5 Reasons Amazon Has a Chokehold on Manufacturers

PopSockets is a classic American Dream success story. Founded by David Barnett in 2014 out of his garage in Boulder, Colorado, in its six years in business, it has sold over 165 million phone accessories. In 2018, Inc Magazine named PopSockets the second fastest-growing private company in the United States.  

PopSockets had achieved unprecedented growth on Amazon in 2018; but by the fall of that year, Barnett decided to terminate the company’s relationship with Amazon, alleging Amazon repeatedly failed to protect it against counterfeit products—even after PopSockets agreed to pay Amazon $2 million dollars to resolve the problem. Also, Amazon kept lowering the selling price of PopSockets’ product and demanded that PopSockets pay additional fees to make up for Amazon’s margin loss.

While Amazon may be a good channel for manufacturers that are not prepared to sell direct, they need to enter the relationship with their eyes wide open. David Barnett’s full congressional testimony can be read here.

Here are five key reasons Amazon has a chokehold on manufacturers:

1. Advertising on the site raises costs

Part of every successful digital strategy requires some form of ad spend to drive traffic to your products online. According to a recent article in Business Insider, Amazon’s ad revenue is skyrocketing—it was about $21.5 billion in 2020, up from roughly $9.3 billion in 2019. Amazon recommends advertising on its site, taking another slice of manufacturers’ already razor-thin margins. Unfortunately, the reality is that manufacturers who don’t purchase ads do not appear in an attractive positioning.

2. Captures data metrics – but how are they being used?

Part of the appeal of selling direct is to capture invaluable customer data—which can then be used make quick sales improvements, develop new products to match data insights and make better business decisions. This is a huge competitive advantage. When a company sells through Amazon, the customer remains an Amazon buyer. A seller will gain some insights such as peak sales seasons or areas where they are shipping more product to, but some of the most truly valuable data, and the ability to resell to the customer, will be inaccessible to them.

3. Uses manufacturers’ sales as a testing ground to introduce their own white-label products to ultimately compete with manufacturers.

Have you noticed lately how many private label brands Amazon seems to be selling?  A Wall Street Journal investigation in April 2020 revealed how the company was using data from its sellers to help them develop private-label merchandise that often competed with the sellers’ products. While Amazon has testified to Congress that it hasn’t used third-party data for its betterment, the article shows otherwise.

4. Has a stringent delivery structure         

Amazon masterminded the expectation of “next day delivery”—turning it into a huge competitive advantage, but at the cost of the manufacturer. Amazon’s stringent delivery structure pushes suppliers to pay for and comply with next-day delivery through a third-party logistics site that is affiliated with Amazon. However, suppliers are prevented from charging more for that service.

5. Forces manufacturers to wait for price increases

Amazon’s pricing strategy is designed to prevent sellers from selling their products for lower prices outside of the platform. Couple this with the fact that Amazon charges high fees, approaching 34%, for sellers to use its marketplace, it’s easy to see how many companies walk away with little to no profit from each sale. If you are not a volume vendor, this may be an impossible equation for your company.

Internal Communication Struggles

Many manufacturers report how gaining control over margins leads to internal disagreements within their leadership teams. Some leaders don’t want to “rock the boat” or jeopardize their company’s existing sales structure, while others are frustrated, want to leave Amazon and build their own e-commerce channel. Manufacturers often suffer from this dilemma because they are used to the traditional sales rep approach and feel intimidated by the thought of selling direct; and the technology side, building the back-end structure to support it.

Although Amazon may seem like the easiest way to capture sales and attention for your company, it is a double-edged sword. Your company will experience restrictions on margins, unexpected fees and chargebacks, tight shipping requirements, and copycat products. But ultimately, what could have been your customer will remain Amazon’s customer. This is the true cost worth considering.