Shopify is 50% of Amazon’s Marketplace but should be 100% of your focus!
If one channel is good, more are better!
Introduction
If it seems like the pandemic caused anyone who was sitting on the fence of starting an e-commerce business to go all in and launch an ecomm business because that’s exactly what happened. More than 85,000 e-commerce businesses were launched during the lockdown and many of them as Amazon Seller accounts, and while I *love* selling on Amazon it’s not without it’s challenges. Amazon has all of the power and they know it — Amazon sets the rules of the ame and has the ability to change at a moments notice. Furthermore, if analyze this relationship and competitive forces through Porter’s 5 Forces Model, the seller loses in each instance meaning that you have very little ability to push back and alter their course of action. While I spend a lot of time focusing on how to build a great Amazon business the reality is that it’s not the only game in town. Marketplace Pulse published a recent article that brought this point home…
Shopify is now nearly 50% as large as Amazon Marketplace after surpassing $54 billion in GMV in the fourth quarter of 2021. Said differently, Amazon marketplace is only two times larger than Shopify (Read More)
Why is this happening — a few reason for sure. There were secular changes pulled forward during the pandemic including customers exclusively look to buy product online, the rise of digital native brands being culturally ubiquitous and last mile delivery taking major steps forward (i.e. instacart).
Another reason why Shopify sales are continuing to climb is because it’s becoming harder and harder to find success on the Amazon platform. Brands are making the determination to either avoid avoid Amazon or to try and diversify their revenue stream from day 1 rather than putting all of their eggs into Amazon’s basket and it absolute makes sense. The cost of selling on Amazon have ballooned over the past 18 months. Amazon’s fulfillment costs have increased by an average of 5.7% versus 2021 and the cost of advertising is projected to increased by more than 30% versus the prior. In 2021, Amazon Advertising delivered >$31B in revenue (at nearly 85% margin) and they will undoubtedly need to comp that number in 2022 which will lead to increased costs for traffic and further on-page monetization of search results. This pay-to-play model is amazing if you are an Amazon shareholder, but as a seller this means that you are making much less profit than in years past while competition is at an all time high.
While the financial constraints are what sellers feel every day, they are not the only issue with selling on Amazon. In the next section I and going to outline some of the major risks with selling on Amazon and why relying on the platform as your only sources of cash flow can be catastrophic for your business.
Risks to Amazon Sellers
What happens if you lose your account? I ask this question to all of my clients to help them understand the reality of selling on Amazon. It might not be justified, but you can wake up one day and your top ASIN is suppressed from search, Amazon may have lost a shipment of product or worse yet your account may be suspended entirely. This more than any other reason is why you need to focus on building out your Shopify business.
Below are some of the most common risks associated with running an Amazon seller account.
Risk to Earnings: Your relationship with Amazon is asymmetrical. Amazon has all of the leverage and there is no room to negotiate which means you are at the mercy of any and all price increases (and to be honest, they are always increases) across fulfillment, advertising, and event potential commission rates. The obvious way to combat some of these cost increases would be to increase prices, but Amazon get’s a vote on that as well….If Amazon deems your price to be too high, they will suppress your listing from owning the buy box making it next to impossible to facilitate a sales. In short, Amazon can raise your cost but prevent you from raising your prices.
Risk to Availability: Another major risk with selling on Amazon is your reliance on Amazon to continue to offer your product. While this might seem to be unlikely it happens quite frequently. You can quickly find your top selling ASIN removed due to an errant customer complaint, algorithm malfunction1, or non-compliant back end keyword added by a black hat seller.
Risk to Customer Retention: As an Amazon seller, you do not own the relationship with the customer or all of the content on your product detail page. Imagine that you have built a successful batteries business and then, out of nowhere, Amazon comes in with a private label version of your item at half the price. Even worse - they advertise to your customers since they already know about their previous battery purchases. This invasion into your business isn’t limited to custody of the customer, it happens on your PDP as well. Let’s assume you drove traffic to your listing through a PPC ad, spent time and money to optimize your content and creative and have a compelling story about your brand — only for Amazon to show an ad for a different item on a lightning deal undercutting your price. Not only have you wasted your ad dollars, but you lost a potential customer as well.
Risk to Cash Flow: On Amazon, it can hard to turn your inventory into cash. Unlike your DTC site, the levers you have to drive demand are limited — you might not have a robust email list and due to Amazon’s fee structure can’t profitably support deep discounts which means your best option is to pull your inventory our of FBA and back to your warehouse. The problem is that it will be weeks until you receive that inventory and sell that merchandise through in other channels to generate some cash.
Risk to Your Account: Amazon can suspend your account as a whole without warning. While this is an extreme case, there are countless instances of seller accounts being permanently suspended for no good reason at all. What do you think happens when a customer looks for your brand it isn’t there? They assume the worst! Have a booming Subscribe & Save business? With a suspended account, customers aren’t going to receive their product, cancel their subscriptions and switch to your biggest competitor.
Path to Diversification
The risks outlined above will not happen for every seller, but one of them will happen to the vast majority of sellers. To help mitigate the risks outlined above you need to focus on revenue diversification — not only will you sleep better at night with your eggs spread across a few baskets, but you will be able to sell for a higher multiple! Below are a few tips on how to use your Amazon business to jumpstart your Direct to Consumer business.
Build Your Email List Through Ads: Many sellers are already running Facebook and Google campaigns to drive traffic to their Amazon listings, but they are missing a HUGE opportunity. If you want to supercharge this strategy, drive users to a landing page and give them a coupon (valid on Amazon) in exchange for their email and phone number. You can do this through your a page and some coding on your Shopify store or a funnel CRM such as Ontraport or Click Funnels.
Tagging Your Social Handles on Packing & Inserts: Don’t be afraid to add your social handles to product packaging or product inserts. This will not have a high ‘conversion rate’, but once added to your social channels you can continually market to these customers with content, deals, and promotions exclusively for your Shopify store.
Advertise on Amazon to Shop Off of Amazon: Through Amazon’s DSP (demand-side platform a/k/a Amazon’s ad trade desk), you can advertise to relevant audiences with strong calls to action that drive customers to your Shopify site. I have used this strategy in the past with real success by retargeting previous visitors of my ASINs, driving to my Shopify site and offering a 20% off coupon immediately upon landing!
Leverage Merchant Fulfilled Shipment: This is a retreat from an older article but still relevant. By fulfilling you will have all the data of you need to start directly market to customers. Not only will you be able to capture all of the address data you need, but you control the post purchase experience. You can add product samples, bounce back coupons or free swag (everyone likes a tee shirt) to the order — all tactics that help to build affinity for your brand. Bonus Points: you can use this data to send your customers direct mail post cards!
Conclusion
Selling on Amazon is undoubtedly a great way to build a business but the sooner you diversify your revenue mix the better your business will perform. Not only is the risk profile of being an Amazon-only business becoming increasingly dangerous but it is quickly becoming less profitable as well.
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Ex: You add non-toxic to your page and get flagged for a toxic product
An additional benefit I noticed for adding Shopify in the mix is offloading inventory for products that didn't gain traction on Amazon (due to highly competitive/hard to rank/low margins). You can typically sell for a higher price than on Amazon and you also get their email info for retention, ups-sells, future sku launches, etc.