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Dangers of the Amazon and FBA Business Model

Amazon and the eCommerce merchant. It’s a Shakespearean tale where love and hate is often a blurred line. There’s no doubt that for many merchants, Amazon is a huge source of revenue for their product. But there’s also plenty of pitfalls when you decide to sell on Amazon.

To kick off our month-long series about all things Amazon, we’ve got a reality check about the potential problems with selling on Amazon. While it presents many opportunities for increasing your products’ reach, it’s important to be aware of the company’s policies that have undermined many eCommerce businesses.

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(With your host Andrew Youderian of eCommerceFuel.com and Bill D’Alessandro of Rebel CEO)

Andrew: Hey guys, Andrew here and a quick note before we get into that official theme music. Today is going to kick off a four part month-long series on Amazon. If you’re in eCommerce, which you probably are, obviously that’s a huge aspect of what we’re doing these days. So over the next month we’ll be covering all sorts of different topics Amazon-related, and I want to kick off this series with just an episode just to make you think a little bit more carefully about some of the things you should be considering from a downfall perspective on Amazon.

Obviously a lot of opportunity there, but given when we’re focusing on it and given the fact that some people make Amazon sound like, you know, just a money machine, I wanted to kind of have a reality check to launch us into this series. So hope it’s useful, hope you make a bunch of money on Amazon, and hope you enjoy. Thanks.

Welcome to the eCommerceFuel podcast, the show dedicated to helping high six and seven figure entrepreneurs build amazing online companies and incredible lives. I’m your host and fellow eCommerce entrepreneur, Andrew Youderian.

Hey guys, it’s Andrew here and welcome to the eCommerceFuel podcast. Thanks so much for tuning in today. Today, talking about the dangers of Amazon and the FBA business model. You know, Amazon is the talked-about game in eCommerce these days. Big courses coming out, you know money seemingly just falling freely from the skies, it’s incredible, right? It’s like the old, old days of AdWords when they were three cents a click. There’s no downside! But there definitely are some pitfalls that we want to talk about today as a reality check, hat tip to David Heacock for the inspiration and some of the finer points on this episode. Thank you, David. And joining me to really dive into it, a man who knows a ton about Amazon, Mr. Bill D’Alessandro. Bill, welcome sir.

Bill: Yup! Glad to be here. This is the topic I love to talk about.

Andrew: Yeah, it’s interesting, and you’ve been on, like I said, I mean you’ve been on Amazon for years. I have very little experience with it. It’ll be interesting to kind of take the opposite approach of what I think has been a lot of ra-ra-ra cheering over the last, you know, two years or so.

Bill: Yeah, and some of it well-deserved, but not without potential other sides of the coin.

Beware the Hijacked Niches

Andrew: Bill, I think the biggest thing that stands out as a potential danger of going onto Amazon is that building your core business on Amazon is, ultimately, is going to lead to heartbreak. A lot of people, I’m not sure if they realize, Amazon is not your friend at all. They’ve got a long track record of hijacking niches, of selling directly out from under merchants, and if you don’t own the platform off Amazon somewhere, you’re gonna get hosed eventually.

Bill: Yeah, I think talk to anybody who used to sell any of the products now covered under the Amazon Basics program. You know, all the cables, all the SD cards, you know Amazon is more than willing to private-label their own stuff and compete with you directly, you know, obviously at much lower cost and with preferential algorithmic ranking. And also they’re expanding into clothing now, they’re doing some of their own clothing lines.

Andrew: They’re doing suits.

Bill: Yup. They are not afraid…basically, they’re using you as their guinea pig, see what sells, and then they’re more than happy to, if it’s a big enough opportunity, go into it themselves and kick you off or take you over.

Andrew: Yeah. I mean this is something that the Amazon employees admitted, and I think maybe even Bezos admitted it in the “Everything Store” book. We’ve had members in the community tell horror stories about Amazon just came into their niche. It actually, yeah it’s a reality and it’s… You know, some of the other things that can specifically happen if you build completely on Amazon.

