Selling through Amazon: Bad for business.
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?
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.