Unlocking Opportunities: Why Amazon is the Ideal Marketplace
Congratulations! You’ve taken the first step toward starting your own business on Amazon, where you can join over 2 million other sellers in a vast and thriving community. With 310 million active customers shopping on Amazon for everything from the latest books to high-end headphones, trendy socks, essential household items, rare auto parts, and even weird Halloween costumes, there is no better way to reach a large and diverse customer base.
Amazon Seller Terminology
Before we delve into the specific inquiries, let’s take a moment to clarify some terms that you’ll frequently encounter throughout our training:
Amazon Seller (Third-party sellers, Amazon Retail): On Amazon, there are two types of sellers: Amazon Retail and third-party sellers. Amazon Retail has a dedicated buying team that sources products directly from manufacturers and offers them for sale on Amazon. On the other hand, there are over 2 million third-party sellers who also list their products on Amazon. These sellers, known as “third-party” or 3P sellers, constitute the majority of product selection on Amazon and contribute to about half of the sales volume and revenue.
Marketplace: The term “marketplace” refers to the entirety of Amazon’s market, encompassing Amazon Retail, third-party sellers, and all customers who interact on the Amazon.com shopping site.
Seller Central: Seller Central serves as the portal through which every third-party seller manages their inventory, sales, order fulfillment, customer inquiries/feedback, and payment disbursement information provided by Amazon. You can access this portal through sellercentral.amazon.com.
Seller Performance: This is the Amazon organization responsible for maintaining the integrity of the marketplace. They play the role of police, judge, and jury when it comes to monitoring seller behavior. Their responsibilities range from tracking shipment timeliness and addressing customer complaints about counterfeit products to notifying sellers about changing marketplace regulations. Sellers often receive warnings or policy violations from this organization, which primarily communicates with sellers via email. However, some sellers find it challenging to understand the root causes of issues due to perceived lack of clarity from Seller Performance.
Seller Support: This organization offers email, phone, and chat support to sellers seeking assistance and answers regarding their Amazon business.
Customer Feedback: Amazon customers have the ability to provide feedback on sellers from whom they’ve made purchases. It is crucial for sellers to actively request feedback and work towards maintaining a high average feedback score while also increasing the number of feedback received. We will discuss this topic in greater detail later.
Product Detail Page: The product detail page, also known as the product page, represents a single product listing on Amazon. It includes essential information such as the title, brand name, bullet points, product description, price, shipping time frame, and the sellers offering the item. By consolidating all pertinent details on one page, Amazon has enhanced the shopping experience for customers and created a level playing field for competing sellers. As a seller, it is vital to grasp the intricacies of managing the accuracy and completeness of content on the product detail page to provide customers with the necessary information to make informed purchasing decisions.
“Add to Cart” Button & Buybox Algorithm: When a customer visits a product page on Amazon, they have the option to add the item to their shopping cart by clicking the “add to cart” button. Since multiple sellers often compete for the sale of the same item, Amazon employs an algorithm called the “buybox algorithm” to determine the default seller whose product will be added to the customer’s cart when they click the button. We will delve into the buybox algorithm in greater detail later, but it’s essential to understand that sellers striving for business growth must focus on understanding the factors that make them the “buybox-winning” seller. Simply offering products at a low price is insufficient to drive sales on Amazon.
Fulfillment by Amazon or FBA: FBA is a fee-based order fulfillment service provided by Amazon to sellers. Under this program, sellers send their products in bulk to Amazon fulfillment centers, where Amazon takes charge of preparing and shipping individual customer orders. Amazon also handles product storage and customer returns for FBA orders. Given that FBA orders qualify for Prime Shipping and Super Saver Shipping for Amazon customers, this program has become a vital strategic component for the success of most sellers on Amazon.
Amazon Selling Coach Reports: Seller Central offers various customized product reports known as Amazon Selling Coach reports. These reports aid sellers in inventory management and product selection development. However, sellers should exercise caution regarding Amazon’s guidance in these reports. Since Amazon is unaware of each seller’s individual cost structure, these reports do not provide insights into whether restocking or adding the items recommended by Amazon would generate profits for the seller.
