November 1, 2010, 12:00 AM

Unraveling Amazon

The closer e-retailers get to Amazon the more it can do for—and to—them.

Nearly every day, it seems, there's a new announcement from Amazon.com Inc.: Amazon acquires Woot!, Kindle prices drop, Amazon WebStores are available. What online retailers need to know is: What matters? What Amazon service would be nice to have? What Amazon move threatens you?

It can be tough to sort this out because Amazon, besides competing with other web merchants, interacts with them in three distinct ways. It offers a marketplace on Amazon.com where other merchants sell to the millions of Amazon customers. It offers the option of Amazon Product Ads that can drive traffic to a retailer's site. And Amazon acts as a technology and service provider.

This article will explain the pros and cons of working with Amazon in each of these three dimensions. The bottom line is that there are potential rewards to working closely with Amazon that must be balanced against the risks that come with giving Amazon visibility into your business.

Amazon's marketplace

Many retailers work with Amazon by selling on the No. 1 e-retailer's marketplace, where they can reach Amazon's 95 million active customers. About 30% of Amazon's revenue comes from third-party sellers, that is, other merchants selling on Amazon.com.

It's an attractive audience. But be aware that Amazon values customer service above all things. That makes Amazon customers extremely loyal, but means Amazon holds third-party sellers to high standards. Retailers must be approved to sell on Amazon, and the bar is high.

Fulfillment by Amazon

Fulfillment by Amazon, or FBA, is available to all retailers, whether or not they sell on Amazon. But let's start with retailers selling on Amazon.

Fulfillment by Amazon means that Amazon will store your inventory, receive the order and ship it for you. This provides e-retailers with several benefits:

  • Pick, pack, ship are all covered by Amazon so you save warehousing and fulfillment costs.
  • You're included in Amazon's free super-saver shipping and Amazon Prime, the program that provides free two-day shipping to consumers who pay a $79 annual membership fee.
  • Your status on Amazon (seller rating and positive feedback percentage) is likely to be improved since the shipping experience is controlled by Amazon.
  • You have a much better chance of getting into the elusive Buy box, which means you get the sale when a shopper clicks Add to Cart.

However, some retailers have given FBA the nickname "Future by Amazon" since handing over your fulfillment gives Amazon complete insight into what products are selling, how quickly, how difficult they are to ship, how much space they take up in a warehouse and how likely they are to be returned. Providing so much competitive intelligence could be dangerous, as Amazon could identify fast-selling products and offer them itself.

Doing that would alienate third-party sellers, which Amazon has no interest in doing. But the possibility remains. Relying on Amazon for all your sales and fulfillment is risky. Don't put all your eggs in one basket.

Retailers using FBA without selling on Amazon gain the benefits of Amazon's warehousing and speedy delivery. But they do not get other benefits, such as free shipping for Amazon Prime members or access to the Buy box, since they are not selling on Amazon. Also, Amazon gets to see what they're selling.

Amazon Product Ads

For retailers that don't want to give Amazon access to sales information but want to reach Amazon's loyal audience, there is a happy medium: Amazon Product Ads.

Similar to a comparison shopping engine, Amazon Product Ads rely on the retailer to send in a data feed with pricing information and a URL that directs back to the retailer's site. Amazon charges per shopper click.

There are drawbacks to these ads. Shoppers rarely click on Amazon Product Ads if the item is available on the Amazon marketplace and appears in the Buy box. Further, if Amazon has inventory for a product, it is less inclined to show ads for it.

However, especially when offering products Amazon does not sell, Amazon Product Ads are a quick and easy way to list your products on Amazon without sharing your sales information. And the conversion rates are good compared with comparison shopping engines. Also, if you have higher-priced items that Amazon doesn't sell, it makes sense to pay per click for product ads as opposed to paying commissions for sales on the Amazon marketplace.

Checkout by Amazon

Amazon also offers tools to retailers, independently of whether those merchants sell on Amazon.

One is Checkout by Amazon, or CBA, a way for Amazon customers to pay on your site with information they have stored at Amazon, a service Amazon introduced a few years ago to compete with the similar Google Checkout. Does it make sense to offer Checkout by Amazon to your site?

Pros: Amazon has many loyal customers. CBA makes it very easy for them to purchase on your site, can inspire trust and thus may entice some to convert.

Cons: You do not receive the e-mail contact information of customers who make a purchase on your site. You receive name and address only. Thus, your marketing capabilities are limited.

Retailers should also consider whether CBA would be that big of a draw. Perhaps shoppers are happy with your current payment options. Adding an additional checkout method can be time-consuming, and consumers can become confused by too many options. We've found that a simple checkout encourages sales.

Amazon WebStores

Amazon also recently upgraded Amazon WebStore, its service that hosts the e-commerce sites of other retailers. This is an example of Amazon seeking to have a hand in more e-commerce transactions.

Amazon's first attempt at a WebStore took a retailer's Seller Central listings, or products the retailer listed on the Amazon marketplace, and grouped them under the retailer's name. The fees were hefty at more than 2% with an additional payment processing fee.

The new WebStore is more advanced, offering checkout, retailer branding and much more reasonable pricing. Amazon also offers bundled discounts for retailers that sell on Amazon or use Fulfillment by Amazon.

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