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We’ve all seen “get rich quick” schemes in one form or another.
From the peddling of shit-stocks to more elaborate pyramid schemes, these systems violate trusted ecosystems and hurt the average joe.
A tell-tale sign of this is grifters that ask to “buy my course, so you can do it too!”
We’re starting to see more and more of this across social media platforms – TikTok in particular. These influencers will sell day trading courses and give tips on which shitcoins to buy next.
But there’s also a more innocuous one going around currently that a lot of people are buying into – 3rd party selling on Amazon.
What is 3rd partying selling, and why do it on Amazon vs. Squarespace or Shopify?
Can you really hit the jackpot around Black Friday this year? Or will your product tank because that course you bought was a bunch of smoke and mirrors?
I came across a very interesting podcast from one of my favourite guests, Ali Hamed on business breakdowns. He does an excellent job of walking through this landscape. Coupled with perfect timing around Black Friday, I thought it would be a great time to dig in here.
This week, in <5 minutes, we’ll cover the Amazon 3rd Party Selling Network:
How Does Amazon’s Marketplace Work? 👉Private Label vs. Third Party (3P)
What is 3rd Party Selling? 👉 Manufacturing, Distribution, Marketing
Attributes of Succesful 3rd Party Sellers 👉 How to Win
Who are the Big Dogs? 👉The Biggest and Baddest in the Space: Thrasio
Downfalls 👉Why it’s hard to Succeed
How GRIT’s Playing it 👉 Plumbing of the System
Let’s get started!
1. How Does Amazon’s Marketplace Work? 👉 Private Label vs. Third Party (3P)
Every time you boot up Amazon on a web browser or the app and enter in a search item, you get fed with two types of results. 3rd Party Sellers – AKA anyone except Amazon, and Amazon’s own products.
The famous book written on Amazon is appropriately titled “The Everything Store” because they set out to fill every possible consumer demand all at your fingertips – and delivered… fast.
A shortcut to scale if you are building a platform is to aggregate third parties. If you don’t have the capacity to manufacture products, aggregation as a marketplace fills this need.
But once you have reached a critical mass on aggregation, in order to achieve margin expansion, typically what you look to do is take over more and more of the supply chain through vertical integration.
From an outside view, this is why the Amazon basic’s private label brand was created. But if you get into the weeds of it, Amazon actually makes better margin on their third party products because they have built out so many warehouses and logistics capabilities.
Instead, the Amazon basic’s private label functions more as a stopgap to fill the need of every single product that consumers want. Amazon does this so more people will think of starting their search for a product on the Amazon app rather than on a Google browser. And why does that matter? Amazon can now turn and sell that ad space and steals that marketshare from Google.
Amazon doesn’t disclose the hard dollars, but currently, roughly 2/3rds of all sales are 3P while the remaining 1/3rd is Amazon private label. Since the margins on 3P are a bit better, Amazon is incentivized to keep roughly this balance to blend profitability and product offering on their platform.
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2. What is 3rd Party Selling? 👉 Manufacturing, Distribution, Marketing
Right now, if you want to sell a good online you pretty much have two leading options: Amazon and Shopify.
The Amazon approach is best for goods that do not have as much brand association and are slightly more commoditized. Shopify excels in higher ticket items where the consumer has an affinity towards a brand through either word of mouth or marketing budgets.
Amazon has 3 main types of fulfillment methods:
Fulfilled by Amazon (FBA): Seller ships inventory to Amazon, and Amazon fulfills orders on the seller’s behalf.
Fulfilled by Merchant (FBM): Seller ships their own products directly to the customer after receiving orders from Amazon.
Seller-Fulfilled Prime (SFP): Seller ships their own products directly to the consumer according to Amazon Prime’s strict shipping standard, allowing them to display the Prime badge on listings they fulfill from their own facilities.
For the purpose of this discussion, we will focus on the FBA component within Amazon that handles all the “stuff” for you.
Amazon offers a full suite of services from the product listing, payments, packaging, warehousing, and logistics side of the equation. The main variables that go into just how much Amazon’s take-rate is, are weight and size. If you were to make a broad generalization, the take-rate on the FBA side is roughly 40% of sales.
That means you have to manufactur the product, and get it ready to go to Amazon with the proper labelling and everything ready to go, then they take 40% ontop of that. So you can see how quickly the margin erodes as these costs pile up.
But first, let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel!
3. Attributes of Successful 3rd Party Sellers 👉 How to Win
I am by no means an FBA Guru, and I think if anyone can crack this code to success you should go out and do it, but this is an aggregation of recent frameworks that successful small to mid-sized sellers have followed.
Avoid Fashion and Electronics
Fashion by nature is fast, and as we wrote in our previous article that focused on Shein, it’s only getting faster. To stay ahead of trends and keep up with capital-intensive manufacturing is a goliath tasks that many many SKUs have failed to do.
