider several factors before fully committing to a selling relationship that has effectively disrupted traditional direct-to-customer distribution channels. This disruption, known as the Amazon Effect, arises from the convergence of e-commerce, technology, and shifting consumer behavior, with sellers following suit online.

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Although selling on Amazon can yield significant rewards, it also carries certain risks. While Amazon can facilitate greater sales compared to other platforms, you will be required to operate your business according to Amazon's guidelines.

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Despite Amazon's creation of abundant options and convenient experiences for consumers, its increasing dominance presents obstacles and threats for sellers.

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Before discussing a strategy to level the playing field and maximize your advantages when selling on Amazon (should you choose to do so or have already done so), let's examine these obstacles in detail. 

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1 - Amazon: More Than Just a Buyer's Market - It's the Ultimate Marketplace Where Buyers and Sellers Converge 

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While Amazon may appear to offer a multitude of potential customers, creating a perception of overwhelming demand that surpasses what any individual retailer could provide, the reality is far more complex.

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Entering into a selling relationship with Amazon entails relinquishing a significant amount of control over pricing, inventory management, and brand identity. (Want someone else to do this for you? Check out our Amazon Management services!)

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Armed with this authority, Amazon strategically fosters competition among its sellers. This process relies on a calculated approach that quantifies and commodifies every brand and product with meticulous precision.

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By doing so, Amazon is committed to maintaining a marketplace that boasts the widest range of options at the lowest possible prices. Consequently, even if a customer chooses to purchase your product, they will inevitably encounter thousands of other sellers vying for their attention, competing on both pricing and product offerings.

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Unraveling Amazon's Mindset: Lessons Learned from the Amazon HQ2 Experience

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In the highly publicized search for its second headquarters, Amazon demonstrated its cultural and economic prowess by inviting potential host cities to compete with bids on how much they were willing to sacrifice to have Amazon. With strategic media tactics, Amazon focused on the positive aspects and enticed multiple major cities into a competitive bidding war. While it's common for large businesses to seek the best deal for substantial, long-term investments, Amazon took an unusually public approach, exerting pressure on politicians to meet their demands and resulting in a higher number of cities participating in the bidding process than usual.

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Following the announcement, cities across the United States eagerly offered extensive concessions in taxes and subsidies to attract Amazon. This process resembled the way Amazon negotiates with numerous sellers for a particular product or category, grinding down prices in pursuit of volume-based advantages.

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Notably, New York City planned to provide Amazon with tax breaks totaling at least $1.525 billion, along with cash grants of $325 million and additional incentives, aiming to establish one of Amazon's HQ2 sites in Long Island City. Although New York initially won the bid, Amazon later retracted its decision in February, prompted by opposition from members of the New York State Senate.

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Amazon's actions demonstrated their dominance, as New York Governor Andrew Cuomo reportedly pleaded with Amazon to reconsider, personally contacting Jeff Bezos, the CEO of Amazon. Furthermore, an open letter published in the New York Times implored Bezos to change his mind, with Cuomo even offering to take personal responsibility for obtaining state approval for the project.

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The message conveyed by Amazon was evident: they possess control over industries like e-commerce and cloud computing, and their interests take precedence when establishing the rules within Amazon's realm.

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2 - Unlocking Insights from Data Exhaust: The Hidden Treasure of Business Operations

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Amidst the continuous stream of headlines highlighting Amazon's dominant position, there exists a subtle force propelling the disruptive nature of Amazon's impact. Within this lies an exemplification of the intelligent utilization of "data exhaust."

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Data exhaust refers to the accumulation of data generated as a natural byproduct of business operations. Surprisingly, this data can possess a value that rivals the actual business activities or transactions that produced it.

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While the B2C retail sector swiftly embraced Amazon's sales platform in pursuit of lost volume, the B2B realm followed suit. Amazon Business, a relatively new venture, is projected to achieve a staggering $52 billion in sales by 2023. Even for the largest manufacturers and distributors, Amazon possesses an unmatched purchasing power. These insights were presented by RBC Capital Markets analyst Mark Mahaney during a Business Insider session.

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Although Amazon Retail has achieved unparalleled success, capturing over 70% market penetration among the highest-spending households, Amazon Business is replicating this triumph in the B2B domain, but at an accelerated pace, marking their second conquest with remarkable speed.

