What are the different methods of selling on Amazon? - Chapter 4

Amazon Selling - If You Can't Beat Them, Join Them is a book authored by Andrew Tjernlund which will be released as a series of blog posts on AMZHelp.com. If you have any questions about our services or wish to sign up, please reach out.

Chapter 4

What are the different methods of selling on Amazon?

It's not an experiment if you know it's going to work. – Jeff Bezos

Affiliate Sales

Affiliate sales are not really selling on Amazon, but does have a role for many sellers that have an existing ecommerce site and also helps demonstrate another clever way of employing Amazon in a business in a non-traditional way. Affiliate sales are basically commissioned referrals. Traffic is driven to Amazon by an affiliate and upon that traffic purchasing something on Amazon the affiliate is rewarded a commission by Amazon. For example, a makeup blog may introduce a rouge that has just hit the market. That author may not only include links to purchase that rouge on Amazon, but also often applicators and related makeup to complete that “look.” Although slightly more involved than this, essentially, if a reader follows that link and purchases the item the affiliate is paid between 4% and 8% of the sale price.

The upside to using this service is that Amazon handles everything. There is no inventory to handle, no customer service and no returns. Without any liability there is only upside. This is a great way to generate extra revenue for those with a retail websites. Some may offer parts, accessories, obsolete units, stock outs and even competitive products with no fees or inventory.

For example, a seller may offer scientific beakers that they regularly stock that come in various sizes measured in ounces. A competitor may offer similar beakers, but has some in metric sizes. It could make sense to add those metric sizes to a company's catalog to capture more sales from existing traffic without making the sourcing and inventory effort for a non-core product. Similarly, a bicycle manufacturer may offer their products direct and although they receive frequent inquiries, have no interest in offering helmets, gloves, or replacement tires themselves. By adding affiliate links to these products the manufacturer can not only better service its customers, but make a little extra revenue.

Quick note: Do not create affiliate links to listings on which you are also a seller (all following selling methods) as this is against Amazon’s Terms and Conditions and can result in closure of your account.

Fulfilled by Merchant (FBM)

Fulfilled by Merchant is the “standard” way of selling using the Amazon platform. A seller creates a listing for a product or adds their offer (made up of price, available quantity, and item condition) to an existing listing. When a buyer searches for an item and selects a seller’s offer for that item the payment is made and the seller is responsible for getting the item to the customer. It is that simple and for retailers it adds a whole new value.

The genius of using FBM on the Amazon platform is that shifts the typical cost structure of an ecommerce retailer. Traditionally, a seller or brand owner decides they want to sell online and spends a significant amount of money building a site and driving traffic to that site. This strategy require an assumption that all the money spent up front will be more than recouped at some later date because the product, site and promotion are too difficult for customers to resist. Amazon is different. Listings are posted on sites at no charge that already gets hundreds of millions of unique visitors each month. Traffic, the likes of which are among the top sites in the world, comes at no upfront charge. A commission is charged upon the sale, but this concept changes the nature of selling costs from upfront to variable.

Amazon makes FBM simple. One can receive sales notifications by email, by logging into your Amazon Seller Central account or by employing one of many third party software programs to organize your sales information. All FBM payment processing fees are included in the commission and customer management is simplified with a suite of free tools.

FBM is a great way to get a start on Amazon. A seller can literally be up and adding products in a few minutes. For those who are concerned, it can also be shut down by the seller just as quickly. Amazon’s FBM is an excellent way for midmarket firms to expand their customer reach, however, it will require certain new administrative tasks and processes. They will mostly be simple, but are unique to Amazon. Eventually, larger sellers on Amazon only use FBM for items they dropship, special order or items with high inventory costs.

Fulfillment by Amazon (FBA)

Amazon’s FBA program is similar to FBM, but with more services outsourced to Amazon. No longer do FBA sellers deal with basic customer service questions (“Where is my item?”) or any picking, packing or shipping to the end customer. The FBA program was created to allow retailers and brand owners to focus on adding value through their exceptional catalog of products and their ability to acquire or create more great products. No longer were these sellers to be stifled by mundane tasks such as order fulfillment and non-product based customer service questions. The idea was that for Amazon to grow they needed their sellers to be able to scale as well.

