Comparing the Majors – Amazon, eBay, and Etsy

Where Do You Shop Online and Why?

Putting your buyer’s hat on for a minute, where do you go when you want to buy something online? If it is a specialty product, say lumber, you probably go to the website of your major box store – Home Depot, Lowes, or your regional store of choice. If you want used items, say a used laptop computer, you may start with eBay or Craigslist depending how close you are to sellers. But for many items, you will start with Amazon, even if you decide to purchase the item elsewhere. Why? For many people, they use the extensive Amazon reviews and ratings to learn about products. Other people like the lenient return policies and customer warranties offered by Amazon. For Amazon “Prime” members, the idea of “free” shipping increases their loyalty to that marketplace.

As a seller, what are the tradeoffs you face in choosing which marketplaces to sell through. In this post, we will provide you with some key information about selling on each of these marketplace – based on actual experience spanning almost a decade. From the start, we will point out that it is not an either/or decision. You may want to sell on a given marketplace simply to maintain a placeholder against your competition.

Amazon – the Growing E-Commerce Giant

Let’s start with the elephant – Amazon. When people ask us about our experience selling on Amazon, the first insight we offer them is: they are no longer your customers, they are Amazon customers, you simply ship the products to them and provide free customer support. This sounds OK, but what does this actually mean for you as a seller. In concrete terms, this means Amazon will give buyers your products and cash to protect Amazon’s reputation. This always confuses new sellers but you can ask any experienced seller on Amazon (or you can read their posts in the Sellers Forum) and they can tell you all sorts of scams that they have experienced such as:

•  Someone ordered using my credit card and shipped it to my house, but it wasn’t me, really – full refund please
• Yeah, that’s my name on the signed receipt, but that’s not my signature – I never got it so I’d like a full refund (and I’ll keep the item thank you)
• I didn’t really mean to order 10 of those items, I only wanted 1 but didn’t notice until after I received them – refund 9 items please – oh yeah, I’d like to keep them all as they’re nicer than I expected
• I thought shipping was overnight and free even though your listing said up to 5 business days for delivery.  It arrived in 2 days so I want a credit for the shipping (even though to the total price was less than the Prime item)
• I ordered the black colored item, you shipped the black colored item, but I really wanted the white colored item – please exchange it for free
• I’m shipping this box of old used books back even though I ordered and received a lamp from your company. The tracking data on your prepaid shipping label shows the items were returned so hurry up with that refund
• This product is a piece of crap…oops wrong seller but too bad anyway as I don’t want to bother to correct my feedback
• If you don’t give me free a) shipping, b) upgrade, c) discount I’ll give you bad feedback (the smart scammers don’t phrase it so obviously)
• Yeah, OK, I used it for 2 years (yes, years) but I’d like to return it as I don’t want it anymore. Sorry about the damage but I’d like a prepaid return label and a full refund. Or, we’ve actually had buyers bluntly admit – “I only needed for a holiday party so now I’d like to return it.”

When prospective new Sellers hear these, and many other variations on these scams, their first reaction is “if it’s so bad, then why do you still sell on Amazon?”  Of course, any online retail sales channel will share some of these problems.  What is different is how strongly the marketplace protects the sellers when these situations occur.  To answer the question,  many Sellers do quit Amazon, but the more complex answer is Amazon can provide higher sales volumes but don’t expect to make money.  The challenge is whether you can break-even on Amazon.  What? Just break-even?

Generating a Sales Plan is Easier when You Have Actual Sales Data

Let’s return to the core challenge: the Buyers are not yours!  Let’s pretend for a minute that you are Amazon.  You’re watching (more correctly, your computers are monitoring) for any products that start to sell really well – it could be the latest fad, the product provides an innovative breakthrough, or it’s just a brand new product that really addresses an unmet need.  The chart shows rapid growth – in fact the sales numbers are so good, they pass an internally defined threshold.  Time to take a closer look.  Remember, as Amazon, you have all of the sales data – who bought what, when, what other products they looked at, what feedback you provided, and how all sellers combined for that product are performing.  Aggregating data across multiple sellers provides insights that a single seller’s data cannot provide. One can develop a much better feel for the market and isolate what particular sellers are doing well that allows them to differentiate from their competitors.  This provides Amazon with critical data that normally could not be obtained from your competition.

The sales volume looks good, but are the sales profitable?  Amazon already charges Sellers 15% (higher if you count all of the additional fees) of their gross sales, so the margins must be greater than that.  Time to check in with your buyers in China – track down this product and get us some price quotes.  Wow! If we order 10 shipping containers a month, we can get really great prices.  Let’s set up one of our Amazon “partners” to sell this product.  We’ll help by boosting their position in the search results, placing ads against the existing sellers with explicit price comparison, and offer free shipping.  Since we have the sales data, no need to guess,  we know which warehouse location where we need to inventory our items.

Sound farfetched? Major office products suppliers used to sell on Amazon until Amazon realized – hey, these guys have a good business and now we’ve got their customer list.  As a consumer, you may be thinking, we’ll those guys had it coming, overcharging us for x, y, and z.  Maybe, but put your prospective Seller’s hat back on again.  How would you react if you build up a business over a period of years only to have someone use your own sales data to determine whether to compete directly against you?  Your own data shows them which product sell at which prices to which areas of the country and what other products are likely to be purchased at the same time.  That is one reason why you saw a lot of large retailers drop Amazon after they came to realize what was actually happening. 