If your account gets banned and you don’t own the platform, you’re just completely out of luck. If, you know, you’ve got a bunch of inventory and you lose that channels, you’re screwed. Unless you have another platform to sell it on, you either take an enormous loss or what you do is you have to liquidate it at almost certainly a much lower price, and with Amazon there’s kind of, you know there’s ways to try to market people back to your site but for the most part, you don’t own the customer. You can’t remarket to them, you don’t have their email address, and so the biggest thing I’ve heard from savvy merchants and Bill, I’d guess, is what you could take as well is… People are saying, “I’ll take the money while I can get it, but at the end of the day I’m looking at Amazon as a tool to build up my own brand on my own website and platform.”

Bill: Yeah, I mean really it’s…the way I look at it is a single point of failure. I mean, I would say if you sell on Amazon right now and are successful on Amazon, I would say your Amazon account is the biggest single risk to your business. Period, because it only takes one thing. I’ve heard countless stories of people shipping, like three packages late and getting their account banned for life, and you have no recourse because it’s not illegal for them to ban you. It’s just their policy and they can do whatever they want to do. You have no recourse at all, they own the channel, they own the customer, there’s…

If your business relies entirely on Amazon and you’re not selling eCommerce, you are at the mercy of Amazon completely, and I will also throw this in there, regular listeners of the podcast know that I’ve bought several businesses and am kind of always in the market looking to acquire small brands with potential.

And all the time, I mean it’s rampant, I’m getting… I’ve seen it just in the past one to two years, all of the brokers that I work with are sending me all of these growing Amazon eCommerce business, and you look at the offering memo and they’re doing 98% of their sales on Amazon. I wouldn’t touch that business with a 10-foot pole. To buy that business is signing up for such a massive risk. I mean, not only could Amazon ban your account, Amazon could change their algorithm, other competitive products could come into the market, and you don’t have any way to defend against them because you can’t contact your customer.

And also, most of the time, people buying Amazon, they’re really not buying because they love your brand. Oftentimes they’re buying…instead of typing your brand of shampoo into Amazon and buying it, they’re just typing shampoo into Amazon and buying it, and when they come back that’s the same thing they’re going to do. And if they find your product they’ll buy it, but they could very easily find something else though an algorithm change, or if you’re out of stock, or if Amazon bands your account.

So if you are relying on Amazon as your only channel, I would advise you to change that quickly, and if someone is trying to sell you a business where Amazon is the only channel, I would advise you not to buy it.

Private Labeling Is (Almost) Over

Andrew: Would you say that the days of easy, private labeling on Amazon, buying a me-too product from China, slapping your brand on it, throwing it up on Amazon, would you say those are pretty much…I mean, would you go into that market today? Let me put it that way.

Bill: If we say those days are over, plenty of counter examples will come out of the woodwork. I would say it is much, much harder than it used to be, and also your run will be a lot, lot shorter. If you do happen to find some miraculous niche that is totally untapped and you can easily private-label a product and start selling it, well guess what? If you were easily able to do it, lots of other people are going to easily be able to do it, too. And as soon as they see your success in the days of Jungle Scout and Unicorn Smasher and all of these things that you can use to guess at sales volume, as soon as you start to succeed your competitors are gonna be a dime a dozen and there’s really gonna be nothing you can do to fend them off.

So I would say the days of easy money via private-label on Amazon are, if not over, I can see the darkness at the end of the tunnel, if you will.

Andrew: Yeah, it’s interesting. Last July or so, started on the process of designing our first ever proprietary product, which just gotten the warehouses or just got shipped to our office recently, we’ll talk more about those later, and it’s been…I mean we haven’t made any money. I mean we’ve invested a ton of money and time, not a crazy amount but some, and at that point I could have gone the FBA kind of private-label route and probably would have made some money, but I wanted to invest in something that had a much longer lifespan at that point. And even though it hasn’t paid off yet because we’re just getting it up on Amazon, I think the defensibility of it will be so much…it’ll be so much more defensible long term, even if I give up some profits in the short term.

