Amazon’s willingness to sacrifice short-term profit for long-term market share is well established.
It’s the way that Amazon CEO Jeff Bezos went from posting an ad looking for developers in 1994 to becoming the world’s richest man a little over two decades later.
The latest manifestation of Amazon’s ‘market share at almost any cost’ approach?
As the Wall Street Journal detailed this week, Amazon has started offering discounts on some products sold by third parties in its marketplace and that use the Fulfilled by Amazon program. The discounted products feature a tag, “Discount provided by Amazon”, and according to the Wall Street Journal, some products are discounted by as much as 9%.
Amazon, of course, is no stranger to discounting and, in fact, has even sold products at below its cost to win market share.
But Amazon’s latest effort is a big deal because its discounts have previously been almost exclusively applied to products it sold to customers directly. By some estimates, third party merchants now account for approximately half of the items sold on Amazon, however, so broadening its discount strategy to third party sellers is arguably critical if Amazon wants to use discounts to drive market share.
Here’s what Amazon sellers need to know about the move
The good news for Amazon merchants is that Amazon’s discounts don’t reduce the amount they earn from sales of their products. If Amazon chooses to discount products they sell, merchants don’t take a loss because Amazon is subsidizing the entire cost of the discount. Therefore, if the discount boosts sales, the discount is effectively free promotion.
The not-so-good news for merchants is that many don’t know that their products are being discounted by Amazon and Amazon isn’t revealing how it’s selecting which products to discount and when it removes discounts. As the Wall Street Journal points out, this could produce some unintended consequences. For example, to the extent discounts boost sales, they may result in merchants running out of inventory sooner than expected.
A bigger issue is that Amazon’s discounts could put merchants on the wrong side of their agreements with manufacturers and other retailers they work with. The Wall Street Journal offers an example:
Jason Boyce, chief executive of home recreation retailer Dazadi.com, says he’s been selling on Amazon for nearly 15 years, and the majority of his more than $20 million annually in sales stem from that platform. He isn’t sure if any of his products have been marked down yet, but said he’s signed agreements with Wal-Mart and other marketplaces to maintain price parity on the same products he’s also selling on Amazon.
Because of the potential costs of unintended consequences, including violations of contractual agreements, it’s important for Amazon sellers to be aware of the discount effort, monitor their products closely and, where appropriate, opt out.
Yes, there is a way to opt out but not surprisingly, Amazon hasn’t exactly made it immediately apparent.
How retailers should respond
For retailers not named Amazon, the online retail giant’s latest push for dominance is not a welcome one, but that doesn’t mean that retailers are helpless.
First, while a considerable number of shoppers are indeed price sensitive and likely to be swayed by discounts, that Amazon competes aggressively on price shouldn’t come as a surprise to retailers. The ways that they should already be defending themselves against the Amazon threat, such as customer experience differentiation, don’t change simply because Amazon is discounting products sold by third party merchants.
Second, Amazon’s move highlights the potential wisdom of establishing merchant agreements with stronger terms. Obviously, there is risk in demanding terms such as price parity. After all, if a merchant does most of its business with Amazon, it might balk and walk when presented with such terms.
But Amazon competitors should keep in mind that many Amazon sellers are wary of Amazon too, and for good reason, so retailers may have more leverage than they think, especially larger retailers like Walmart.
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