Amazon is not only the world’s leader in e-commerce, it also offers the incredible opportunity for businesses and entrepreneurs to reach millions of buyers on its platform.
Around 50% of sales on Amazon are made by third-party sellers (source), which means the income potential is absolutely huge.
There are a number of different ways to sell on Amazon. You could buy and resell products (referred to as retail arbitrage), hire a manufacturer to create private labeled products for you, design and create your own custom product, buy and sell used products, or buy products wholesale and resell on Amazon.
The details of each business model are unique, but Amazon sellers will face some of the same challenges regardless of what business model they’re using.
In 2015, My wife and I started a private label brand selling on Amazon. Although we ran the business part-time, it grew very quickly and completely exceeded our expectations for the business. However, we also faced a lot of challenges that we weren’t expecting, and ultimately we decided that selling on Amazon was not something we wanted to do long-term. As a result, we sold our business and moved on.
This article will cover some of the specific challenges that you should expect to face if you’re considering selling on Amazon.
Amazon pays third-party sellers every two weeks. The challenge is, you’ll need to put out the money for inventory long before you start to see income from that same inventory.
Many sellers hire manufacturers in China to produce inventory for them (especially private label brands). Those manufacturers will usually charge somewhere around 25% of the cost of the inventory upfront before they begin production. Depending on the manufacturer and the quantity that you are ordering, the production may take about 1-2 months.
When production is finished, you’ll pay the remaining balance for the inventory and shipping and it will be sent to you. Shipping (including customs clearance) can take anywhere from a week to a couple of months until it reaches Amazon’s warehouse, depending on whether you ship by air or sea. That means that it may be several months before you start to get paid for the inventory that you buy.
That’s hard enough with one product, but if you have many different products, it becomes even more challenging. If you’re trying to grow your brand and launch new products, it becomes harder yet because those new products aren’t generating any cashflow.
Cashflow is easily one of the biggest challenges that most Amazon sellers will face (and really, this can apply to other ecommerce businesses as well). On paper, you may be making a nice profit, but you’ll need to keep cash on hand so you have it when you need to place an inventory order. Preparing for holiday shopping or a seasonal peak requires you to put up even more cash in order to get enough inventory to support higher sales volume.
Of course, a line of credit can be a solution to the issue of cashflow, but interest charges will be an expense that sellers need to consider. Plus, new sellers may have a hard time qualifying for a line of credit.
Amazon presents sellers with an incredible opportunity, and as a result, millions of sellers have jumped onto the platform. The competition can be brutal since so many sellers are competing for exposure in the search results.
The typical approach followed by most private label sellers involves finding low-competition products. However, those low-competition products are becoming extremely rare and hard to find.
Excessive competition makes it hard for new sellers to break in. Buyers tend to choose established products with name recognition and/or hundreds of customer reviews over new products with very few reviews.
The excessive competition winds up driving prices down. The response of most sellers who are facing a lot of competition is to lower their price.
Selling on Amazon and competing based on price is a terrible idea because there is always going to be someone who is willing to sell for less. This leads to cutting costs in the manufacturing process, lower-quality products, negative reviews from customers, and a drop in sales volume.
In general, the price wars lead to razor-thin profit margins that make it difficult to survive. Some sellers are willing to move products at a loss in order to pick up customer reviews and try to establish sales velocity that leads to higher search ranking, with the hope of increasing the price later. This usually doesn’t work, but it means that sellers may be facing competitors who are willing to sell at extremely low prices.
Product reviews and seller feedback play a huge role in the buying decisions of Amazon customers. Some buyers and new sellers may not understand the difference between the two.
Product reviews are supposed to address issues directly related to the product, regardless of who the seller is.
Seller feedback should address things like order fulfillment and customer service, and it should not address issues related to the product.
If you’re selling through Amazon’s FBA program (Fulfilled by Amazon), many of the potential issues that could come up as seller feedback will be irrelevant to you since Amazon handles everything related to fulfillment and shipping.
When my wife and I started selling in 2015, Amazon allowed sellers to give away products in exchange for a review, as long as the reviewer clearly stated in their review that they received the product for free or at a discount for the purpose of reviewing it.
But in 2016, Amazon made significant changes to its review policies, no longer allowing sellers to give free products, discounts, or any other incentives in exchange for a review. This was a result of sellers and reviewers manipulating reviews and customers starting to loose trust in the reviews that they read on Amazon. While this was the right move for Amazon to make, it made things harder for sellers.
