Here's How Amazon is Making Their Fulfillment Businesses More Valuable
Amazon stores are very hot at the moment. It makes sense, given that they are the biggest marketplace on the internet with a huge in-built customer base. Just on Cyber Monday 2015 alone, there were 23 million orders. If you are an online seller, it makes perfect sense for you to have a presence there.
But anytime you place your revenues in the hands of another company, you subject yourself to both the positive and negative consequences of their actions. Ecommerce store owners who rely on strong rankings in Google could one day find that Google no longer favors their website. In the same vein, businesses that sell through Amazon’s marketplace benefit from their massive customer draw, but are also subject to Amazon’s policies.
Recently Amazon changed some of these policies, and some of their sellers will feel a pinch as a result.
FBA vs. third-party sellers.
Two of the most common business models on Amazon for sellers are their Fulfilled by Amazon (FBA) program and their third party seller program. Many of the businesses who participate in the third party seller program are arbitrageurs who utilize dropshipping to turn a quick profit.
Fulfilled By Amazon is as it says. You manufacture or source your products yourself, send them to Amazon, and they will send them out for you when you receive an order -- for a fee obviously. Third-party sellers, however, opt out of Amazon’s warehousing and fulfillment services. There can be several good reasons to opt-out of the FBA program, especially if a business has fulfillment operations already established.
However, there is a significant portion of Amazon’s third party sellers who dropship. These sellers never touch the product. Their role is to generate orders. Order fulfillment and returns are handled by the company that makes the product, or by a distributor of that product. In the most simplistic terms, a dropshipper acts as a front-end marketing arm for certain products.
Recently, Amazon informed third party sellers that they’ll need to adopt Amazon’s return policies for any orders received through the Amazon marketplace. For these third party sellers, and especially for dropshippers, this could represent a significant financial pinch.
Amazon’s push for a more uniform experience.
While many Amazon sellers are upset over this change -- due to the added cost and process of shipping prepaid return labels -- Amazon is certainly doing this to improve consumers experiences.
For the consumer, there is little difference in experience if you order a product that is sold directly by Amazon vs. a product that is sold from a company utilizing Amazon’s FBA service. Both products will be eligible for Prime. Both products will share the same return policy. Both products will be held to the same standards, and both products will come directly from Amazon.
However, in the past, a consumer who ordered from a third party seller may have a different experience. The delivery times may not be as reliable, the quality of the product may not be as high, and the return policies may differ depending on the seller.
Amazon’s recent change to require that all sellers provide a prepaid return slip appears to be aimed at improving their customer’s experience when ordering from a third party seller.
Clamping down on dropshippers.
Regular FBA sellers should be thrilled over Amazon’s recent changes to their return policy and also ratings systems. In effect, Amazon is removing low-quality competition.
For third party sellers who manage their own fulfillment, however, they have a legitimate complaint. Not only will this likely impact margins, but it will also add a new step in their fulfillment processes.
But the entrepreneurs who this hurts the most are the dropship arbitrageurs. These sellers are entrepreneurs who saw an opportunity to push products through Amazon’s massive marketplace without being involved in handling a physical product. In many of these cases, the company that is actually receiving the orders has no idea that their dropshipper is selling their product through Amazon (and may actually prohibit selling through Amazon).
James Thomson, CEO of Buy Box Experts, an Amazon consultantancy firm, sees Amazon as focusing on lower-quality dropshippers.
“Amazon is definitely clamping down on drop shippers. [They are] definitely clamping down on retail arbitrage (buying stuff in bulk for low prices and then reselling for a profit). It's not that they're bad things. It’s that the performance metrics are nowhere near as good as they are through FBA. So at the end of the day if Prime and FBA are really what Amazon wants, that's the level of performance Amazon wants its sellers to deliver on.”
Amazon is effectively making retail arbitrage much more difficult to sustain.
Ultimately, this makes FBA businesses more valuable.
There have been some questions about the long-term viability of Amazon-based businesses. At Quiet Light Brokerage, while we have seen a strong uptick in the number of Amazon businesses for sale, we have also heard strong feedback from seasoned acquisition experts who wonder about the viability of a business built on Amazon’s marketplace.
If anything, though, Amazon business owners who are already on the FBA program should be encouraged. By focusing on the end user experience, Amazon will progressively weed out those companies that previously have been able to compete head-to-head with higher quality businesses and higher-quality products.
That’s not to suggest that this change alone will eliminate the problems of retail arbitrage, nor will it eliminate some of the competitive issues on the Amazon marketplace. But this, along with a number of changed policies, does seem to be a step in the right direction.
The end result for business owners who use Amazon to fuel a revenue stream is that their business becomes more valuable, more defensible and more sustainable. And, for the consumers, a better experience.
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