Electronics have an extremely short half-life (the time required for a quantity to reduce to half of its initial value). Constant innovations driven by Moore’s law can render an SKU irrelevant in the span of six months. This also creates the need to absorb alot of waste in inventory which compresses margins if a product’s sales cycle is not managed effectively.
Additionally, if you are building a dongle or gadget that attaches to a product like an iPhone, Apple can change a spec and render your product useless which puts you back to the drawing board.
Customer service and reviews as a moat
By nature of the discovery of the product, reviews are important. When users boot up the web browser, they are not searching your brand, they are searching the product type.
Reviews become your brand.
Consumers will look at the price, then the number of reviews, then the quality of reviews before starting to read the comments. If the comments are off or even if there are not enough, the consumer will be hesitant to “buy now” or “add to cart.”
By incentivizing purchasers through discounts and focusing on quality and customer assurance, you can build and strengthen a “review moat”
Have a portfolio of niches rather than a focus on cross-selling
In his podcast interview, Ali talks about one aggregator who owns a mobile whiteboard business, a gravy separator business, an HDMI business, a shower curtain liner business, and a coffee craft business.
The beauty of these products is that they’re almost entirely uncorrelated to each other. Too often, when someone goes in and tries to cross-sell products it doesn’t work on Amazon’s platform. This is because of the nature of the search and discovery native to Amazon’s website.
When the site recommends products, they are sorted based on reviews, comments, price, and relevancy. Sure you may have a related product to say, shower curtains, like a bath mat, but there’s probably a more dominant seller with a review moat already in that category. It may make sense to buy them and move into that category, but when other sellers in the market see one product category dominanting, competition piles in.
Best to diversify.
Be the best at selling scissors
Amazon is great at selling high volume low average selling price SKUs because of the scalability of the take rate when using FBA. If you can become dominant in a very specific and commoditized product and form a review moat around it, moving the quantity of that item can be profitable.
4. Who are the Big Dogs?👉 The Biggest and Baddest in the Space: Thrasio
Any time you have massively successful platforms, a goood business idea is to build ontop of this platform as a shortcut to scale. Veeva did this on Salesforce, Pinduoduo did this on WeChat, and Thrasio has been doing this on Amazon.
Thrasio is one of the largest aggregators in the FBA space. They go around and buy individual stores and brands to add to their portfolio in the hopes of increasing sales and cutting costs, dropping it all down to the bottom line.
In October, they also landed a fresh $1 Billion in funding which pushed the valuation up to $10 billion. They have paid over $600M for more than 150 acquisitions in the FBA space. They cover over 200+ brands, 22K SKUs, and 124 channels and marketplaces.
When Thrasio makes an acquisition, no two deals are the same. They frequently have earnouts scheduled so that the merchant they are buying the store from can participate in the growth of the business that they worked so hard to build.
Since Amazon focuses on high volume and optimizes for lower average sales price, it’s frequently a scale game and Thrasio does just that by rolling up these vendors.
5. Downfalls 👉 Why it’s hard to Succeed
We always try to look at both sides of the equation, and its not all sunshine and rainbows in the FBA space. Below are some of the key areas on why its hard to do this:
Amazon poaches the product
At the front and center of all the anti-trust debate re:Amazon lately is the copying of 3P products and promoting their own brands.
Amazon has been shown to create exact replicas of products sold by 3P in order to bring them private label and cannibalize other vendor marketshare.
This is a huge problem to the ecosystem if it becomes even more rampant because Amazon will lose the trust of a key part of their supply.
Amazon demotes products if you mess up on inventory for too long
Ali explains that the number one way to ruin your Amazon business is to run out of inventory. If you stock out too many times, Amazon will de-rank your listing, and what will happen is your competitors realize that you’re starting to run out of stock, or selling back inventory if you don’t have quality assurance.
The competition will then start spending more money on advertising to try to completely sink your product whereby a demotion flywheel takes over.
You’re at the mercy of Amazon’s Terms Of Service (ToS)
If you ever break Amazon’s ToS, good luck reselling your business. If you do anything like trying to drive traffic off-platform, write fake reviews, mess up on labelling, sending unapproved products, etc… you’re toast.
When you are labelled as a bad actor its incredibly difficult to get back on the good side of papa Bezos.
You don’t own the customer, Amazon does
When the customer goes shopping for the product, they go to Amazon’s site. When the product arrives, it’s in your packaging, but not before sitting on the doorstep in Amazon’s packaging.
By the very nature of the discovery of the product, the consumer is not really brand-focused during the selection process. They look at the price, the competition, and as mentioned above, the reviews.
Wrapping Up…
The new economy is a digital one. There are more and more ways to make money online every single day.
If you can master the ins and outs of a platform and learn how to scale this business it can be incredibly lucrative. But there are no shortcuts. You have to do the work just like any other business.
And like any other money-making idea, there are a lot of scammers out there.
So do your work, and get it right.
Oh and remember, I am long and strong Amazon.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
P.S Bitcoin went on sale this weekend. You know what to do ; )
Sources:
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