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Amazon Business Models For Sellers

By Joe | Business Planning

Dec 19
Business Models
Of the different Amazon Business Models for sellers that can be followed, which is the best for a new seller?  Budding Amazon sellers should be asking that question before jumping in and seeking a product.  Instead, they ask, what product should I sell online? 


Traditional business teaches to develop a product/brand and then build your business around it. Due to the high number of products still not online, the ecommerce business model, in some cases, is backwards. Marketplaces like Amazon, are like this. New sellers flock to the platform without products a business and often zero experience

What is the best business model for me to follow to maximize my experience and resources? How does my prior experience help me with any particular business model? This is where a new marketplace seller should start. All to often they are targeted early on by savvy marketers selling get rich quick private label programs often with next to no experience themselves.

Amazon Business Models | Knowledge is power

Outlined below are several of the specific business models as they apply to marketplaces such as Amazon. Entering the online space is a bit easier when you have an idea upfront of the available options and what might work best for you.

There are several distinct marketplace business models. It starts by determining which business model is the best for you to follow. Each has its own set of pros and cons. They are arbitrage, wholesale, dropship, private label and digital.

This article will focus on several marketplace business models. Including some of the assumptions that new sellers make as they pile onto the platforms.

Digital

You are a yoga instructor, you make an instructional yoga series that you want to sell. You offer it as a digital download available all across the world. Cost of entry can be quite high as you have all the production and editing costs.

Experienced sellers see digital products as the holy grail of e-commerce, no inventory, no order processing & no fulfillment. The only expense then becomes marketing and the effort it takes to spend the proceeds. Once the initial costs are paid, the cost of sustainability is low although you need new editions .

Arbitrage

Arbitrage is the art of buying liquidations and selling at full price. It happens online, in retail, even from one marketplace to another. It takes a fair amount of work and can tie up a considerable amount of money in inventory. You have to enjoy chasing the sale in the retail stores and have a sharp eye for value.

Amazon seems to be moving to end this model as it is getting harder to sell due to brand gating. Brand gating is when a brand restricts who can resell a product based on agreements and receipts. Your arbitrage business can disappear overnight, and you can be stuck with a lot of inventory. If you do not have other sales outlets or a backup plan, you can be in trouble. Margins can be very high with Arbitrage, but also time-consuming. Sellers that are successful with it, swear by it.

Drop Shipping

E-commerce got its start via drop shipping. Brands weren’t venturing onto the net to sell in the early days. It was the brave lone businessman who worked deals with manufacturers to ship goods.

As a drop shipper, you have no inventory and ship no product; you list products and process orders. When an order comes in, you send it to whomever you are buying it from. They ship it as though it is coming from your business. Margins are lower most of the time with drop shipping. There can be a host of issues that occur that are out of your control also.

Drop shipping success comes down to the relationship that you have with the manufacturer and your ability to market products. Drop shipping can be the easiest or the hardest of the business models. If set up correctly with proper margins, drop shipping is fairly easy to automate or outsource to a virtual assistant

Be unique, find local businesses and products that aren’t available everywhere else. All of the business models mentioned are already overrun with sellers selling the same products from the same manufacturers. It is key to set yourself apart. Create a value proposition that makes the buyer want to buy from only you!

business-models

Ecommerce Business Models

Wholesale

Wholesale involves buying at wholesale and reselling at retail prices. A drawback can be the competition if you choose products that everyone else sells. You need to have some investment income for the purchase of inventory and the amount of time it takes to sell them.

One pro is that many times the smallest order from a wholesaler can be as low as 100$. Margins can be as high as 50% if you pick your products well and competition is sparse. Competition is the key to success.

Manufacturers will often let anyone resell a product and do very little to set price restrictions. As a result, many sellers are burdened with listing hijackers, scams and a race to the bottom with the lowest price available.

A seller should try to get an exclusive agreement with a manufacturer meaning only that seller can sell in a particular area or marketplace. Map pricing, or minimum advertised price is when the manufacturer sets a minimum price that a product can list for. This at least creates a level playing field for sellers to start from.

Minimum advertised price does not mean that a seller cannot sell below that amount, they cannot list below that amount. Easily worked around with discount codes and discounts applied at the cart level.

The best insurance than any seller can have against competition is diversity across marketplaces. If you have more than one place to sell your products, shifting product emphasis is easy when problems arise.

There is no simple business model or overnight success within reach for anyone. There are lucky new sellers, but not many. There is no golden goose or magic pill, regardless of whatever some magic seminar says.