On the surface, the only difference between a product that is FBM and FBA is that one is at the original seller’s location and the other is at an Amazon fulfillment center (FC). For an item to be eligible for FBA the actual item must have been sent to an Amazon FC by the seller. This can be done by the truckload or even as a single carton. Once that item is shipped using the Seller Central portal and arrives at an Amazon FC it now is eligible to be FBA and therefore Prime. In summary, the way most sellers make their items eligible for Amazon’s famous Prime service (free 2 day shipping being the feature benefit) is to use the FBA selling method on Amazon.

So, when a buyer sees that an item is Prime what that essentially means is that Amazon has confirmed that the product is in stock at their warehouse and ready to ship. Amazon is obsessed with providing an excellent customer service experience and the key to that is making sure the product is available and ships quickly. Amazon feels more comfortable promising a high level of service when they are in full control of fulfilling that order.

Seller’s using the FBA method can expect three great benefits. First, due to the preference of many shoppers to purchase Prime items (often despite it not being the lowest total cost) most sellers see an increase in sales volume once they move from FBM to FBA. This is particularly true for sellers who compete with other sellers of on a particular Amazon listing. Amazon gives preference for the “Buy Box” position (the offer that acts as the default choice if a buyer were to simply “Add to Cart”) to those offers that are FBA (Prime). Knowing that the item is accurately described, actually in stock and likely nearby gives Amazon confidence that the transaction will leave the customer happy and therefore FBA sellers often control the Buy Box, even when not offering the lowest total price.

Second, Amazon gives a boost in search rankings within Amazon for items that are Prime. Using the same logic as previously mentioned, in a general search such as “shovels” the items Amazon has the most confidence in promoting are those that they fulfill. Again, like discussed earlier, those in competitive categories or with common search phrases will benefit most from using Amazon’s FBA service.

Third, and the most underrated, is the logistics benefits using FBA provides. All orders for FBA listings are automatically picked, packed and shipped by Amazon. Amazon charges for these services, but with Amazon’s extremely low shipping rates it is often less expensive for Amazon to pick, pack and ship than for a seller simply to cover postage on an item. Additionally, Amazon leverages its automated processes to handle all order related customer service including tracking, lost items and returns. Conceptually, one could use FBA to send a year’s of product to an Amazon FC then do nothing at all except collect the payments from Amazon.

To be clear, when using FBA the seller still owns the inventory. Amazon charges small storage fees to discourage inventory languishing at their facilities. The seller also maintains fully pricing power, listing information and an ability to have Amazon return the items back to the seller. More on it later, but in fact, many sellers using FBA to fulfill orders received outside of Amazon. Generally, advanced sellers use FBA to allow their businesses to scale and particularly if it is important that they maintain full control of price and availability (for example: items with MAP pricing).

Vendor Express (VE)

Vendor Express is the introductory way of selling directly to Amazon. To clarify, FBM and FBA are techniques that involve selling on Amazon (the platform) whereas VE and the following mechanisms deal with selling directly to Amazon (now, the retailer). Vendor Express is an open door way for Amazon Retail to add more to their direct sale catalog. A brand or reseller then simply uploads their product catalog via a category specific spreadsheet and, essentially, waits for the purchase orders to roll in. Granted the spreadsheets are gargantuan and there are a variety of Co-Ops, terms and processes to follow, but a seller may really get a purchase order from Amazon the same day they sign up.

Selling directly to Amazon sounds exciting and intimidating to many mid-market companies, but recall from previous chapters the refrain of molding Amazon to one’s strengths. When adding products a seller specifies which products they offer, any case packs or minimums and, most importantly, the price at which they sell the item. Of course, Amazon encourages brands and retailers to give them their best price, but any company that complains after the fact about Amazon asking for too low of a price only has itself to blame.

