44% percent of purchases made on the internet start at Amazon. In 2015 alone Amazon did $107 Billion in sales. At Amazon their operating objective is to be a one stop shop for their 54 Million Amazon Prime Members and over 400 Million regular customers. Every day they expand their offerings and add new categories.
The best thing is, Amazon is an open market. Currently about 50% of the products are "shipped from and sold" by Amazon. The other 50% are sold by Third Party Sellers. These two halves make up Amazon's Vendor Central and Seller Central services perspectively. Vendor and Seller Central are the two business models offered for doing business in Amazon's channel. Next we'll dig into the specifics of Seller and Vendor Central. After that we'll take a look at how Amazon is designed, how its customers shop and key concepts and terminology you should know.
All products sold and fulfilled by Amazon on Amazon are sourced by Vendor Central partners. In this business model you basically act as a wholesaler to Amazon. The Vendor Central business model breaks down like this.
1) Amazon directly buys your product.
2) You ship your products out to amazon's warehouses.
3) Amazon turns around and sells your product as Amazon on Amazon.
At the beginning of the vendor central relationship you "the company" will send Amazon a list of your SKU's and pricing. From that point Amazon analyzes the marketplace to see if your pricing is competitive to what is currently being offered. When they decide your pricing is competitive they will offer you an opportunity to sell to Amazon.
Typically they will purchase inventory from you monthly. Amazon will forecast the demand of future months and on the Vendor Central platform you will have access to see these forecasted amounts so that you can manage your inventory accordingly. Amazon handles all shipping, returns and customer service responsibilities after they purchase the product from you.
But not all responsibilities fall on Amazon once they buy your product. You "the company" are still responsible for creating and editing the product's listing which is a critical component to your product's success.
Some benefits of Vendor Central include:
- A + listings - A+ Listings are aesthetic format for your listings that only Vendor Central sellers have access to.
- Automatic Top Rank Category Listing - We will get into further detail about this later but this greatly increases sales volume.
- Amazon Invoice/Billing and Inventory Request fits great in wholesale business models.
Now lets take a look at Seller Central
Seller Central is a way for third party sellers to sell their products on Amazon. In this business model you sell your product on Amazon. There are a couple of business models within seller central that are offered to third party sellers by Amazon. We'll go into these business models in further detail but first lets take a high level look at how seller central operates.
1) You create listings for your products on Amazon.
2) Amazon's customers buy the product directly from you.
3) Depending on the business model being used, either you are responsible for shipping, customer service and returns or you can pass that responsibility off to Amazon.
Now let's take a look at the main business models within Seller Central. There is Vendor Fulfillment and Fulfillment By Amazon or FBA. Vendor Fulfillment is a very hands on business model. In Vendor Fulfillment you "the company" take on full responsibility for product shipping, customer service and returns once the sales are made on Amazon. Next let's talk about Fulfillment By Amazon or FBA.
Fulfillment by Amazon is a business model offered by Amazon to relieve these responsibilities that can become crippling as your ecommerce business scales. Fulfillment By Amazon (FBA) leverages Amazon's massive supply chain and logistics systems to your advantage. In the FBA business model, you ship Inventory in bulk to Amazon's Warehouses. From there once a sale is made, Amazon ships your product out of their warehouse and to the customer. Amazon also handles all customer service and returns for the product. With this business model, Amazon takes a percentage of every sale as a fee and there are fees associated with your inventory storage in Amazon Warehouses.
In both business models, you are in full control of the product pricing, listing design and marketing.
Some benefits of Seller Central include:
- Price Point Control
- Quick Payment Turn Around Time (sales revenue transfers to your account every 14 days)
- Low Barrier to Entry
Amazon Business Models Conclusion
In conclusion there is no perfect Amazon business model for every business. The choice of which business model your company should pursue is truly a case by case decision. There are many different variables and factors to take into consideration including but not limited to the type of product your selling, how your business is structured, how your supply chain operates, inventory limitations, product price point etc. Goat Consulting completely understands all of Amazon's business models and the factors that need to be considered when deciding between them. We can point your company toward the direction of ecommerce success and help you walk the path!
Nows that we've covered the basics in Amazon business models, lets take a look at Amazon itself. We'll be looking at some key concepts and terminology related to how Amazon is designed and how its' customers shop.
it begins with a search
Amazon is built around a key word algorithm. The first thing a customer does when shopping on Amazon is enter a keyword phrase in the search bar. For explanation sake let's pretend somebody want's to buy an umbrella. They'll type the keyword "umbrella" into the search bar and hit enter.
Amazon then brings up a list of all products associated with the keyword "umbrella" and displays them starting with the best selling and reviewed products (or products ship and sold by amazon) followed by less popular products in descending order.
The keyword association algorithm takes into account the product listing's title, body, description and text. Best Selling products are determined by sales volume and a thing called "conversion rate". Conversion rate is the rate at which someone visits your listing compared to the rate at which someone purchases your product.
Let's check out the top selling product for the keyword "umbrella"
The Product Listing
Above is a product listing and it is crucial to your success on Amazon. A listing must read well and be aesthetic, while being designed with Amazon's Algorithm in mind. Core components of a product listing include Title, Media/Images, Bullet Points, Reviews/Star Rating, Price and Product Description. Each component needs to be carefully crafted and positioned for optimal success in the Amazon marketplace
You can see that in this listing they have different SKU variations listed under under the title and price. When done correctly this is a great way to encourage customer product exploration and increase your sales volume.
Under where it says "In Stock" you can see that the product is sold by Upper Echelon Products (Third Party Seller) and Fulfilled by Amazon thru FBA
If your look closely, on the right hand side toward the bottom you can see that Upper Echelon is not the only company selling this umbrella. Let's click on the "4 new" link and look at the other sellers.
There are 4 other individuals selling this exact same product. It is not uncommon for one product to have multiple sellers, in fact it is quite common. The four sellers are locked in fierce competition for a thing called the "buy box" (shown to the right). Right now Upper Echelon Products holds the buy box. That means that their product listing is the one that appears in the general "umbrella" search result and there product is linked to the "buy box" shown to the right which is the easiest path to purchase for a customer. Factors that rank products for the buy box include whether or not the product is prime, price point, conversion rate and sales volume among other things.
Typically 90% of sales done for a product go to the party who owns the buy box. This statistic shows how much of a game changer the buy box is. The remaining 3 sellers are left to fight amongst the 10% of sales that are left.
This is a key advantage of the Vendor Central business model. Amazon doesn't play fair. If they source a product they will more often than not award themselves the buy box. If you sell to Amazon it's likely that your listing will win the buy box for your product and Amazon will rake in 90% of sales for that product, increasing the inventory amounts that they purchase from you. Third Party Sellers can gain access to the buy box too and even occasionally beat out Amazon, as seen in this umbrella product example. This however is typically not sustainable. While Amazon may let Third Party Sellers get the buy box once in a while, a majority of the time they will take it. Third Party Sellers do best selling in markets not yet dominated by Amazon. The less people selling that product, the less competition and the more money you'll make.
Amazon strives to make its marketplace a clean, simple and convenient experience for its customers. But if you take a look behind the curtain, you'll find that Amazon is a complex, fiercely competitive market and that while it is exploding into the largest retail marketplace in the world, it can be difficult to navigate. Goat Consulting exists to clear your vision so that you can make the right decisions and so that we can work together to grow your business into everything that it can be.
That wraps up this lesson in Amazon 101. This segment did not discuss amazon advertising, marketing and promotions which is a huge topic that is entitled to its own segment.