Selling through Amazon: Bad for business.


 

amazon

Amazon is a company we all know. The reason we all know Amazon is because of their enormous success. Part of that success was that Amazon is a platform that mediates a two-sided network of third party retailers and consumers. These retailers are often small businesses that use Amazon to gain access to a large audience and become visible.

It seems like a good deal. A small retailer doesn’t have to spend a lot of money on its own website and online marketing. Amazon does it for him and all he has to do is put his products on Amazons platform and ship them as the orders come in. Piece of cake. How this might seem like a smart and easy way to make money, it also comes with a dark side: Many small retailers feel exploited by Amazon and often have trouble generating any profit at all.

The first big disadvantage of selling items through Amazon is that Amazon takes a fee for every product that it sold. This fee consists of a referral fee and a closing fee that are variable and a fixed fee of $0.99 per product (Amazon.com, 2014). This means that, especially for cheaper products, the fee directly cuts a large part of the profit margin and sometimes even turns a profit into a loss.

One would have to sell its products at higher prices in order to cover for the fees that have to be paid. This is, however, easier said than done and this brings us to the second disadvantage: Companies hardly have any brand recognition (Power, S. 2013). If someone asks you where you bought your book, you’ll say “Through Amazon”, instead of the third party reseller where the book actually comes from. This makes it difficult for the seller to differentiate on anything other than price.

On Amazon, the competition between third party resellers can be fierce, but as a retailer you could even be competing with yourself. When you sell through both your own web shop and Amazon, you have the problem that people are likely to find your Amazon shop faster than your regular shop. This is because Amazon has vast resources to invest in their SEO. Even if you would close your Amazon web shop, it would still come up in the search results with the status “Product not available” (Orsini, RO., 2012). This is disastrous for small retailers, because people visiting that page will click through to competing retailers offering substitute products.

These are just three out of many negative same-side network effects (Li, T., 2014) that small retailers face when selling on Amazon. The sad thing is that most retailers do not have a choice but to sell through Amazon. Otherwise they cannot keep up with competition. Do you think that Amazon is playing a fair game? Or are they just viciously exploiting small business owners?


Bibliography

Amazon.com (2014) Fees and Pricing, http://www.amazon.com/gp/help/customer/display.html?nodeId=1161240, 13 October 2014.

Li, T. (2014) Information Strategy Session 7: Platform Mediated Networks, [lecture to Msc Business Information Management] Erasmus Univercity Rotterdam, 13 October 2014.

Orsini R.O. (2012) How Amazon exploits small online retailers, http://www.dailydot.com/business/how-amazon-exploits-small-online-retailers/, 13 October 2014.

Power, S. (2013) Why Amazon Is Bad For (Small) Business, http://www.huffingtonpost.com/steven-power/why-amazon-is-bad-for-sma_b_3427279.html, 13 October 2014.

Advertisements

3 responses to “Selling through Amazon: Bad for business.”

  1. wendy091027 says :

    Amazon provides a fair playing field for both consumers and third party retailers. Let’s weigh in on the pros and cons of having Amazon as an intermediary.
    Using an analogy, Amazon can be regarded as a Bank providing a service. By connecting consumers and third party retailers it is unsurprising for Amazon to charge a fee. This is similar to the fee charged by Banks as they connect borrowers to lenders. In the finance world, Banks charge a fee for providing expertise, lowering transaction costs and most importantly dealing with asymmetric information. These main functions of a Bank are extremely important in an economy and thus accounts for its very existence. The same arguments may be applied to the existence of Amazon and the benefits it provides to justify its high fees.
    Through this analogy, we can better understand why and how Amazon is able to implement such high fees on third party retailers. Just like a Bank, Amazon is able to counter the problem of asymmetric information. As mentioned in the passage, most of these third party retailers haven’t been able to establish a brand for themselves and thus the quality of products remains unknown to customers. To prevent adverse selection similar to the Lemons problem (Akerlof, 1970), Amazon has actively encouraged customers to rate products that they have purchased. This acts as a signal to other potential buyers of the product quality. In terms of transaction costs, Amazon also provides several modes of payment which are convenient and secured for both parties. Compared to setting up a private website that provides multiple payment services, Amazon benefits from economies of scale and is thus able to lower its transaction cost. However, whether or not the benefits of lower transaction costs are transferred to consumers or retailers are unknown and less important for this discussion. Last but not least, using its expertise, Amazon is able to better market its products to customers through various means.
    Hence in my opinion, Amazon, like most businesses exists to make profit. Is Amazon playing a fair game? They might not be, but why should they if they don’t need to. In the end, the main purpose of providing a means of connecting consumers to unknown third party retailers efficiently has been achieved. Hence, in a way, Amazon provides a platform for unknown retailers to test their products and may subsequently choose to differentiate itself by becoming an independent retailer.

    Akerlof, G. A. (1970). The market for” lemons”: Quality uncertainty and the market mechanism. The quarterly journal of economics, 488-500.

  2. mowagenaar says :

    I will comment on both the article and the comment.
    I think that Amazon mainly plays a fair game. The fees are not just fees for ‘using’ their platform, but they have different purposes.
    For example, the comment states that Amazon is also providing a bank service and therefore they can charge the third party sellers. This is true, but I think the most value adding service that Amazon offers is their fulfillment service. Especially when a small company wants to sell their products in other countries than the country from where they’re operating. Selling through Amazon in a different country can actually be really convenient to start. Amazon takes care of all the storage and delivery, which can be hard to organize from a different country.
    Another point is that the article states that Amazon will be on top of the search results list, instead of your own web shop through their SEO policy. A way to avoid your potential customers go directly to Amazon, is to higher the price a bit on Amazon and lower the price a bit on your own website. And of course, work on your own SEO policy as well.
    Of course, while Amazon has an enormous market share they have a lot of power which they can misuse as well. At this moment I don’t think they misuse it against third party sellers, and I think, when Amazon will higher their fees too much, there will eventually rise new platforms for third party sellers.

  3. 418489rsm says :

    A lot of small merchants feel that amazon.com competes with them at the same time that they use their website to reach customers. Amazon uses its marketplace to spot new products, test sell them and then exert control over their pricing. Small sellers are attracted to amazon to make use of its vast customer base, but they have to fight hard to compete with them. Although they do get good shipping service and customer base, and thus it becomes a platform hard to resist. They also refuse to discuss its pricing strategy openly. The commission they charge the sellers is as high as 15 % for mobile phones.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: