Is Amazon Against Its Merchants?
Smaller brands selling on Amazon may stand a chance of competing with more prominent brands, but do they have a shot when it comes to competing against the one brand that stands tall above them all, Amazon itself?
The recent lawsuit, the People of the State of California v. Amazon.com, raises concerns about a level playing field in the online marketplace. In the world of commerce, a level playing field refers to the concept of fairness, in which each player has an equal chance to succeed by following the same rules. Amazon is no exception to the rule. This article seeks to provide all the context required for Amazon merchants to decide whether or not the benefits of selling on Amazon outweigh the costs.
The People of California vs. Amazon
On Wednesday, September 14, California filed a lawsuit against Amazon.com, alleging the eCommerce giant was in violation of California’s Cartwright Act and the California Unfair Competition Law (UCL). The Act prohibits trusts from creating or carrying out restrictions in commerce, while UCL prohibits false advertising and illegal business practices. In other words, Amazon is being accused of violating antitrust laws by blocking price competition and pushing up consumer prices. Essentially, Amazon imposed agreements at the retail and wholesale level that prevented effective price competition across various online marketplaces and stores, claiming such agreements improve customer experience.
The deception stems from Amazon’s attempt to lead consumers to believe that they are getting the lowest price possible because Amazon “coerced its third-party sellers and wholesale suppliers to enter into anticompetitive agreements on price,” as stated by California Attorney General Rob Bonta. What’s more, this is not the first time Amazon has been accused of enforcing an anticompetitive cycle. Earlier this year, according to NPR, “a judge dismissed a similar lawsuit that was filed in Washington, D.C., though the city’s attorney general has appealed.” Moreover, these anticompetitive agreements not only make it increasingly difficult for rival online marketplaces to compete but also for Amazon merchants to compete with the eCommerce giant itself.
Drawbacks of Selling on Amazon
Like all things, selling on Amazon is comparable to a double edge sword. Of course, the platform allows smaller businesses to access millions of online shoppers, but such a privilege does not come without drawbacks. There are five chief disadvantages of being a third-party merchant selling on Amazon: heightened competition, the ongoing battle with sellers who counterfeit products, profitability from a margins standpoint, a power disparity, and a lack of rich competitive data.
1. Heightened Competition
As previously mentioned, third-party sellers not only have to compete with bigger brands that operate at a much larger scale with more resources, but they also have to compete with Amazon. An investigation conducted by Reuters found that the “everything store” has even rigged its search results algorithm to promote its own brands. What’s more, Amazon’s anti-competitive practices brought to light in the recent lawsuit make it more challenging for third-party sellers to compete with Amazon-branded products. Amazon’s continued downward price pressure forces merchants to accept lower margins to compete, most of which can’t afford to do so. As a result, merchants are disadvantaged because no matter how low they price their products, Amazon can appeal to more customers as it can afford to price its products even lower.
2. Counterfeit Products
Product counterfeiting is nothing short of a form of consumer fraud. Amazon merchants are increasingly fed up with competing with sellers who counterfeit their products and sell them at substantially lower prices on the platform. Often made of inferior quality, such products have the utmost potential to damage both margin and brand reputation. Although Amazon prohibits the sale of counterfeit products, given its low barriers to entry, there is a proliferation of such products on the platform. Despite its latest efforts to weed out counterfeiters from its website, third-party sellers must take into account that Amazon keeps a generous share of any sales made from counterfeit products.
3. Profitability Margins
It’s common knowledge that selling on Amazon comes at a price, and that price is called referral fees. Amazon has been accused of exploiting its position as a gatekeeper to impose increasing and unfair fees on third-party sellers. A 2021 report from the Institute for Local Self-Resilience found that in 2021 alone, Amazon amassed $121 billion in proceeds from sellers. What does this mean for brands selling on Amazon? From a margin standpoint, such fees can potentially bankrupt sellers while generating colossal profits for Amazon. From a profitability perspective, being a third-party seller on Amazon also means giving up the possibility of cross-selling and upselling since the platform’s search engine often recommends products from other brands. Another study cited in Forbes, from eCommerce Fuel’s State of the Merchant report, found that brands selling primarily on Amazon had lower margins than those selling on their own stores.
4. Power Disparity
Amazon’s eCommerce dominance means that small businesses don’t have much choice but to rely on its online marketplace to reach consumers. However, many third-party sellers are acutely aware that marketing their products on Amazon also means giving up control over storytelling, merchandising, and branding. Such a loss of control is challenging for sellers, especially since Amazon is both their digital landlord and direct competitor. According to CNCB, Amazon has been accused of using “its power to squeeze the merchants that sell on its platform.” As such, the eCommerce giant’s double role of selling its own products while simultaneously running a marketplace for third-party sellers creates a conflict of interest in which the sellers are perpetually threatened by the financial burden of an account suspension.
5. Lack of Competitive Data
Given that Amazon has access to unfettered data ranging from customer information to individual sellers and product knowledge to transaction details, merchants are presented with yet another disadvantage. In contrast, Amazon itself has the ultimate advantage when it comes to market intelligence. According to the Wall Street Journal, Amazon has been accused of using and exploiting data from third-party sellers on the platform to create similar products that are sold at lower prices for its own benefit. Rich customer data can be the difference between selling more as it provides merchants with the information they need to personalize their products. Unfortunately, for third-party sellers, customer data is a black box.
Benefits of Selling on Amazon
Despite the drawbacks listed above, given that Amazon is the leading online retailer, raking roughly 60% of all online retail purchases in the US last year, as reported by Pymnts, brands simply cannot afford not to sell on the platform. However, the exposure they receive just by having their products listed on the platform may very well outweigh the shortcomings.
In an effort to compete with Walmart, Amazon has been rolling out a slew of features aimed at keeping suppliers and encouraging customers to come back for more. For instance, during the recent Amazon Accelerate conference, Amazon announced three new marketing solutions to help direct-to-consumer DTC eCommerce merchants reach Amazon shoppers.
According to Pymnts, “Among the tweaks aimed at wooing D2Cs to sell and fulfill orders on the world’s biggest eCommerce platform are a new free email messaging service as well as improved Amazon analytics and greater cohesion with the one-click purchasing and delivery system that dominates the spending of its 200+ million Prime members.”
Though still in beta with the intention of being rolled out in 2023, the new targeted marketing emails Amazon offers to third-party sellers will allow them to send emails to customers that have already purchased from them. The eCommerce giant is also testing a new Buy with Prime Amazon badge within individual brands’ stores. Peter Larsen, Amazon’s Vice President of Buy with Prime, said:
“With the launch of Buy with Prime, sellers have begun to increase conversion by offering shopping benefits that millions of Prime members love and trust — including fast, free delivery and a seamless checkout experience.”
A Chance to Win
Is Amazon against its own merchants? Probably not. It is, however, a business and its main goal is profit. Sure, Amazon can work wonders in terms of providing third-party sellers significant product exposure and allowing them to compete with the big boys. But, they must remember that Amazon is the biggest boy of them all, and trying to compete on price with Amazon is extremely challenging, especially when it doesn’t want to share its wealth of consumer and seller data.
Just because Amazon doesn’t want to share the bulk of its eCommerce data with third-party sellers doesn’t mean they can’t access it elsewhere. Third-party sellers can leverage third-party Amazon optimization seller software that provides the Amazon data analytics they need to be able to compete with Amazon-branded products. DataHawk, for example, gives sellers access to Amazon SEO, product, market, ads, and finance analytics so that they have a chance to compete against Amazon products on the platform.
These kinds of software services also offer a variety of tools to help third-party sellers beat Amazon at its own game. Such tools include Keyword Rank Trackers, Sales Rank Trackers, ASIN Trackers, BuyBox Trackers, Profit and Loss Trackers, Sales Estimator Tools, Keywords Research Tools, and Listing Optimization Tools, among others.
In an eCommerce utopia, every seller would find success selling directly to consumers themselves on their own platforms where they don’t have to compete for the digital shelf, where they have access to their customer data, where there are no counterfeit products, and where they have an opportunity to have high-profit margins.
Unfortunately, in the real world, those things are far more difficult to maintain, let alone achieve. Therefore, there is a price to pay to get a constant stream of consumers. That is exactly what third-party sellers sacrifice to have their products on Amazon.com, even if that means competing with the platform. On the bright side, thousands of brands, both large and small, have found success on Amazon. However, only now is Amazon realizing that it has to tread lightly and that it has to establish a level playing field in the online marketplace. After all, Amazon needs the support of its retailers because, without them, the platform wouldn’t be as successful as it is today.
In sum, do small brands have a shot at competing against the eCommerce giant that is Amazon? In short, yes. Given the stakes, eCommerce merchants must ask themselves the following questions, do the benefits of selling on Amazon outweigh the costs? Does the platform’s algorithm favor its own products? Do smaller brands have the resources at their disposal to stand a chance? Knowing the answers to these questions and having an arsenal ready to go into the Amazon competition battle can be the difference between a profitable eCommerce business and one that tanks.