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What is the real cost to serve Amazon?

As more businesses shift their trading to eCommerce marketplaces, understanding the cost to serve each marketplace is critical. More important is knowing that the key to maintaining profitability is to drive efficiencies in each of these areas. In the early days of trading with Amazon, the primary goal was selection - they wanted your entire catalogue ranged online. With minimal terms and limited costs, Amazon was probably the most profitable account for many toy companies at that time. Fast forward to 2022, and Amazon cares more about its Net PPM - more so than ever before. While you may have strong command of your negotiated coop terms and advertising costs, other Amazon-specific costs may be more challenging to track and minimise. Throughout the year, Amazon will continuously ask for chargebacks, shortages, hard bundling or unexpected fees in one form or another. There will be cost price increases, requests to join new operational programmes and the cost of resources, to name but a few. Does your business know its true cost to serve Amazon?

Operational Costs & Chargebacks – the silent killer

Chargebacks – they’re costly, time consuming and often overlooked. With P&L responsibility repeatedly landing on the sales function, comes the challenge of engaging your account manager into the world of shipments and deliveries.

Amazon is a master of marketing and the same is true for how it communicates with its vendors. Spiralling costs are often masked by complex acronyms when really the task is simple: deliver on time and in full, in the correct configuration.

Delving into the Vendor Manual from Vendor Central should be everyone’s first port of call to understand how to prevent these chargebacks. In a world where Amazon is happy to buy your whole range, processes for operational success could see you hit that profit target rather than adding massive penalty charges to your account.

The challenge this creates is one of internal communication. Amazon is often branded as a Marketing and Sales account – but never forget serviceability. An end-to-end process of managing chargebacks should see your profitability increase. Never forget the power of finance and operations, they will provide key visibility on Shortages and On Time Accuracy charges, which can quickly mount and have a significant impact on your P&L.

Amazon Cost Price Increases - the art of negotiations

If you’re looking to improve your vendor margins on Amazon, chances are that you’re planning to increase your cost prices. After all, Amazon will simply pass the cost increase on to the end customer, right? Wrong! Amazon is a price follower, meaning it will match the lowest price of a product in the market. Cost increases make it harder for Amazon to maintain a margin, so their Vendor Managers (if you’re lucky enough to have one) are likely to reject your cost increase right away. Without having a VM in your arsenal of defence, it’s hard to negotiate your price increases. However, if you’re able to demonstrate pricing has moved in the market segment, it’s likely that Amazon’s systems will auto accept your price increases.

Team of a labour-intensive account

With limited contact at Amazon, management of an algorithm is required, which ultimately means more resources (compared with other accounts) to manage – and the cost of resources continues to creep up. With limited skills in the market, Amazon talent is more expensive. Alongside an Amazon lead, there will often need to be a skilled team to support growth aspirations, from managing Amazon advertising to analysis of chargebacks. And if you’re fortunate enough to be able to invest in an Amazon AVS, you will require time and resources to manage the AVS. When you factor the cost of the team, is Amazon truly profitable for you?

Amazon Advertising: It pays to play

Brands must advertise to stand out in a competitive market. More product views than ever are coming from paid placements on Amazon. When you’re paying to play, you need to optimise every penny spent. And Amazon PPC shouldn’t be seen as a short-term strategy. When you have a long-term approach, you’ll win more clicks and sales from other retailers, but your organic placements will be boosted too. Without investing in Amazon Advertising, your products don’t have much chance of success, but with more companies increasing their Amazon Advertising spend throughout the year, the cost of advertising is increasing. Without spending in this highly competitive area, it will be challenging to grow your Amazon business.

Cost of Content and Keywords

70% of traffic comes from a mobile device, where only two product listings appear above the fold. If you’re not appearing ATB then chances are your competitor is. Advertising on Amazon fits into the oldest saying of all: the right stock in the right place at the right time but replace “stock” with “product.” It’s common knowledge that there are machines out there that can change 300,000 bids a minute to optimise your spend – but often the biggest area of unsuccessful investment comes from broad keywords which are not converting.

In a world where New to Brand customers are costing more and more, it is important to optimise every penny you’re investing. There can sometimes be a “set it and forget” attitude when it comes to Amazon’s seemingly automated marketing platforms. Do not fall for this - constant adaptation of strategy and budgets should be in place, especially if you’re using an agency.

In summary, the Amazon platform is a master at disguising hidden costs. The true skill and success factor is empowering your business with visibility of these costs. Once you have this visibility, the strategy of investing and servicing Amazon as a platform becomes clear. The Etopia team is confident it will yield a more profitable account.

Asha Bhalsod Asha Bhalsod of Etopia Consultancy challenges companies to recognise the full extent of the costs of dealing with Amazon, in order to best utilise the retailer as a profitable platform.

asha@etopiaconsultancy.co.uk