Amazon and “Hyper Competitive” Pricing


Guest-blogger
Ama
Mark_carson_headshotMark Carson is President &
Co-Founder of Fat Brain Toys, a multi-channel retailer and developer of
specialty toys and games. Their stacking toy, Tobbles Neo, was presented with
the ToyAward at this year’s Spielwarenmesse International Toy Fair in
Nuremberg, Germany.
 

First
off, I'll acknowledge that this article could easily be written off as
"sour grapes" as it's almost cliché for a smaller company to take
shots at the 800 pound gorilla. But before you discard it, I'd ask that you
give careful consideration to the long-term effects of hyper-competitive
pricing on the Amazon platform.

Price
slashing is a single problem, but of course it has many adverse effects:

  •  It
    erodes margin for retailers online and off
  • It
    tarnishes a manufacturers' good brand
  • It
    puts good retailers in a bad light by making them look overpriced
  • It
    sets into motion a vicious cycle that ends badly for everyone involved

In
some respects it's unfair to single out Amazon as there are many culprits
involved. Then again, Amazon has brought much of this upon themselves, but
importantly, they could easily take control of the problem if they chose to do
so.One
of the roots of the problem is the third-party marketplace created by Amazon.
The great thing about this program is that it allows virtually any retailer to
sell online with little effort. This is also a bad thing for the exact same
reason. With no barrier to entry and no ability to differentiate, price becomes
the one and only determinant for one merchant to be chosen over another. Anyone
selling on Amazon knows this. All you need to do is set your price to 1¢ below
the lowest price and you will almost instantly become the default seller…at
least until another merchant sets their price 1¢ lower! And so the cycle
repeats… 

I
should know; we too got sucked into these pricing games starting back in 2005.
But we learned long ago that it was simply a race to extinction. We could
extract as many sales as we wanted from Amazon, but of course profit and
long-term sustainability would prove much more elusive. For us it became a
simple question: Do we exist to move "units" or do we exist to build
a long-term, trusted brand with consumers who share our passion for quality
toys? The answer for us was obvious. 

Since
that time, things have gotten much worse in the industry. Not only are there
more sellers competing for the same product (over 100 in some cases!), but now
there is Fulfillment by Amazon to contend with. FBA is a compelling offering –
so compelling in fact that it is now utilized by hundreds of merchants who sell
toys and games. The problem once again is that there is no barrier to
entry…no commitment to the product. It's common to see a single FBA merchant
selling toilet paper, motor oil, adult products, and specialty toys.

As
a specialty category, this is where I think we've failed. Everyone is in such a
hurry to push their products out to the world that they don't think through the
consequences of selling to anyone and everyone. While most specialty
manufacturers would think long and hard before they sold into a mass channel
like Wal-Mart, those same manufacturers are rushing headlong into Amazon
without considering the consequences to the broader market. As a manufacturer,
you too have to ask yourself: Am I just trying to move "units" OR
build a long-term, trusted brand with the retailers and consumers who share our
passion for quality toys?

So
what can be done about it? Following are some of the most common ways that
manufacturers are dealing with it today: 

  1. Just
    ignore it and hope that the free-market economy will eventually take care of
    itself.
  2. Limit
    the number of online retailers.
  3. Implement
    Minimum Advertised Price (M.A.P.) policies.
  4. Forbid
    retailers from selling on third-party marketplaces (like Amazon).
  5. Avoid
    selling direct to Amazon.com.
  6. Deny
    shipments to third-party fulfillment houses (like Amazon FBA).

My
suggestion; anything but #1! The problem is real and will only get worse if
it's ignored. As a specialty manufacturer, you should already be very choosy
about who's selling your products so it's only natural that you would limit the
number of retailers (online or off).

Generally
speaking, M.A.P. policies are a good thing…provided they are enforced across
the board. But this is a constant frustration for many reputable retailers in
regards to the Amazon platform. One rogue merchant will drop their price, so
Amazon will automatically match that low price to gain back the "Buy


Box". Amazon of course will cast the blame on the smaller rogue merchant,
but manufacturers rarely have the courage to hold Amazon accountable to the
M.A.P. policies they established. If a M.A.P. policy is implemented, it should
be enforced aggressively and impartially regardless of the size of the
retailer. If unenforced, M.A.P. policies actually do unintended harm to
companies that are playing by the
rules.

In
fact, it might come as a surprise to many manufacturers that Amazon themselves
are actually ENCOURAGING price slashing. They send out a weekly email to each
Amazon seller flagging the inventory where their prices aren't the lowest, thus
perpetuating the bloody price wars.

No
question, Amazon has built an enormously successful business by offering huge
selection at cut-throat prices. But if your brand is based upon more than
simply price, you might think twice about the long-term ramifications of being
sold on Amazon’s platform.

 

 

 

 

3 thoughts

  1. Thanks so much for your post. I deal with this everyday. There are many Amazon sellers whom we have never sold to that somehow get ahold of our kits and then low ball them on Amazon. Just last night I actually purchased a damaged kit that I could not get a third party seller to remove and it was driving the price down on our products. It’s the first time I had done that, but I really don’t want damaged product being sold like that, especially as it drives down the price at the expense of our long term retailers who have helped to build our brand.

  2. Well spoken, Mark. We are a Canadian distribution company trying to support our specialty retailers in their mission of educating, engaging and providing a value-added experience to the consumer. It is so frustrating to hear from 2nd generation retailers who work their hearts out advising consumers on the perfect gift -only to watch that same person whip out a cellphone and brazenly announce “thanks for all of the advice. It will be the perfect gift. I’ve just paid $10 less on Amazon and they ship for free”. When specialty retailers are killed off by “showcasing” for Amazon, the consumer will finally wake up to limited choice and no customer service. Worse, the traditional entry level retail jobs for their kids will also have disappeared, depriving them of the opportunity to learn the art of selling from old masters who made it their life’s work. Those kids can then get a resume-boosting, skill-building job pushing a floor mop in one of Amazon’s monster warehouses.If they work hard, they might get promoted to taping boxes.

Leave a Reply