Selling on Amazon: Risks for Business Startups



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Here are now to be taken on the risks that start-ups should pay attention to when selling on Amazon Marketplace.

Selling on Amazon: Risks for Business Start-ups Selling on Amazon: Risks for Start-ups

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Here writes for you: Markus Fost is the winner of the Vendor Award and in business development as well as a member of the Management Board at metabo. Profile

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Risks in the strict sense

Overview

In addition to the opportunities mentioned, the Amazon Marketplace also carries a lot of risks, which the business founder most likely can not recognize at first glance. This often leads to problems that are threatened with existence.

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To address these threats, the author will address the most serious risks within this chapter. A description of all existing risks "can not be guaranteed in this chapter for the reasons mentioned above.

Maximum price transparency

Overview

What is a blessing for customers can be a curse for the provider. It is clear that the Amazon Marketplace offers maximum price transparency compared to other sales channels.

The advantage that on the one hand numerous customers are attracted and that Amazon perceived as attractively priced marketplace automatically brings with it the disadvantage that the potential business start-up will hardly be able to sell an identical product at a higher price.

Competitive prices

Overview

In an online shop this is somewhat more possible, even in the stationary trade even common practice. Therefore, it is to be assumed that the salesperson immediately breaks the sales as soon as he is no longer in an exporting position with his product. The possibilities to deal with this problem were discussed.

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However, the entrepreneur must be aware that the success depends decisively on the product selection and on the procurement sources. Thus business models have little chance of success if products can not be procured at competitive prices. The reason for this could be, for example, that existing competitors were already able to establish themselves with high quantities of waste.

Deficient differentiation strategies

Overview

By trading on the Amazon market, the founder of the business pays a certain risk, which applies to all marketplaces: a limited possibility of differentiation.

Due to the high standardization in the product presentation as well as the handling of transactions, the focus of the customer is almost exclusively on the product. The dealer remains behind and is hardly noticed.

Lack of branding

Overview

These factors, as well as the limited presentation possibilities of the product do not promote the establishment of a brand. If the entrepreneur starts out as a pure distributor without marketing proprietary developments, brand building is not quite as essential. In addition, every entrepreneur who sells exclusively through the Amazon Marketplace must be aware of this.

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Thus, a strategy can be quite useful to use Amazon as the sole sales channel for the start-up of business, but later to supplement the business model with additional sales channels, such as an own online shop, a wholesale distribution or even a stationary trade. This also leads to a reduction in the dependency on Amazon.

Dependency on Amazon volume

Overview

If the entrepreneur's business model is based solely on distribution via the Amazon Marketplace, then it automatically enters into a strong pendency. With regard to future changes to the commission model or the general terms and conditions, the founder gives himself an actually incalculable risk.

For example, Amazon's Marketplace retailer is automatically subject to changes such as the obligation to respond to customer requests within 24 hours on 365 days a year.

Threatening exclusion

Overview

If the dealer does not stick to it, the exclusion from the Amazon sales platform threatens him. As long as this is pending, the entrepreneur must be able to ensure that all Amazon policies, as well as the given benchmarks, are adhered to in the customer statistics.

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In practice this is quite feasible, provided the founder shows a professional organization and handling right from the start. Nevertheless, depending on the stock risk, the founder should consider whether the dependency should be reduced in the medium term by setting up additional sales channels.

High sales fees require high-margin products

Overview

Amazon's variable sales fees vary between 7 and 20 percent depending on the product group, see Figure q in the Appendix. There is also a fixed sales fee of EUR 0,99 per item sold. The latter fee does not apply if the "Power" sales tariff is chosen, which causes costs in the amount of EUR 39,00 per month.

Figure 17 shows pricing for the Amazon Marketplace using two examples. These are based on the premise of the "power" sales tariff, since the basic tariff for serious business start-ups alone will not be considered due to the limited listing and evaluation options.

Selling on Amazon: Risks for Entrepreneurs 1

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In the left price example from the picture the customer book for EUR 100,00 plus EUR 3,00 shipping costs is sold. The existence-creating Marketplace dealer is subject to VAT and has already paid the monthly fee for the "Power" tariff. The payout from Amazon in this example amounts to EUR 84,59 of which the Marketplace dealer must pay the shipping costs, as well as the internal process costs.

In the example shown in the figure, an MP3 player is sold to a customer in France for EUR 150,00 plus EUR 7,31 shipping costs. Since in this example the commission is only 7 per cent and the assumption is made that the dealer is liable to VAT, the payment will be EUR 146,30, from which the shipping costs to France and the internal process costs of the entrepreneur must be contested. From the two examples it becomes clear that the distribution on Amazon tends to be more likely for products with higher margins. In any case, founder in his business model has to thoroughly check whether this can work with the sales fees of Amazon profitably.

Conflict of Interest Amazon vs.. MarketPlace dealer

Overview

Another risk for the business founder is the conflict of interest between Amazon itself and the Marketplace dealer dar. The entire strategy of Amazon is designed for strong growth, which can only be accomplished by the product catalog in the marketplace steadily increased. The fact is that the growth of the past few years without the introduction of the MarketplaceConcept, would not have been possible.

From the aluminum plate to the toothbrush, almost all consumer goods are now available on Amazon. In this case, Amazon itself is primarily responsible for products that have a high sales volume. In product terms, on the other hand, Amazon likes the precedence of the market dealer.

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Kanibalisierungsgefahr

Overview

Amazon's buyers are, of course, also the sales figures of such niche products, so that Amazon can always begin the direct sales of these articles as long as they can agree with the manufacturer of the product and agree on a supplier contract.

The fact that end customers trust a ceteris paribus more directly than a volume trader can lead to a cannibalisation of their sales. In the event that the vendor has no exclusive rights to the product, the vendor has no chance to take action against this practice.

In addition, Amazon and other vendors may use proprietary images, videos, and product descriptions for their own distribution activities as a result of the transfer of the unrestricted right of use of the content specified in the Terms and Conditions.

Exclusion from selling on Amazon for lifetime?

Overview

The risk of exclusion from the sale on the Amazon platform due to a breach of the local company's guidelines or the unsatisfactory set of targets set by Amazon is one of the biggest risks to the entrepreneur.

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If the exclusion is based on one of the above-mentioned causes, it is almost impossible to get this decision repealed.

The entrepreneur has also no possibility to open another seller account since Amazon automatically checks whether newly created accounts are connected with an existing blocked account, in some form.

Here the company name, the address, telephone numbers, bank details and even the IP addresses including the MAC address of the computer are compared. If the Amazon system recognizes that these parameters match, the previously created seller account will be closed immediately.

Disability lock due to lack of targets

Overview

If Amazon's goals are not met, the Marketplace account will be reviewed similar to policy violations. In such a review, Amazon reserves the right to withhold any payouts up to 90 days temporarily. At the same time, Amazon expects that incoming or pending orders will continue to be processed.

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Since the sales proceeds are distributed in the 14-daily rhythm, a considerable payout sum may have accumulated during this period. The retention of this payment for 90 days can inevitably lead the entrepreneur into insolvency if he has low liquidity and needs these calculable cash flows.

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  1. Melanie

    Thank you for your great contribution! I've really enjoyed reading it, your writing is just great.

  2. Norman

    Very informative series on eCommerce, thanks for that.

  3. Peter

    Something does not work with the commentary, I had to start several times over.

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