For the brand executive who finds that her brand is sold on Amazon in a manner not consistent with her intentions or her efforts in other sales channels, the challenge of piloting her brand creates a dilemma: can she course-correct without a decrease in altitude? In other words, can a brand fix problems on Amazon without hurting sales?
The brand may like that its products are getting exposure to 55% of US customers searching for their product 1, and it may also enjoy or even rely on a staple of high sales volume from the channel. However, its product pricing, listing quality and branded feel has suffered on the channel. Product images and descriptions are lacking in quality and quantity while grey market sellers offer product at discounted prices, driving down Amazon Retail offers. All the while, the source of grey market product and the identify of sellers remain mysteries. So in defines The Amazon Problem for Brands. But how did the brand end up in this situation in the first place?
For a brand to take control of its own destiny online, it’s critical to focus on how product is going to show up on Amazon. For brands that develop and execute a proactive, on-going strategy, the rewards can be significant, while failure will be costly.
For most brands struggling to wholly understand and control distribution and representation of their products on Amazon, those brands have only themselves to blame for this Amazon Problem.
Let’s dive into the Amazon ecosystem to provide a better picture of its complexity and nuance.
Amazon’s objective is to become the preferred shopping destination for ALL of the products which their customers are seeking – insights supported by the extraordinary amounts of customer search and purchase data which Amazon collects every day from millions of customer interactions on the Amazon site. Amazon also wants key brands available at low prices, constantly in-stock, and preferably eligible for Amazon Prime (either by being sold by Amazon Retail or a third-party seller using Fulfillment by Amazon “FBA”).
To accomplish these goals, Amazon takes a long-term view: it does not focus on short-term margins, but rather focuses on ensuring that these brands are available on Amazon, either through third-party sellers or through Amazon Retail. The third-party Marketplace (3P) team recruits sellers who can bring the types of product selection which Amazon customers are seeking, while also encourage these sellers to use FBA. The first-party Amazon Retail (1P) team focuses on brands with strong name recognition and the most searched brands The 1P team typically starts by approaching the brand to secure a wholesale relationship. If the brand agrees, then Amazon Retail contractually secures regular inventory of Prime-eligible products. Amazon Retail usually matches the lowest prices that it can find offered by other third-party sellers on Amazon or on thousands of other websites which it scrapes daily. Amazon Retail is generally prepared to lose money on sales if that helps to ensure that Amazon remains a highly desirable shopping destination for that brand.
One critical actuality: both Amazon the company, and Amazon the marketplace are rather efficient at capitalizing on brands’ distribution errors. With barely an exception, anyone with product can start selling products on Amazon – regardless of the ancestry and lineage for the inventory. The Amazon channel offers such a huge potential customer base that distributors and retailers will violate their distribution agreements with brands to become grey market sellers, often using mysterious Doing Business As (DBA) names to disguise their seller names.
Third-party resellers with access to product can set up selling accounts on Amazon within minutes, and start selling items. If the reseller has a direct relationship with the brand, a simple change in the DBA combined with the use of FBA makes it ever so challenging for the brand to identify the reseller. For resellers with no direct relationship with the brand, the brand usually has little ability to push such resellers off Amazon, as Amazon rarely gets involved in distribution-related disagreements between brands and resellers of those brands.
Should a brand decline Amazon Retail’s offer, the Amazon buyers will look for other sources, including distributors, and foreign supply. With the recent launch of the Vendor Express platform, Amazon Retail has become a significant buyer of grey market product – product sourced from distributors and retailers who are very possibly breaking distribution agreements with the brand, all done in a manner where Amazon Retail will not reveal the source of its product to the brand. Amazon Retail may even purposely price below costs initially to push the brand to reconsider Amazon Retail’s offer to buy wholesale product from the brand, all the while that the brand faces complaints from its other channels upset that pricing on Amazon is now so much lower than anywhere else. Further, we have first-hand experience with brands that wholesale to Amazon Retail in one country, finding their products surfacing in another Amazon marketplace even though that contradicts the terms of the wholesaling contracts that they have with Amazon.
Common throughout this, if Amazon decides to target a brand for its marketplace, different Amazon teams each focus on approaches to landing that brand on the site, whether through direct, indirect or diverted sources of supply. Here is the crux of the problem: the vast majority of brands do not have enough control over their distribution to address this Amazon problem. If a company is divided into a brick and mortar channel Sales group and an Ecommerce group, the incentives of those two groups are rarely aligned to encourage that the Sales team to keep an eye out for product being diverted from brick and mortar to online channels. From our experience, most brands knowingly doing business with Amazon (through Amazon Retail or authorized online resellers) are surprised to hear that online sales of their brand are often 25-40% higher than they expected – all from brick and mortar product diverted to online. Because diverted product is usually sold at lower prices, efforts to align online and offline pricing get confounded quickly.
Solving the Amazon problem is a constant battle, but one that needs to start with seven steps:
- There must be aligned sales incentives so the online and offline sales teams work towards the same company-wide goals of stabilizing the brand’s pricing and distribution.
- The brand must implement a clear online reseller / anti-diversion policy that is communicated to all distributors and known retailers.
- The brand must regularly police its distribution channels regularly, and if violations are found, there must be consequences for the violators (such as losing access to the brand, or delayed access to new product, or no access to discounted selection).
Remember that the larger the distributor or retailer, the easier it usually is to go unnoticed diverting a small portion of that channel partner’s inventory to a grey market online reseller.
- The brand may need to implement physical tracking (e.g., serial numbers, batch IDs, RF tags, packaging unique by distributor) to identify channel diverters.
- The brand should remove the incentive for retail arbitragers to buy at short-term sale prices in one channel, and then resell profitably online at higher prices.
- If selling to Amazon Retail, the brand should develop a backup Amazon channel distribution plan should you need to pull the plug on Amazon Retail for any pricing or diverting shenanigans. The brand must take a long-term view to protecting its brand equity – know your distributors and retailers well (domestically and internationally). Maintain regular communication with them.
Creating and implementing a strong Channel Control strategy is one of the keys to a successful Amazon Strategy. To learn more about Channel Control, Marketing, and Content strategies for Amazon, please contact Buy Box Experts.