Potential Strategic Issues When Selling on Amazon
With that context in mind, let’s explore several crucial strategic considerations you should address before making the decision to sign up and source inventory for selling on Amazon:
The allure of being an online seller: One of the significant advantages of being an online seller is the minimal upfront investment required. You can start selling products without the need for a physical store or a large warehouse. Additionally, you can operate without hiring a large workforce. The online marketplace grants you access to millions of customers who are actively searching for various products, including those similar to yours. However, it’s crucial to understand that while selling online may seem straightforward, without a clear understanding of the processes required for success, failure is a real possibility.
Choosing Amazon as your selling platform: As a new seller, two critical considerations are finding customers for your products and fulfilling orders. With Amazon, you gain instant access to over 270 million customers who browse and shop on the platform. Additionally, Amazon’s Fulfillment by Amazon (FBA) service allows you to outsource order fulfillment if you prefer not to handle it yourself. For many new online sellers, fulfilling orders can be challenging, involving tasks such as packaging and shipping. FBA alleviates these challenges by taking care of product storage, shipping, and even customer returns. While other marketplaces may offer less competition than Amazon, they also have a smaller customer base. Furthermore, no other online platform has developed a fulfillment and customer service program as robust as Amazon’s FBA. Although sellers must pay Amazon referral or commission fees on each sale, the benefits of Amazon’s expansive customer reach, efficient credit card processing, and customer attraction make it an attractive option for many new sellers.
Understanding the Amazon marketplace and competition: Before 1999, Amazon exclusively sold products it sourced from suppliers. However, Amazon transformed into a marketplace by inviting competitors to list and sell their products on its platform. Amazon charges a referral fee for each third-party sale, and sellers willingly pay this fee to tap into Amazon’s vast customer base and benefit from the trusted shopping experience Amazon provides. With over 300 million products available, Amazon offers customers a high likelihood of finding what they are looking for. Nonetheless, it’s essential to recognize that Amazon’s referral fee remains the same regardless of the number of competitors on a listing or the extent of price competition.
As a seller, it’s crucial to:
- Monitor competitors for your products.
- Be flexible and prepared to adapt your product lineup based on competition.
- Track the sales rank of products, as Amazon may consider sourcing items that sell well.
- Recognize that Amazon can be a formidable competitor, but so can other sellers who employ different sourcing strategies or sell products at lower prices.
- Understand your all-in costs to determine your profitability accurately, avoiding price reductions that may result in losses.
- Remember that Amazon is not your partner but rather a current and potential competitor. While you participate in the marketplace, you must adhere to Amazon’s rules and understand the dynamics of the game.
Amazon has specific expectations and responsibilities for sellers, which you need to incorporate into your daily processes when managing an Amazon seller account. These performance metrics are closely monitored to ensure that sellers maintain a minimum acceptable level of performance.
Here are the Key Performance Criteria:
- Order Defect Rate: An order is considered defective if it receives negative feedback, an A-to-z Guarantee claim, or a service credit card chargeback. The order defect rate is calculated by dividing the number of orders with defects by the total number of orders within a specific timeframe.
- Cancellation Rate: The cancellation rate refers to the number of seller-cancelled orders prior to ship-confirmation divided by the total number of orders in a given period. High cancellation rates indicate issues with inventory management and can lead to negative feedback from customers.
- Late Shipment Rate: The late shipment rate is the percentage of orders where the ship confirmation is completed after the expected ship date. It’s important to ensure timely shipment to avoid customer dissatisfaction and potential negative feedback.
- Policy Violations: Amazon notifies sellers of policy violations, performance warnings, and account block or suspension through the Notifications page in Seller Central. Sellers are graded based on their response to these notifications: Good (no unread notices), Fair (unread policy or performance notices), and Poor (unread critical notices requiring immediate attention).
- On-Time Delivery: This metric represents the percentage of packages that buyers receive by the estimated delivery date. It relies on confirmed tracking information provided by the seller.
- Contact Response Time: Sellers are expected to respond to customer-initiated messages within 24 hours. Timely and high-quality responses contribute to good customer service and help minimize negative feedback and claims.