Unlike any of the other marketplaces, Amazon may become your direct competitor.   Therefore, even if you make money, if you are selling in a product category that is large enough to catch Amazon’s eye, you may suddenly find your business crushed by a new competitor. 

Viewing Amazon as a Lead Generator

One way to look at Amazon is as a lead generator for your own sales channel.  Since Amazon takes a minimum of 15% off the top (this includes both the product and shipping), you can discount your products 15% and make the same profit as a sale that occurs on Amazon.  While many Buyers will not leave Amazon to make their purchases, for a good price a lot of people will.  15% off the top is usually enough for buyers to at least think about buying direct especially since it the same product coming from the same warehouse but 15% cheaper.  If you reposition Amazon as a marketing cost instead of a profit center, then you can profit from direct sales while keeping your marketing costs to breakeven or possibly even a small profit.  Therefore, your own sales channel must provide the Buyer will a compelling value to get them to make the jump.  This means, lower price, same return policy, same shipping speed, and possibly even product upgrades.

OK Smart Guy…What’s the Answer?

Based on our experience, there is a seller profile that can do well on Amazon.  By “well”, we mean 1) use Amazon to help block competitors, 2) generate leads for direct sales, 3) make a small profit through Amazon sales.  Here are our recommendations:

1. Operate multiple warehouses to cover your major US sales regions – Northeast, Southeast, Central, Northwest, and Southwest.  To be more specific – you will need warehouses within 2 shipping zones for the major carriers – Fedex and UPS.  This allows you to compete on delivery time, but more importantly shipping costs.  Your regions may vary.  For example, if you sell products related to ranching, you probably don’t have many sales in the urban Northeast.  If you sell general consumer products, however, you will need better coverage.  The objective is to be able to match Amazon delivery speeds at the same or lower price.  “Fulfillment by Amazon” is usually not profitable for most, but not all, sellers – run the numbers yourself to see whether it makes sense.  Just remember, Amazon, can, has,  and will change the rate structure at any time when they want to bump up their profits.
2. Manage shipping costs – Amazon obtains fantastic discounts with the shippers.  Despite the fact there is no “free shipping” Amazon works hard to get buyers to believe that myth.  For many sellers, shipping costs can exceed the actual cost of the product.  We use shipping analysis software to examine all shipping charges for accuracy. We often capture significant refunds from shippers due to numerous billing errors.  More importantly, we take our contract negotiations with the carriers seriously and negotiate carefully for the discounts that are meaningful to our shipping profile.
3. Do not sell items that can be shipped by mail directly from China.  The USPS subsidizes postal rates for Chinese sellers.  It can be cheaper for a seller to ship something from Hong Kong to Chicago than a US-based seller to ship the same item from Los Angeles to the same destination.  The marketplaces try to prevent this by placing items with longer shipping times lower on the search results, but you may suddenly find your business competing with a new offshore competitor.  For non-destructible items that are lightweight you will find that these sellers will drive down prices as many buyers don’t look carefully at the delivery times or they may not care that it takes longer to arrive.
4. Assume your supplier will also ship directly to Amazon’s warehouses and price accordingly.  Negotiate for exclusive product features even if it is for a specific time duration only.  In China, there are no rules, so you can assume that the best you can do is delay when your competitors will order the same products you’re selling.  Plan on it and prepare for price cuts when that occurs.  Maintain a good relationship with your supplier so you can be alerted when a new player enters your market.  Amazon is aggressively courting manufacturers with this model (Amazon – you don’t have to learn English or the US marketplace, we’ll be your US sales channel just keep our warehouses stocked).
5. Expect Amazon profits to be about break-even at best.  Their lenient return policies come at your expense and more and more buyers are willing to take advantage of that.  Recently, Amazon implemented their “automatic returns” which means they issue a prepaid return label on “your behalf” to the customer so they can return your items. Of course, Amazon charges you for this service (another markup). Historically, Amazon has never made money on product sales – for some reason shareholders assume that even though Amazon loses money on every product sale, they are going to make it up on volume.  In reality, once consumers get used to certain price points, it’s very hard to get them back up.   Amazon currently makes most of its money through seller commissions and other services (AWS – computer services) to cover for their losses on most product sales.
6. Don’t place your entire catalog on Amazon – just enough to capture buyer’s interest.  The goal is to capture leads not to make Amazon money and alert them to your profitable products.  Protect your core business.  Some companies even use Amazon as a liquidation channel – selling off items at a huge discount to generate sales traffic outside Amazon’s reach.
7. Offer services bundled with your products so you can maintain a relationship with the customer.  For example, if you sell bar coders AND the software to manage inventory, then you have a reason to reach out to customer periodically with product updates.  This can also make it more difficult (unless you are simply reselling someone else’s off-the-shelf software) for competitors since you are essentially providing what are essentially custom solutions.
8. Consider direct mail, not email, campaigns.  Amazon prohibits follow-up contacts with “their” customers through email.  However, you may find direct mail promotions can achieve similar results.  Of course, direct mail costs more but you have the mailing list already.  This approach only needs to be done with Amazon-only customers.

eBay – the Aging Standby

Etsy – Artsy, Crafty, but Now We’re Publicly Traded