Sometimes it feels like this.
As more business shifts to e-commerce marketplaces for consumer brands, understanding the cost serve each marketplace is critical. What’s more, knowing how to drive efficiencies in each of these areas is key to maintaining profitability of this fast-growing channel.
To many consumer brand manufacturers, building an Amazon Profit & Loss statement (P&L) can be daunting. While you may have strong command of your negotiated coop terms and advertising costs, continuous asks from Amazon throughout the year, unexpected fees in the form or chargebacks or shortages, and other costs, such as Amazon-specific hard bundling or prep may be more challenging to not only track, but minimize.
We’ve worked with thousands of brands to help them properly understand, negotiate, AND minimize costs to ensure a thriving, sustainable ecommerce marketplaces business. Below is a comprehensive look at our findings.
Marketing, Merchandising and Advertising
Before Amazon had a robust advertising platform, manufacturers paid for “advertising” on Amazon in the form of marketing accruals or MDFs. This typically paid for inclusion in Amazon’s automation and personalization engine or merchandising placements that were manually placed on-site by a Site Merchandiser. However, the last five years’ growth of Amazon’s ad platform has reduced non-paid-advertising inventory, rendering these accruals somewhat redundant.
Pro Tips:
- Advertising can be a big sales driver…or an enormous profit drain. An effective strategy that leverages Share of Search or comparable strategy and digital shelf analytics is critical to strategic, efficient advertising that drives online and offline sales.
- When negotiating with Amazon on terms, make a case for your new, increased costs of Amazon’s ad platform. Explain your need for offsetting reductions in outdated merchandising and marketing accruals to continue to affordably drive Amazon as a growth channel. Brand manufacturers may be able to get them lowered.
- Is Amazon pitching you merchandising packages like Father’s Day, Back to School, or New Year, New You? While you can’t expect performance metrics on these packages, they can be worth your while IF one of the following holds true: Amazon is putting significant corporate investment in driving traffic to the promotion or promotion landing pages OR participation comes with something that helps your products stand out in search results.
- If you’re being pitched a headcount on Amazon’s side (Strategic Vendor Services (SVS) / Amazon Vendor Services (AVS) program) to work on your business, carefully weigh the pros and cons to understand if this program is right for you.
These types of fees may be referred to as the following:
- Merchandising and marketing accruals
- Strategic Vendor Services (SVS) or Amazon Vendor Services (AVS)
- Merchandising straight payments
- Sponsored Ads, Sponsored Products, paid search
- Demand Side Platform (DSP)
- Other media directed towards Amazon
- Subscribe & Save accruals or fees
- Promotions and Vendor Powered Coupons (VPC) funding
Product Pricing (Costs) and Off-Invoice Discounts
Quantity discounts. Quick pay discount. Returns allowance or markdown dollar commitments. These off-invoice discounts can quickly add up. In addition, they’re tricky to track due to the timing of the discounts being taken relative to Amazon’s inventory receipts. Also, making use of Amazon’s freight, transportation, and Vendor Flex programs may provide opportunities to use their freight and warehousing infrastructure at reduced rates…but you need to do the math to make sure.
Pro Tips:
- Sophistication in your accounting dashboard will help track and manage (and dispute) these discounts over time to improve visibility—especially quick pay discounts. In addition, consider consolidating these disparate terms in your next vendor negotiation. Having fewer coop agreements and deductions will simplify your accounting.
- Haven’t given Amazon a cost increase in years in fear they’ll stop ordering from you? Amazon puts controls in place to ensure their lack of category expertise doesn’t come back to bite them. There’s a formula to a successful cost increase negotiation, and the better you can package it for senior leadership approval, the better: 30-60 days written notice, proof of increasing costs for the manufacturer (raw materials increase, etc.) and security that it’s a cost increase being passed to ALL retailers (not just Amazon). If you’re also working on any efforts that improve Net PPM, even better.
- When considering programs such as Vendor Flex, Cross-Dock, and making use of Amazon-pays freight, a careful comparison with your own freight and fulfillment costs is important to ensure these programs actually save you money.
These types of fees may be referred to as the following:
- Base MDF
- Special pricing/costs
- Quantity discounts / pricing tiers
- Quick pay discounts
- Damage allowances
- Return allowances
- Volume discounts
- Freight allowances
- Vendor Flex fees
- Cross-Dock fees
Retailer Pricing or Profit Assistance
Amazon’s profits got you down? In ecommerce marketplaces, items must “stand on their own.” Meaning, there typically aren’t large basket sizes over which to amortize shipping costs. Due to the success of “One Click” checkout, most customers order one thing at a time. Single unit shipping economics put enormous margin pressure on ecommerce retailers. Those ecommerce retailers, in turn, put subsequent margin pressure on their suppliers, the consumer brands.
Most vendors we work with are plagued with discussion and management of Amazon’s Can’t Realize a Profit, or CRaP designation. If items are unprofitable or “CRaP” for the retailer, the brand will suffer in the form of tense negotiations, ineligibility for marketing, and decreased presence in search results.
Pro Tips:
- These are arguably the most negotiable of all monies paid towards Amazon. Properly preparing for these negotiations and arming yourself with data is key to a successful negotiation.
- Beware of “blank check” funding. Guaranteeing Amazon a specific margin percentage or Net PPM percentage can be risky. Since the retailer sets their own retail pricing, the amount owed by the Vendor is variable and uncontrolled.
- Amazon may attempt to compare your brand vs. the “category” or “peers” to illustrate gaps to “standard” or “category average” terms. These comparisons may or not be direct peers, so take the comparisons with a grain of salt.
These types of fees may be referred to as the following:
- Crap allowances
- Margin guarantees
- Item-level rebates
Operational Fees (Chargebacks and Shortages)
Companies like Amazon, Walmart, and Target have their own stringent, unique requirements in supply chain management for manufacturers that deliver to their warehouses, from the types of packaging and labeling used to shipping notifications. And according to PYMNTS, “failure to comply with those requirements can be costly, and eat into already-thin margins for those manufacturers.”
Brands that sell on Amazon through Vendor Central must adhere to specific operational compliance processes and standards to avoid penalties and be paid in-full by Amazon. Discrepancies resulting from purchase orders, shipping, receiving, packaging, and data misalignment may result in chargebacks to the vendors and significantly cut into their earnings. The dispute process can be tedious and requires data from a range of sources to initiate.
Pro Tips:
- Amazon’s receiving process is highly automated, and there’s no person checking in products. Therefore, your brand’s data in Amazon’s system must be near-perfect to avoid mis-matches and fees.
- Disputing and reversing chargebacks and shortages is important, but identifying—and fixing—the root cause of the problem is critical to prevent future problems. Most issues stem from incorrect item data in Amazon’s catalog. Quarterly catalog “scrubs,” where the manufacturer compares their item-level data with the data in Amazon’s system and corrects errors that may have cropped up, are a best practice.
- The easiest way to avoid chargebacks is to ship what you say you’re going to ship when you’re going to ship it.
These types of fees may be referred to as the following:
- Chargebacks
- Shortages
- Prep fees
Key Takeaways
As more business shifts to e-commerce, a sustainable and profitable business model is key. Understanding your cost to serve Amazon and ecommerce marketplaces might seem overwhelming, but breaking the costs down into what’s negotiable, non-negotiable, and recoverable will help consumer brands properly organize internally. What’s more, understanding both the hidden costs and redundant costs will help brands successfully negotiate with Amazon to bring costs down and improve profitability.