Work from home
Author: University of Texas at Austin
Published: 07/16/2024
Type of publication: Instructive / Useful – Peer reviewed: Yeah
Content: Summary – Introduction – Major – Related
Synopsis: Explore the advantages and disadvantages of selling to Amazon as a small seller. Learn when this strategy can increase profits and when it might be best to avoid it. Is it better for the seller to maintain control over the price of their product, but share a fraction of the revenue with Amazon? Or should they sell to Amazon and let it resell their products to consumers? The agency channel makes the most sense when the market for a product is smaller and buyers have fewer options to find it. With less competition, the seller can set higher prices and make higher profits. A reseller relationship can be attractive when competition and substitutability are high. If buyers can buy the same product from multiple sources, Amazon is more likely to offer a good deal.
Introduction
In Amazon Prime Today, shoppers will be able to browse more than 600 million products. They may not know that most of those listings are from non-Amazon sellers, who account for 60% of sales on the platform. Most are small and medium-sized businesses: bookstores selling used hardcover books, toy makers selling original products, and retailers selling clothing.
Main Summary
What buyers also don’t see is the choice the platform and seller make about how to interact. Is it better for the seller to keep control over the price of their product, but share a fraction of the revenue with Amazon? Or should they sell to Amazon and let it resell their products to consumers?
New research from Texas McCombs may help them determine when to sell to Amazon and when not to. Stephen Gilbert, professor of information, operations and risk management and the Eddy Clark Scurlock Centennial Chair in Business, creates mathematical models of interactions between companies and consumers.
With Parshuram Hotkar of the Indian School of Business and Chuanjun Liu of Fudan University in Shanghai, Gilbert modeled the two types of channels that e-commerce platforms like Amazon offer to sellers.
- The agency channel is the most common and the most independent. The seller lists their products on the platform, but maintains control over inventory, pricing, and possibly fulfillment.
- A reseller channel is a partnership where the retailer buys the seller’s inventory, sets the prices, and ships the products. Reseller channels are more exclusive; Amazon’s is invitation-only.
Reseller relationships offer hope for higher sales volumes, thanks to Amazon’s marketing power. But they come at a cost. Amazon collects $140 billion a year in sales commissions, and seller complaints about unfair fees have prompted an investigation by the Federal Trade Commission.
Amazon, for its part, argues that the fees cover its costs, such as its distribution network, inventory management, shipping and delivery. Under the agency channel, the seller assumes those costs.
The general consensus has been that for sellers with high sales volumes, a reseller relationship is worth the additional fees.
“It’s true that a high-volume reseller may have a better chance of entering into one of these relationships,” Gilbert says. “But what we’re saying is that there’s more to it than that.”
More about resale
In building the seller and reseller channel models, Gilbert’s team analyzed several factors that influence the choice between them.
Other channels
Some manufacturers already sell their products elsewhere, such as brick-and-mortar stores, their own websites, or e-commerce stores like eBay and Etsy.
Number of players
The number of other resellers involved, such as brick-and-mortar stores, affects the intensity of competition in the market.
Substitutability
For mass-market products, it is relatively easy to substitute one channel for another. A shopper can find Gillette razor blades in a wide variety of stores that offer comparable convenience.
For more handcrafted products, such as a set of wind chimes, it may be more difficult to replace the online channel. The buyer may prefer to see and hear them in person before purchasing.
Gilbert found that these variables can affect a salesperson’s decisions.
- A reseller relationship can be attractive when competition and substitutability are high, as in the case of razor blades. If buyers can purchase the same product from multiple sources, Amazon is more likely to offer them a good deal. According to Gilbert, “both the platform and the manufacturer win.”
- The agency channel makes the most sense when the market for a product is smaller and buyers have fewer options to find it. With less competition, the seller can set higher prices and make higher profits.
He notes that sellers have a third option: neither channel. That might be the best option, if Amazon sales cannibalize too much of their existing sales.
“If those sales do not generate enough incremental profits to offset a potential reduction in profits from traditional resale channels, the seller should consider leaving the platform,” Gilbert says.
As with negotiating a car, a recall could even lead to a better deal, he adds.
“A seller’s willingness to move away from the platform’s agency channel could make the platform more willing to offer them favorable resale terms.”
More information about Amazon Prime
“Channel Choice Through Online Platform” is published in Production and Operations Management.
Attribution/Source(s):
This peer-reviewed publication was selected for publication by the editors of Disabled World due to its high relevance to the disability community. Original author: University of Texas at Austinand published on 16/07/2024, the content may have been edited for style, clarity or brevity. For further details or clarifications, University of Texas at Austin Contact can be made at utexas.edu. NOTE: Disabled World does not offer any warranty or endorsement related to this item.
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Cite this page (APA): University of Texas at Austin. (July 16, 2024). Pros and Cons of Outsourcing Your Ecommerce to Amazon. Disabled world. Retrieved July 23, 2024 from www.disabled-world.com/disability/employment/home/amazon-sales.php
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