There are plenty of great benefits for those that choose to sell directly to Amazon Retail (First Party, 1P) instead of FBM/FBA (Third Party, 3P). 1P sellers get weekly purchase orders and Amazon actually takes ownership of the product, like a traditional reseller. Amazon pays on time (usually 2/60, Net 90) and interactions with Amazon are automated. Although Amazon now sets the price for the consumer, a supplier to Amazon can still expect profitable sales by controlling their price as they sell to Amazon.

Perhaps the greatest advantage of 1P sellers is the promotional boost their products receive. Think of it: Amazon now has a major incentive to move these products and bump up the sales velocity. So, not only do listings see a major boost in their search rankings within Amazon once a Amazon themselves starts offering the product, but most sellers see their items enjoying enhanced exposure on the internet at large.

Amazon commits millions of dollars to optimize their product pages for search engines and special enhancements are dedicated to items sold directly by Amazon. Many brand owners and retailers witness the Amazon listing for their items reach the first page on Google for general keywords within a month or two. Therefore, selling via 1P can have the added effect of increasing a company's exposure on the internet at large.

All in all, selling 1P via VE furthers the outsourcing position of a business. The same outsourcing of customer service and fulfilment exists as with FBA, but furthermore promotion, inventory management and sales are automated for the VE seller. However, this comes at a cost. Replacing the commission found with 3P selling are typically a variety of standard Co-Op agreements--in other words: discounts). These range by product category, but are roughly equal to 3P commission levels (10%-14%). These are stated to cover damage, freight, and marketing. What they mean to VE sellers is: no returns, Amazon covers all freight costs to their FCs and additional boost in the promotion of your products.

The Co-Op fees can be costly, but they do provide benefits that may make part of a brand or retailer’s line particularly attractive for this method. Items that are massive or susceptible to returns may allow some 1P sellers to get their money’s worth out of these discounts. The only major downside to selling on VE is the preparation processes required to work with Amazon’s automated systems. In short, these include special labeling, packing and shipping to many FCs each week. All of these actions must be done within the VE platform (short of a major EDI integration) and is not limited to Advance Ship Notices, Invoicing and Chargebacks for errors. Once practiced, these processes can be mastered, but like all major initiatives there can be a costly learning curve.

Vendor Central (VC)

VC is much like VE, except that VC is invite only and targeted towards brands. While a company can apply through VE, VC companies have been recruited directly by Amazon buyers. This is usually based on strong VE or 3P sales, for which Amazon obviously has access, or in attempt to mimic the offering of a major competitor (Walmart, Best Buy, Grainger, etc.). In this capacity, Amazon attempts to identify brands it would like to resell and a retailer's private label brand has just as much of a shot as a traditional manufacturer’s brand.

While being primarily automated, VC sellers have a buyer that is a, well, real person. They often discuss marketing strategy and sometimes meet in person. This personal relationship allows for a large amount of flexibility. Things like bulk buys and listing help can simply be discussed when automation tools are lacking. Although most decisions are still metric based, new products with no Amazon history or seasonal items can get a major boost because the buyer is no longer just a buying algorithm.

Dropship Central (DC)

New to Amazon in early 2016 and still in Beta testing, dropship central allows VC sellers to ship directly from their warehouse to fulfill orders. Essentially, Amazon is maintaining its control over the selling actions, but is no longer covering the fulfillment aspects of the sales process. The VC channel, with the goal of stocking items in Amazon FCs is still its main channel, but DC allows for Amazon Retail to still sell products during stockouts or when items are cost prohibitive to ship twice (Vendor to FC, FC to customer). Like all Amazon sales methods, DC has great flexibility. The seller maintains a virtual warehouse for Amazon that indicates what they are willing to ship directly to Amazon’s customers and even specifies lead times.

Amazon Selling - If You Can't Beat Them, Join Them is a book authored by Andrew Tjernlund which will be released as a series of blog posts on AMZHelp.com. If you have any questions about our services or wish to sign up, please reach out.