Bill: Yup, I agree with that. You might make a quick buck, but you better be willing to launch a new product every four months, and pop and then bleed off, and pop and then bleed off, and some people want to do business that way. I’m gonna tell you what, that’s not a business you’re very easily able to sell.

The Fake Review Crackdown

Andrew: This next point, hat tip to Lars Hundley in the forum for kind of putting it on my radar, is that I think there’s gonna be a review crackdown at some point. There are getting to be a ton, I saw some stuff from Lars that there’s an article in Fortune about how an Amazon reviews can’t be trusted that he shared, and even when I’ve been on Amazon organically looking for things, reading through the reviews, I’ve been noticing so many more products where 9 out of the 10 reviews they just disclose right in the review that it was a donated product that was free, and the credibility that those have is almost zero.

And so I think we’re gonna have a huge review crackdown at some point in the near future. It’s gonna be more or less the penguin for reviews on Amazon, and if what’s been an easy way to build up your sales ranking and get some credibility with fake reviews is probably going to be coming to an end.

Bill: I totally agree. It’s been too easy, and if you’re a seller doing this you know it’s not in the best interest of the customer. And if there’s one thing that I will bet on is that Amazon will do is in the best interest of the customer and not in the best interest of their sellers, and Amazon knows that polluting their review system with fake reviews is undermining the confidence in their review system and they will move to fix it, because I know they think that’s one of the differentiators of their platform is that you can do reviews. That’s why you buy stuff on Amazon because you know you can read reviews, and if they lose the credibility there, Amazon knows that’s a threat to their existence. I really think they’re gonna crackdown on this hard.

The giveaways for reviews, the fake reviews, and I thought it was interesting to hear you call it penguin for reviews. I think it was about a month ago, they rolled out a new algorithm that reprioritizes which reviews actually are called out on the product page, and the star rating now is not a simple average of all of the stars of all of the reviews. There is a certain way…

Andrew: Interesting.

Bill: …as well. So that’s been changed about a month ago. So many more changes are coming to the review system, so I think if you think that it’s… If you’re used to the days of private labeling a product, giving away a bunch of them, and then buying a bunch of fake reviews on Fiverr and watching the sales roll in, I would think twice. I don’t know how much longer that’s gonna go on or even if it’s still possible.

Running Out of Stock = A Sales Ranking Drop

Andrew: In terms of maintaining momentum and cash flow issues is, you know, we just recorded an episode on accounting and cash flow and how important it is to keep tabs on that, so anytime you have inventory, you make a product, cash flow is a concern. It’s not something that’s just unique to Amazon, but one thing that is unique to Amazon is if you run out of stock on a product, your sales rankings can drop and it’s incredibly easy to lose momentum with Amazon. Whereas if you own your own platform, you can control what products appear where on the homepage, at the top of your category pages, and running out of stock it gets always…it’s never good but it’s not as painful as it is as when you’re on Amazon. And it can be a major risk.

Bill: Yeah, and on your own website you can do things like take preorders, or, you know, still take the orders then email people and say ships in two weeks. You do that on Amazon you’re gonna get banned because you have to ship within their service level window. So, yeah, if you are not a great operator, if you tend to run out of inventory, you have a lumpy inventory, that’s another risk of selling on Amazon. It can really cost you.

Andrew: One thing is, I think it kind of goes without saying, but Amazon you’re paying. Right? You know, 15% to access their enormous customer base. Now want you hear that sounds small, right? Like 15% to access, you know, the more or less everyone who’s online? That’s not that big of a deal. That’s pretty cheap, but you think about it.

Let’s say your average margins for a retailer, net profit margins, you know 20-25%. Like maybe lower for, you know, really cut-throat drop shipping niches, maybe higher for people who have great products and stock themselves with low overhead, but let’s call it 25%. When you’re paying 15% to Amazon plus or minus, you know that’s tremendous. I mean that’s more than half of the profit that you’re just paying to them to get stuff shipped out, and so long term, building that brand you’re significantly improving the overall profitability of your business.