Non-compliance with these metrics may result in negative consequences for your selling privileges, such as account suspension or decreased Buy Box ranking.
It’s crucial to:
- Ensure a low order defect rate by maintaining positive customer experiences and promptly resolving any issues.
- Minimize cancellations through effective inventory management and accurate listing availability.
- Ship orders on time to meet customer expectations and reduce potential claims or negative feedback.
- Regularly monitor the Notifications page for policy violations and promptly address any issues raised by Amazon.
- Provide timely responses to customer inquiries to deliver excellent customer service and maintain a competitive edge.
Performance Targets: To maintain a successful seller account on Amazon, it’s important to meet certain performance targets.
Amazon recommends the following targets for key metrics:
Order defect rate: Keep the rate below 1%. An order is considered defective if it receives negative feedback, an A-to-z Guarantee claim, or a service credit card chargeback.
Pre-fulfillment cancel rate: Maintain a rate below 2.5%. High cancellation rates indicate inventory management issues and can lead to negative feedback from customers.
Late shipment rate: Aim for a rate below 4%. Timely shipment is crucial to meet customer expectations and reduce claims or negative feedback.
Pricing Parity: As a seller, you are expected to offer the same or lower prices (including shipping costs) on Amazon compared to other sites where you sell products. Even if it costs you more to sell on Amazon, it’s important to match or better your total price on Amazon to prevent customers from seeking alternatives outside of the platform.
While navigating your seller account, there are Several Distractions that you should be aware of:
Amazon Selling Coach Reports: These reports provide suggestions and recommendations based on your current inventory. However, it’s important to note that Amazon’s recommendations may not align with your own business goals and cost structures. Carefully evaluate the profitability and demand of recommended products before making decisions.
International Expansion: Amazon may encourage you to sell in other international marketplaces. While there are opportunities, it’s crucial to thoroughly evaluate the operational challenges, such as export issues, taxation, and foreign currency exchange, before expanding into foreign markets. Focus on maximizing opportunities in the Amazon.com marketplace before considering international expansion.
Focus on Success on the following Key Areas
Order Defect Rate: Maintain a low order defect rate to avoid account suspension. Strive to improve your business operations and provide excellent customer service.
Cash Flow: Properly manage cash flow to prevent excess capital tied up in slow-selling inventory. Monitor fast-moving and slow-moving inventory to optimize replenishment and conversion into cash.
Profitability: Create a simple spreadsheet to track costs and sales. Understand your profitability and work towards being profitable rather than solely benefiting Amazon.
Inventory Management: Develop processes to efficiently replenish inventory from suppliers and manage minimum order quantities. If using FBA services, ensure timely delivery of inventory to FBA centers.
In the “Systems” chapter of our training, we will delve deeper into the processes needed to monitor and manage these areas. Pay close attention to these processes, as they form the foundation for effectively managing your Amazon seller account within the dynamic marketplace environment.
If you’re ready to proceed with registering for an Amazon account, we have a few recommended processes to help you get started:
Legal Paperwork: Ensure all your business paperwork is in order before initiating the registration process. This includes information such as your business name, state tax ID, a valid credit card number, and a nearby phone number.
Sales Tax Permit: During your business registration with the state, you may have the option to obtain a Sales & Use Tax Number. If you didn’t obtain this initially, visit your state government website to obtain a Sales Tax certificate and number.
Sales Tax Payment: Once you have a Sales Tax number, your state government will assign you a payment schedule, typically monthly, quarterly, or annually. The frequency of payments is usually determined by the expected sales volume you provided during registration. Higher sales volume may require more frequent payments.
Suitable Initial Products: Identify a handful of products that you can list immediately upon registration. It’s crucial to check if these products fall under restricted categories that require ungating or permission to sell. Many sellers realize after registration that their products need approval, causing unnecessary delays. Avoid this by checking beforehand.
Product Images: Verify that you have product images that meet Amazon’s image requirements. If you have inadequate images, consider reshooting them before registration. Having the right product images ready will enable you to create listings promptly after registration.