Amazon has also tightened up rules related to sellers asking customers for reviews and follow up emails that are sent to customers after a purchase.
These changes have made it difficult for sellers to get reviews for new products, and getting sales without reviews is virtually impossible when you’re competing against products with very strong reviews.
Another challenge is the fact that many customers don’t make the effort to leave a review unless they have a bad experience with the product. Under the old rules, sellers could attempt to remind customers to leave a review, but now sellers must wait for customers to decide to leave a review.
Sales tax laws are changing very quickly. Many states are passing new laws, and as a seller, staying on top of the sales tax laws in 50 different states is a major task. Fortunately, there are some resources for Amazon sellers that can be a huge help (we used TaxJar), but it still takes effort from sellers.
Historically, Amazon has placed the burden of filing and paying sales tax on third-party sellers, but some states are now forcing Amazon to take a more active role, which could be good for third-party sellers.
Even sellers who want to do everything by the rules may face challenges and confusion related to what they should do in order to stay compliant.
One of the reasons why Amazon has become so successful is because they are generally very buyer-friendly. As a customer, dealing with Amazon is usually a good experience, and the return policy is more customer-friendly as compared to many other e-commerce sites.
The return policy can vary depending on the category of the product. Some categories offer free returns for customers, but as a third-party seller, you’re the one who is paying for that return. And the free return policy essentially encourages customers to buy multiple products, choose the one they want, and then return the others. I had several customers tell me that they purchased as many as five competing products and returned the four that they chose not to keep. This results in high return rates and a lot of expenses for sellers.
Additionally, the returned products have usually been opened and may or not be in a condition that allows them to be re-sold. Facing fees for a returned product, losing the revenue from the sale, and then losing the ability to sell that product can be a frustrating experience for sellers.
Amazon will automatically re-package returned products that are in a condition to be re-sold. This sounds good for sellers, but the problem is, it’s completely up to an Amazon employee’s discretion whether a product should be re-sold. The employee is most likely not familiar with your product and they may not even make sure that everything is included in the package. They may re-sell a product that is missing pieces, or the buyer may think that they have received a used product. That buyer can file a complaint against you for selling a used product as new, and Amazon may suspend your account.
There is a setting in your Amazon seller account that allows you to state that Amazon should not re-package and re-sell your returned inventory, and I recommend that you do this. That way, you’ll be able to have your returned items shipped back to you (at your cost) and you can determine for yourself if it can be re-sold. You may be able to re-package it so it will not be confused for a used product. It costs you more money as a seller, but it prevents bad experiences for your customers.
Over the years, Amazon has become increasingly strict with the third-party sellers that they allow to sell products in certain categories. This is mostly for the safety of buyers and as an attempt to reduce the amount of counterfeit products that are sold on the platform.
Getting approval to sell in some categories can be very difficult, especially for small sellers. In some cases, you’ll need to purchase inventory in order to have the documentation required by Amazon to be approved to sell. That means you’ll need to pay for inventory that you won’t be able to sell if you don’t get approved.
In general, Amazon’s communication with sellers could use improvement. Most of Amazon’s rules are pretty clear, but the challenges are usually involved with enforcement of the rules. Sellers may have their accounts suspended without a clear explanation of the reasons, or they may not be able to speak to anyone at Amazon to find out what they need to do in order to get their seller account reinstated.
Also, as a seller, you may get a different response from each Amazon Seller Support rep that you speak to.
All of this makes it challenging for sellers to run a business.
As a third-party seller, you are completely at Amazon’s mercy. Obviously, Amazon provides sellers with an unprecedented opportunity to quickly reach millions of buyers, but Amazon also has incredible power over third-party sellers.
If Amazon decides that you’ve violated their rules, they can rightfully suspend your seller account. Of course, most seller suspensions are justified and are in the best interest of everyone (Amazon, customers, and legit third-party sellers). However, sometimes a seller makes an honest mistake or has no idea what they’ve done to warrant a suspension.
A suspension from Amazon will bring your business to a halt. The best way to deal with this is:
Amazon makes it possible for sellers to quickly build highly profitable e-commerce businesses, but there are plenty of challenges that come along with it. For many sellers, the upside outweighs the challenges. Only you can decide for yourself.