Navigating your options to optimize your bottom line
Over the last two decades, selling on Amazon has evolved iteratively. With each update to the marketplace, the bigger picture can seem a little more complicated. For many online sellers, it can be a challenge to forecast your potential net revenue on Amazon based on fees, surcharges, and other direct costs you may not be familiar with. How does this compare to your owned e-commerce site or traditional wholesale?
We help our clients optimize their businesses on Amazon’s Seller Central everyday. Some are experienced manufacturers trying to maximize their earnings; some are new sellers trying to stake a claim; and others are already wholesale vendors on Amazon looking to make the switch from Vendor to Seller Central. In any case, we assume you’re here because you’re contemplating the business case for Amazon (if you’re not quite there yet, just consider the numbers.).
This article aims to give you a high level overview of how the channels stack up against each other. We built a handy reference table to help you visualize some of the initial costs and profits driving the bottom line for a hypothetical widget. Then, we’ll explore some pros and cons of each channel to help inform your decision making. You’ll probably have more questions as you read; our Amazon consulting experts are always available to discuss more nuances pertaining to YOUR specific business challenges.
An Overview of Options
You may have experience with wholesale or traditional e-commerce retail through your owned channels. So how do your baseline estimates for shipping costs, packaging, and other logistics stack up against selling on Amazon?
This estimate is the starting point for so many businesses, including most of our clients. The following table assumes a generalized, hypothetical widget, weighing 1 lb. in small packaging. Starting with a basic price point and subtracting cost of goods, we proceed to calculate some assumed fees and costs based on Amazon’s current rates in 2019. Of course, these rates can shift, but they provide a helpful baseline.
It’s worth noting right away that Amazon’s Vendor Central platform has changed with time. While it used to be the default model for doing business with Amazon (a wholesale structure that heavily favored small commodities and large brands), it has since become invitation only. It’s likely not even an option anymore for most new sellers. But, the comparison is still helpful to provide a sense of the fees and costs associated with doing business on Amazon.
The best comparisons are truly between Amazon’s Seller Central and the owned channels at your disposal. Notice the net profit per transaction can be very close depending on the fluctuating costs of business. We’ll explore additional differentiators that may inform your choice.
Perks of Amazon Seller Central
Seller Central allows businesses to sell products directly to consumers through the Amazon marketplace. In other terms, you leverage Amazon’s digital infrastructure and gain access to their millions of active shoppers. You set the price and manage the customer satisfaction experience, from managing the posts to interacting with your customers. In exchange, Amazon takes a commission on every single transaction, a percentage that ranges from 10% up to 18% depending on the category.
So is the trade off worth it? For businesses who rely on personal touches and good customer service, the commission to Amazon is worth gaining access to the high volume of active shoppers. Client relations is obviously very important to e-commerce and owned channels so this is a bit of a wash related to SC. Fulfillment by Amazon (FBA) is still an option, meaning Amazon will hold your inventory in their warehouses and take responsibility to picking, packing, and shipping each order. Yes, you’ll incur fulfillment fees, but it means you get the “Amazon Prime” badge with your items and give customers the confidence and expediency they’ve come to expect in their deliveries.
This balance between Seller autonomy and Amazon fulfillment becomes helpful post-transaction, too. When considering channels, we commonly see businesses overlook factors like credit card fraud charge-backs or payment for lost shipments. Through Seller Central, Amazon takes responsibility for both.
Amazon Seller Central:
- Pros: Leverage Amazon’s infrastructure (Web + IT hosting), consumer reach, and fulfillment (shipping time and efficiency) while maintaining ownership of the product, customer service, and marketing
- Cons: Commission paid on every individual sale; Amazon fulfillment fees (FBA); payment cycle is not immediate, but typically deposited every 2 weeks into your bank account; Amazon retains ownership of your customer’s information.
How does that compare to my owned channels?
Beyond the net profits from our example table, the same back-end questions discussed in Seller Central may apply to your calculations for your owned channels. Let’s start with e-commerce retail.
Even though the net profits were close per transaction, selling through your own channels carries risk of liability. For credit card fraud chargebacks and lost shipments, you carry responsibility as the vendor. In addition, you are responsible for the website, IT work, hosting fees, and any development costs. Not to mention the campaigns and marketing that drive your sales.
Owned E-Commerce Retail:
- Pros: Immediate payment upon transaction, total customization of web/retail experience and the customer is yours
- Cons: Liability and responsibility, ownership of all logistics, fulfillment and returns
Although it’s not an apples-to-apples comparison, it’s worth also touching on the additional considerations that may apply to a traditional wholesale model. Bulk-purchases don’t have the same fraud charge-back or lost shipment risks associated, but they carry an extra burden of managing accounts receivable and reconciliations. Furthermore, wholesale vendors typically have significant delays in payment processing, up to net 30 or more.
- Pros: Bulk-purchase volume greater than individual sales
- Cons: management of accounts and reconciliation with buyers, delayed payments, and potential hosting, development, and IT fees
Ultimately, each business must make the best decision for their sales and marketing strategy. For 2019 that strategy usually involves Amazon Seller Central at some level.
That’s where we come in.
The calculations to optimize your engagement with Amazon (and thereby maximize your net profits) can become so granular that margins become razor thin. At the same time, the Amazon engine is constantly changing. We keep tabs on the rates and fees so our clients don’t have to navigate those calculations alone. Our example table is just a starting point, an illustration to visualize some of the factors at play as a snapshot of this market in this moment. And it’s certainly not exhaustive for every consideration your business will make.
In fact, if you are wrestling with the numbers, there are tools that can help expand on our example table. Check out one such Fulfillment by Amazon Revenue calculator here that can “Provide your fulfillment costs and see real-time cost comparisons between your fulfillment and our offering for customer orders fulfilled on Amazon.com.”
Your business will have its own unique equation, factoring in pure economics while balancing logistics, inventory, customer service, marketing, and other holistic factors that influence your bottom line. It’s a common struggle, and the main reason we decided to turn our years of expertise into a consulting service.
We are more than happy to explain more about the differences and similarities we see, or answer any questions you still have over a free consultation with one of our Amazon Growth Specialists. When you’re ready to move forward, be confident in the choice you’ve made.