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Amazon’s B2C Commerce Graph

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Amazon's B2B enterprise boasts an impressive clientele, including 55 Fortune 100 companies, over 50 of the largest 100 hospitals, and 40 local governments serving the most populous areas. Moreover, approximately 80% of the 100 largest educational institutions are already part of this network, and the numbers continue to rise.

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Given the multitude of sellers and buyers within Amazon's ecosystem, combined with their robust data capabilities, Amazon has the ability to construct a B2B Commerce Graph, akin to Facebook's unparalleled "Social Graph." This Commerce Graph contains valuable insights into the connections, behaviors, and profile data of a significant portion of B2B consumers.

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The B2B Commerce Graph offers a comprehensive overview of where money is being spent in the B2B sector, including details on the products, timing, and price points. As this graph expands, the pressure on B2B sellers to join this marketplace intensifies, following the trajectory witnessed in the B2C realm. With access to this extensive and actionable dataset encompassing the majority of B2B transactions, it is reasonable to anticipate a similar erosion of profit margins in B2B, accompanied by the eventual launch of Amazon's own brands in each category.

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While this development undoubtedly brings benefits such as enhanced accessibility, convenience, and cost savings for Amazon's 2 million Business Buyers, it also raises concerns regarding the commodification of B2B brands. This process has already commenced in earnest within the B2C landscape and is expected to have significant implications for B2B branding as well. 

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3 - Added Financial Responsibilities Imposed on Sellers by Amazon

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Amazon's dominant role as a conduit for extensive commercial activity has positioned them with significant power, enabling them to further monetize their platform by imposing tolls for access.

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Operating under a "pay to play" framework, Amazon levies various fees on third-party sellers, either per item or as a percentage of sales. The latter can range from 15% to 20% of the sale price, in addition to listing fees. Special promotions like Prime Day and Lightning Deals incur extra charges as well.

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Moreover, opting for Amazon's Fulfillment by Amazon (FBA) service, where Amazon handles warehousing and order fulfillment, typically entails both listing and fulfillment fees.

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To establish a presence and attract attention on the site, sellers often need to invest in search rank optimization and advertising, which comes with its own costs.

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Advertising on Amazon's platform has emerged as a highly lucrative avenue for the company. In 2018, they reported $10.1 billion in revenue under the "Other" category, encompassing ad services and sales linked to their various service offerings. Interestingly, Amazon does not disclose their specific earnings from advertising alone.

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Furthermore, vying for advertising space can be fiercely competitive, with no guarantee that your ad will be seen by consumers amidst the competition of higher-performing products. This is why working with an Amazon store management company that can run these ads for you can be a great way to stay top of mind as customers carry out searches.

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As profit margins shrink, only a select few manage to rise to the top, commanding the majority of attention. Other sellers find themselves scrambling for whatever foothold they can secure.

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4 - Customer Control: How Amazon Exercises Ownership Over Your Customer Base

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Upon registering as a seller on Amazon, you are presented with two fulfillment options: Fulfillment By Amazon (FBA) or Fulfillment by Merchant (FBM). With FBM, you take charge of shipping products to customers using your own logistics and operational processes. Consequently, you gain access to the buyers' postal addresses (more details on that later).

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Regardless of the fulfillment method chosen, it is strictly forbidden to redirect customers to your own website, no matter the circumstances. The rationale behind this is straightforward: these customers belong to Amazon, not to you.

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Ultimately, Amazon's primary objective is to foster customer loyalty towards their platform, not towards individual sellers like yourself. 

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5 - The Peril of Suspension or Ban: Your Seller Account at Risk

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In the event that you fail to meet Amazon's customer service standards or accumulate a substantial number of negative reviews, you run the risk of being suspended or, in more severe cases, banned. These actions can be initiated abruptly, often due to the rising automation of these processes.

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Moreover, sellers who provide inventory to Amazon wholesale may encounter sudden removal of their product listings. This occurs when Amazon's algorithm, which heavily influences the dynamics between the platform and its sellers, deems that the sellers are unable to achieve profitability. 

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6 - Amazon's Growing Arsenal: A Plethora of Competing Brands Under Their Ownership

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Indeed, Amazon possesses the unique ability to simultaneously serve as a platform provider, partner, and formidable competitor.