Bill: Yeah, I mean it’s…if you’re…plenty of businesses are 15% net margin businesses, and if you start selling that product on Amazon you’re not making anything.

Step Up Your eCommerce Game

Andrew: So I guess it boils down to, Bill, do you think…what are your thoughts? Do you think eCommerce is getting harder? I feel like the first problem for eCommerce was distribution, which Amazon solved, and then commodity products are getting saturated in terms of the white label market for Amazon, like some courses that have come out, you know, recently that really teach that model. Do you think it’s fair to say that eCommerce is getting significantly harder the last two or three years and going forward?

Bill: Yes, and let’s make sure we define what eCommerce is. Selling on Amazon, which is a subset of eCommerce, is getting a lot harder, and I would say kind of quote, traditional eCommerce, selling on your own website, is also getting a lot harder. In general, I don’t think eCommerce, selling online is the easy money that it used to be. I think you’ve got to be good. Not that there’s not huge opportunity, but I just don’t think you can bumble into it anymore.

Andrew: Yeah. Lots of money to be made on Amazon, of course, still. Like you were saying, tons of opportunity and loads of advantages on that platform, it’s incredible, but I think the takeaway is just be really aware of the dangers, of the pitfalls. Make sure you’re using Amazon to leverage their customer base to build your own brand.

But It’s Still a River of Money!

Bill: Yup. I think if we would like to try to end this on a positive note instead of just dumping on Amazon the entire time, the caveat is you should still sell on Amazon because it is quite literally a river of money. They have tons of demand, there are tons of customers. You just need to be aware of the risks and the fact that you’re playing by their rules. If you are not selling on Amazon you are a fool, but you should not rely on Amazon as the foundation that you build your home on is what I’m trying to say. And Amazon is great, I love Amazon, I made lots of money on Amazon. I don’t want Jeff Bezos to think I hate him, but just you can’t rely on it exclusively, and if you do rely on it as a part of your business you need to know the risks and take whatever steps you can to mitigate those risks.

Andrew: Man, I feel such, like, a dark and pessimistic person after that, Bill.

Bill: Yeah, a little bit, but I think people need to hear it. There’s a lot of content on the Internet that says, like, “Yeah, go on Amazon, get rich quick, eCommerce is easy,” I think is extremely irresponsible. I hate to hear it, and so we will use what small platform we have here to help people understand that if you want to start a business online it’s very possible and you can do it, and it’s one of the most accessible ways to make money that there ever has been, but you will need to work, you might get it wrong, you’re gonna have to do a lot of research, and you can fail. I just think it’s best for people to go into things like this eyes wide open, and anybody that tells you it’s a sure thing is lying to you.

Andrew: Bill, I’ll have to write an apology letter to Jeff Bezos and start fielding the emails from his lawyers now, so it’s been good as always. Thanks so much for coming on.

Bill: Yep, glad to do it and I’m interested to see what sort of reactions we’re gonna get to this thing. Feel free to comment on the post and tweet us @eCommerceFuel or @BillDA.

Andrew: Yeah, or at @youderian, ecommercefuel.com, we’ll have the show notes up for this whole episode as well, as that’s where you can go ahead and comment on them. Yeah, love to hear peoples’ thoughts. Thanks, Bill.

Bill: Sure thing.

Andrew: Want to connect with and learn from other proven eCommerce entrepreneurs? Join us in the eCommerceFuel private community. It’s our tight knit, vetted group for store owners with at least a quarter million dollars in annual sales. You can learn more and apply for membership at ecommercefuel.com. Thanks so much to our podcast producer Laura Serino for all of her hard work in making this show possible, and to you for tuning in. Thank you for listening. That’ll do it for this week, but looking forward to seeing you again next Friday.

What Was Mentioned

Photo: Flickr/Scottish Goverment



Andrew Youderian
Post by Andrew Youderian
Andrew is the founder of eCommerceFuel and has been building eCommerce businesses ever since gleefully leaving the corporate world in 2008.  Join him and 1,000+ vetted 7- and 8-figure store owners inside the eCommerceFuel Community.

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