Jeff Bezos, Amazon’s founder and CEO, realized early on his site would never be the “everything store” he imagined if it had to purchase and store every product it sold like a traditional retailer. It would need an infinite supply of warehouse space and capital.
Instead, in 2000 the company launched its own marketplace, allowing independent sellers to use Amazon as a platform to offer their goods for sale. It let Amazon become the e-commerce giant it is today and has fueled the company’s staggering success.
While the small- and medium-sized businesses that largely make up that marketplace have been great for Amazon, it’s less clear whether Amazon has been equally great for them. The company has undoubtedly siphoned sales from retailers of all sorts around the US. On the other hand, it has given many entrepreneurs the chance to reach a larger audience than they ever could have otherwise.
But then that access can carry its own costs, too. For individual companies considering selling through the site, there can be some major pros and cons involved.
Here are some of the most notable items on the pro side of the ledger:
The reach is hard to beat
The most compelling reason for any small company to sell on Amazon is because of the sheer volume of customers it draws. Its Prime membership program alone has more than 150 million global subscribers, and more keep signing up. Access to that audience is valuable. From June 2019 to May 2020, US small and medium businesses on Amazon averaged $160,000 in annual sales, according to a report from the company (pdf). In that period, the number with more than $1 million in sales grew 20%. Owners of some small businesses attribute their prosperity to Amazon and there are the occasional stories of sellers who make millions on the platform.
The pandemic has only pushed more shoppers to the e-commerce giant, and the company says sellers on its marketplace are reaping the benefits. During the recent holiday season, sales by third-party merchants, most of them small and medium-sized businesses, grew more than 50% compared to the same period in 2019, it said.
Amazon will handle the grunt work
The tasks of managing a website, processing payments, storing inventory, and picking and shipping items to fulfill orders can be a lot for a small business to handle. Amazon allows sellers to easily sign up, list items, and start selling. For those interested, it will also warehouse and ship items for a fee through the Fulfillment by Amazon (FBA) program it has offered since 2006. These items can also be eligible for Prime, making them more likely to be purchased by Prime subscribers who want the fast, free shipping than alternatives not included in Prime. For a company simply looking to start selling quickly and outsource a lot of the logistics involved in retail, Amazon can be attractive.
It has incentive to support its sellers
Since 2017, sellers on Amazon’s marketplace have been responsible for most of the company’s product sales. Amazon is happy to see them sell as much as possible. The more sales they rack up, the more money Amazon generates. In a recent report (pdf), Amazon said over the course of 2019 and 2020 it invested more than $30 billion in logistics, tools, services, and employees to help small and medium-sized businesses. It also provides assistance such as technical support, loans, and credits for its cloud-computing platform, Amazon Web Services.
As for the cons of working with Amazon…
Sales can come at a high price
In addition to levying a monthly charge on professional merchants and collecting its slice of each sale via a ”referral fee” that can exceed 15% of the price depending on the item, Amazon can also charge a number of other fees, depending on which services a seller uses. Features such as FBA, advisory services to help sellers, and advertising all come at additional cost.
Amazon says these add-ons are voluntary. It doesn’t force anyone to pay for them, and many sellers on its marketplace don’t. But sellers have reported feeling obliged to take part. If they don’t advertise to boost the visibility of their listings, those listings can easily be buried in the deluge of products on the site. If they aren’t part of FBA, their items might not be eligible for Prime shipping. (Amazon has a program it calls Seller Fulfilled Prime that lets merchants fulfill orders from their own warehouses, but so far it seems relatively few sellers have been able to join and meet Amazon’s shipping standards.)
The costs involved in being successful on Amazon can quickly mount. One marketplace seller detailed in 2019 how Amazon kept about half the revenue from the sale of a $15 toy.
There’s tons of competition, including from Amazon
Got a great product you know would sell a ton if you could just get it in front of Amazon’s customers? Get in line. Marketplace Pulse, an e-commerce intelligence firm, estimates there are some 2.4 million active sellers on the platform. They aren’t just small US businesses. Chinese merchants have flocked to the site, some selling goods straight from Chinese factories at prices that are tough to match. If a product is successful enough, knock offs can proliferate on the marketplace too.
And then there’s competition from Amazon itself. The company has launched dozens of its own private label brands that vie with its third-party merchants for customers. They haven’t all been successes, but Amazon has been accused of giving priority to its own labels in search results. Maybe more concerning to many small businesses is the evidence gathered by the Wall Street Journal that Amazon used data it collected on sellers to launch competing products, despite Amazon’s repeated statements that it strictly prohibits the practice.
Amazon has all the leverage
The e-commerce giant may depend on its merchants in the aggregate, but individually they don’t have much power. Sellers say Amazon effectively punishes them if they’re found offering their items for lower prices on rival sites such as Walmart, dropping them lower in search rankings for instance. Many feel Amazon also pushes them to pay for FBA and advertising. Even larger companies such as Tumi, a luxury bag maker, and PopSockets, which produces cellphone grips, have described Amazon as trying to control what they sell as well as how and where they sell it.
The feeling among such sellers is that Amazon squeezes them for as much money as it can with little concern for their interests. Small businesses in particular may feel they have no alternative but to bow any demands if most of their sales happen on Amazon.
There’s no simple answer on whether a small business should sell on the marketplace. Some suggest if you’re a business with unique products and good margins, allowing you to make money even as Amazon takes its cut, you have a better chance of thriving on its marketplace. But then some do well buying random stuff like mouthwash and lipstick wholesale and reselling it on the platform. Results vary greatly, and companies have to decide for themselves whether the rewards are worth the costs. A large number of small and medium businesses feel they are. For everyone else, there’s always Shopify.