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Having mastered the art of facilitating the sale of third-party merchandise, Amazon has gone a step further by persuading consumers to purchase its own products.

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By the year 2022, it is estimated that Amazon's sales from its exclusive brands alone will reach a staggering $25 billion. At present, the company boasts ownership of 139 private label brands and 473 exclusive brands, encompassing a wide array of product categories such as apparel, electronics, food, furniture, healthcare and beauty, household goods, industrial supplies, and pet-related items.

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While some of Amazon's private label brands are explicitly identified with its name, like Amazon Essentials or AmazonBasics, there are numerous "phantom" brands that do not carry the Amazon label. Consequently, many people unknowingly purchase goods directly from Amazon.

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Make no mistake, if your brand has not already faced competition from an Amazon brand, it is highly likely that it will in the future.

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Consider the following excerpt from the Amazon Services Business Solutions Agreement:

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"By using our services, you grant us the right and license to exploit, in any manner, all of your materials, including the ability to use, reproduce, display, distribute, modify, adapt, create derivative works of, and commercially or non-commercially exploit your materials. We also have the right to sublicense these rights to our affiliated entities and operators of Amazon Associated Properties."

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Should a particular product or category demonstrate notable success, Amazon can effortlessly introduce similar offerings under a fresh competitive brand that goes unnoticed. Furthermore, once they identify the products with significant potential, Amazon increases production and elevates their visibility on the platform through advertising.

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In addition, your competition extends beyond Amazon's private label brands; you are also vying with them for a share of customers' spending. It is evident that Amazon's objective is to capture as much disposable income from both their customers and sellers as possible.

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While Amazon maintains that the majority of its sales still come from third-party brands, the expanding presence of their aggressive private label brands raises questions about how much longer this will remain true, as it diverts sales away from independent sellers.

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To compound matters, reports indicate that in September 2019, Amazon manipulated its search algorithms to favor products with higher profit margins. Furthermore, certain divisions within the company pressured engineers to prioritize the promotion of Amazon's own private label products over those of others. 

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Controlling Brand Experience, Data, and Customer Relationships is Key

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It is possible that you find yourself in a scenario where Amazon has swiftly dominated your industry, utilizing its distinct capability to expedite growth by offering your product at a loss. In such a situation, you might feel obligated to sell your products on Amazon since that is where the majority of customers are found. Perhaps you are a wholesaler or manufacturer who is accustomed to relying on distribution channels to generate a significant portion of your sales, as distributors are valuable partners in driving revenue. 

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Relationship with Customers 

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Previously, the terms of service (TOS) stated that contacting customers via email was not allowed. The updated TOS, however, takes a broader approach by prohibiting brands (sellers) from reaching out to customers through any means other than the Amazon Customer Service app.

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This serves as an illustration of Amazon's exertion of its market power to establish complete ownership and control over customers. Considering their immense scale, this poses a significant challenge, as it soon may encompass virtually all customers.

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One aspect that remains unclear in the Amazon TOS is how they handle customers who actively seek out a specific seller/brand and register or make purchases on their own website.

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In light of this, brands are encouraging customers to "register" their product on their own websites and provide personally identifiable information. While this is not an explicit invitation to make a purchase, many express concerns regarding how Amazon might react to such activities in the future. 

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In Conclusion 

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The crucial point to note is that Amazon cannot be labeled as a "bad" or "evil" corporation. In fact, its remarkable achievements since its humble beginnings in 1994 as an online bookseller are truly impressive.

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Nevertheless, while Amazon may not have malicious intentions towards you specifically, their unwavering focus lies in capturing all the profits across various categories for themselves. You are perceived as mere content or a commodity. Consequently, Amazon stands to gain more from the business relationship than you do.

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Hence, it is essential to thoroughly contemplate the conditions and potential consequences before entering into a selling partnership with Amazon. Understand that not only will you receive a lower profit margin from each sale, but you will also face a significant barrier between you and your actual customers.

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If you choose to sell on Amazon or are already engaged in it, exploring the option of direct selling can help you regain some control over your customer base. Dealing with such a colossal company that operates under strict rules and regulations, seize any opportunity available to enhance your personal brand awareness and establish individualized customer relationships.

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When you have ownership of the customer, you possess the future of your business and brand. Amazon recognized this fact decades ago, and their current position exemplifies the significance of such ownership.

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