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The Future of the Third-Party Seller
Stay on top of the latest e-commerce and marketplace trends.
An ever-increasing amount of data is surfacing today that indicates competition on Amazon is causing third-party (3P) sellers to become a shrinking segment on the platform, with less and less of a presence each day.
According to Marketplace Pulse, less than 24% of the top Amazon third-party sellers are resellers, versus 31% in 2016, demonstrating that many resellers are facing hardships that are gradually pushing them off of Amazon.
What factors are putting this trend into motion? What can you do, as a third-party seller, to not only stay afloat but ensure a sound future inclusive of long-term growth? We have compiled several strategies to help guarantee your business is poised to outpace the competition both now and in the future.
What Factors Are Catalyzing This Trend?
There are many variables at play that may be potentially shifting the makeup of the reseller model on Amazon. To begin, the original categories of many top third-party sellers have become tremendously saturated, so they are expanding to new categories where you may have enjoyed a dominant presence. In these new categories or sub-categories, sellers will likely mimic the processes and implement the tools they used to gain market share in their original categories.
Additionally, although Amazon has shut down its marketplace in China, there is still an influx of Chinese sellers on various Amazon marketplaces, selling to 12 countries including India, Japan, Australia, Canada, the U.S., and five Western European countries. Due to the fact that these sellers and manufacturers can cut out middlemen wholesalers and distributors and sell directly to consumers on Amazon, they can price lower than U.S. competitors, therefore winning the sale more often than not.
Lastly, the trends of brands shifting to the third-party marketplace and brands and private labels establishing a marketplace presence also account for the increase in competition for third-party sellers who now need to optimize their go-to-market strategies to remain in the game against these larger players.
How You Can Remain Competitive
A key element to remaining competitive and profitable on Amazon is ensuring that your Amazon strategy is fluid while remaining agile and open to shifting your strategies and priorities according to changes within Amazon.
You can also negotiate exclusive distribution agreements with suppliers or establish a private label line that fills a gap or consumer need in order to differentiate your supply chain. In fact, 32% of Amazon retailers plan to launch new private label brands in 2019. Additionally, by being the only authorized reseller of branded products, or one of a select few, you will be able to mitigate the risk of penalty for being unauthorized or violating minimum advertised price (MAP) policies.
If you are unable to negotiate exclusive distribution agreements with your suppliers, or if creating private label products does not necessarily make sense for your business, you need to achieve economies of scale in order to exist despite increasing challenges as a third-party seller. Economies of scale, which are cost advantages that you can gain when production hits a threshold of efficiency, allow you to lower your overall costs.
Your product costs or cost of goods sold (COGS) will likely be fixed initially. If you choose to lower your prices, although you may be sacrificing margins for a period of time, you will likely experience an increase in sales volume as a result. Second, if you lower your shipping costs, you will be able to price more competitively and still make money. By sourcing SKUs from different suppliers, you can maximize efficiency by sending the orders to the Amazon fulfillment center closest to the supplier, helping you cut costs along the way.
If you are unable to lower your product or shipping costs, perform an in-depth analysis of your operating costs. Do you have room to automate operational tasks that are being performed manually? If you can maintain the same revenue after scaling back on headcount or increase your revenue without adding people or increasing your operating costs, your net margin — which includes operating costs — will allow you to price more competitively. By driving down your costs, you will then be able to afford to lower your prices, attract more customers, and increase your sales velocity.
Dynamic Pricing and Catalog Diversification
On Amazon, price reigns as king. To avoid leaving money on the table, you need to ensure that your products are priced as optimally as possible to achieve your desired sales volume. By leveraging technology to reprice your items, you are effectively ensuring your products are not being overpriced or underpriced.
With a sophisticated algorithmic repricer, for example, you are not required to construct or adjust the rules or logic for selling over and over again. You provide the cost of each product, then the maximum and minimum prices at which to sell them.
There is a common misconception that you have to sell at the floor price, when in actuality repricers can be advantageous and can drive prices up and make incremental gains. While rule-based repricers only take into account your competitors’ prices and ignore all other seller metrics, automated, algorithmic repricing software makes objective decisions based on big data, which lead to completely impartial and precise answers.
The algorithm can find your competitive advantage in the current selling arena by leveraging vast quantities of data and by monitoring everything from the competition to price fluctuations to Amazon’s seller rankings, among many other variables. Even if longstanding sellers leave the arena and new ones enter it, the algorithm can still optimize your performance whereas rules have trouble adapting.
Feedvisor’s algorithm, for example, takes into account the impact of data on other sellers, even if that data is only known to Amazon. For example, let’s say there are 20 very highly rated sellers all offering one type of speaker. One day, a seller gets a complaint from a customer saying that they are selling fake products. That seller’s performance will degrade over time because of the complaint, but only Amazon has this data. The algorithm can detect the change in performance and adapt as needed, while a rule-based repricer cannot.
In addition to this advantage, a sophisticated algorithm can find the optimal price that exists between maximizing profits and increasing Buy Box share, if you are a competitive seller. In contrast, rule-based repricers boost sales and gain Buy Box share frequently by lowering prices. In turn, sellers miss out on opportunities to sell their goods at a higher price and maximize profits.
A sophisticated algorithmic repricer can achieve stronger results because it can account for the many different data points across a seller’s or retailer’s store, the competition, and the variables that Amazon tracks. Through machine learning, it can understand and dynamically respond to the market.
Outside of repricing, be sure to always monitor for new products, suppliers, and catalog line extensions. Perform extensive research on every potential product and supplier to make sure they are a proper fit for your business. Below are a few key considerations when scouting for new products:
- Quality: Is this product new or unique in some way? Can you take it to market? Does it solve any pain points for consumers?
- Competitiveness: Is Amazon on the product listing? If so, what does the competition look like?
- Pricing: What data can you gather on pricing? Do you have competitive insights on how other sellers price similar ASINs?
Additionally, by monitoring and understanding consumer trends, you will be able to ensure that the items you choose to launch are relevant to your target audience. For any new item you are considering adding, be sure to factor pricing, shipping and fulfillment logistics, seasonality and any other demand fluctuations, and competition into your pre-launch analysis.
Although the traditional reseller model and demands have become compounded as the result of an ever-evolving Amazon marketplace, taking some of the recommended actions outlined above can help you streamline costs, automate manual processes to enable productive workflows, and create additional streams of inbound revenue.
It is undeniable that third-party resellers helped make the Amazon marketplace into what it is today, so with an adaptable strategy you will effectively be able to navigate low margins, changing and increasing fees, and an influx of competition to drive long-term growth.