Private Label

Private Label is the top of the food chain. This is where tomorrows big brands may get their start. Unfortunately, the mindset of most private label sellers will keep them from ever becoming that big.

First, what exactly is private label. Private label is when you create a unique product either through creation or improving on a product already available. The cost of entry can be quite high as production runs are expensive. You have to maintain inventory levels, do all of the marketing, negotiate all deals, etc… It can be a lot of work, the spillover to regular website sales is very good as well.

The reward of private label is you have your brand.  Margins should be well over 50%. Private label is the most work as a business model. Not only are you a seller but you also have to have business smarts, sharp judgment, and sound analytical reasoning.

Other Considerations

Selling online, Amazon, in particular, does not follow traditional business models. Amazon would have you think that the world starts and ends with them and there is no other place to sell. There is a small amount of truth to that due to the amount of traffic coming on Amazon.

At 50% of total e-commerce, dominating a niche on Amazon does not make a brand big. How many big name brands came out of Amazon? Very few, because who is selling to all the other buyers that do not buy on Amazon. While not impossible, it is rare to find successful e-commerce businesses that ignore Amazon.

Amazon Seller Success

Success comes through taking a big picture view and targeting your demographic, often across multiple marketplaces. As a seller, if you are not utilizing and taking advantage of the 2 billion person audience available on Facebook, you are leaving money on the table

Traditional business models teach that you need to find and follow your customer. Identify who your product demographic is, how to get their eyes on your products and where they congregate on the web. Many times the best selling platforms reveal themselves in that instance.

Buyer Beware

Regardless of what any seller thinks, there has been a nonstop flood of new sellers for at least 15 years. The dream of overnight wealth is top of mind for most with no idea how to get there.   Most inexperienced sellers seem to have their hopes set on private label. Many, many businesses prey on the expectations of new sellers and offer systems and procedures to attain overnight wealth.

While there are a few sound systems and several very in-depth programs available, The majority of seminars and gurus are a sham. Most of their attendees fail and any that don’t, they take the credit. But some people only learn through classroom instruction and that similar format, so there is a small market.

The real test of a marketplace expert is someone who has produced successful results for many different products in a minimum of several different categories across several different marketplaces and over several years. A couple of years out of high school and one successful product on Amazon doesn’t make anyone an expert.

For the majority of new sellers, all the material needed is online, youtube, forums, seller groups, all free of charge. But it is not how it happens for 99% of private label sellers.

One fundamental principle you don’t hear any seminar mentioning is that selling and private label are two very different concepts and each requires in-depth learning to have sustainable success. If you have no selling experience and no business experience, private label, in most cases, is not how you should start.

Think of private label as being like opening a marque cart in the mall year round, making something you have never made before in your life. Costs are astronomical, but there is traffic walking by every second. You have no clue what you are doing, but there are lots of people you don’t know or trust to ask for advice. After the initial outlay, you have no reserve, and if it isn’t a success the first season, you are finished.

If that is a risk you cannot afford to take, then you have no business starting with PL.

Becoming efficient at selling, optimizing listings and ranking products does not happen overnight. While you can learn about it, the right teacher is time and experience. Add the ground-up business building encompassed by private label and all of the details and concepts involved, and you have a fulltime job learning with no time to sell.

Every day, in Facebook groups, sellers are grasping for a lifeboat, hoping someone will save them by doing the work as they are too overwhelmed. The other potential new sellers don’t even see these others. They block them out, and when it is their time to struggle, they are the first to say, where are all the success stories that used to be everywher.

We have covered enough here to make a potential new seller at least consider their options. Another article covering and debunking all the myths associated with online selling will come later.

Conclusion

In the end, only you know your strengths and weaknesses. Only you can pevaluatep where your background would help you the most with each model. Many sellers end up with a hybrid model doing a little of several of the models which work well.

Wholesale and drop ship are the two best models for any new seller as it gives the opportunity to learn the business. You gain valuable experience and get a good handle on how things work. If later on, you choose PL, it becomes much easier to launch without the burden of learning to sell at the same time.

Proper planning now will reduce the learning curve later. Be brilliant at the basics and always have a backup plan! pIf you are not skilled at creating listings, knowledgeable about how to optimize listings, how and why listings rank as they do, then you are setting yourself up

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About the Author

Joe Reichsfeld is an Ecommerce Consultant with experience going back before 2000. Specializing in listing optimization and marketplace expansion, Joe currently assists clients with over 3.5 million sku's.

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