Thoughts From the Amazon FBA Front Lines
I’ve been selling on Amazon since 2016. It’s been a wild ride filled with highs and lows. I’ve seen the good, the bad, and the ugly.
Before I launch into things let me say that I’ll be the first to admit that Amazon FBA literally changed my life. I’ve started and managed multiple 7 figure per year accounts. When I started my business I began with $5k and a $300 Chromebook and in two years had a very significant Amazon business. I broke free from my day job, had a nice exit, and now get to consult, invest, write, and do lots of other cool stuff. I’m not here to trash Amazon but instead to look at it for what is today.
And the truth is that it’s not all roses and unicorns in Amazon land folks. Things are tough out there. Real tough for some sellers. In this post I’ll share my perspective on the biggest challenges facing Amazon sellers today. I’ll also share my thoughts on how to win on Amazon in 2020 and beyond by way of trying to ‘future proof’ your business. Current Amazon sellers and anyone thinking of starting an Amazon FBA business will hopefully find this article useful.
Let me also state upfront that I still think selling on Amazon presents a very compelling opportunity for an entrepreneur to start, grow, and sell a business. It takes a great deal of smarts and hustle, but success is most certainly still within reach. The marketplace is so vast, so dynamic, and so powerful. As things can we can only play the hand we’re dealt; the savvy entrepreneurs will adapt and find. Plus there are always new trends to capitalize on (hello Solar Eclipse Glasses, Slime, and a host of other things) or under-the-radar niche products you can grow over time.
The bottom line is that it’s still possible to have massive success selling on Amazon. But I current and new sellers need to be clear eyed about the obstacles they’ll face and be strategic in determining how to overcome them. At the end of this post I’m going to give you some ideas on how to win big on Amazon in 2020.
Interested in learning the nuts and bolts about how to sell on Amazon? Check out our comprehensive guide right here.
The Two Big Challenges Facing Amazon Sellers in 2020
Before I get into the ideas on how to win on Amazon in 2020 and beyond first I have to be a bit of a downer and share the big challenges sellers are facing now.
There are two overriding challenges that current and prospective US based Amazon sellers face. I’m not talking about normal course of business stuff here like logistics, managing PPC, etc. Instead I’m talking about conditions that are, and will continue to be, causes of major pain for US based sellers. Given ~60% of Amazon sales are from 3rd party sellers these challenges will manifest in ways that will impact both buyers and sellers. What are these big two challenges?
#1: Review Manipulation & Amazon’s Indifference/Incompetence ⭐
Amazon has a massive fake review problem and it’s majorly impacting third party sellers.
Anyone that’s ever shopped on Amazon understands the importance of stars and reviews. Buyers put a lot of trust in reviews and I would argue they are one of the largest factors of Amazon’s success. And in case you weren’t aware there is A LOT of sketchy behavior that occurs when it comes to Amazon reviews. It’s starting to become more widely reported (good article here) but I still sense the average Amazon shopper doesn’t totally appreciate the magnitude of review manipulation. In many cases there are more fake reviews than real ones. It’s pretty insane.
Fake Reviews Hurt Buyers and Sellers
It’s obvious that fake reviews hurt buyers. They get misled into buying something that may not be all that is seems. But fake reviews really hurt sellers as well. They can destroy a sellers’ review moat which can cause a downward spiral that is hard to recover from.
Fake Reviews Erode Legit Sellers’ “Review Moat”
What are two of the most important data points when it comes to purchase behavior on Amazon?
- Reviews (quantity and star rating)
If you’re not competitive on reviews and price you don’t stand much of a chance having success selling on Amazon. The exception is well known brands but the truth is most third party Amazon sellers are hawking slight variations of the same stuff from China. How do I get you to buy my stuff? I have good reviews and a good price.
Brands and sellers have spent years on Amazon painstakingly doing all the right things built up a quantity of good reviews. How? They did this by offering quality products, providing responsive customer service, and ensuring product safety. Great product and service equal great reviews. Those reviews are a moat of sorts. A stamp of approval that can’t be taken away. And great reviews allow for some, albeit small, level of pricing power.
But that review moat you painstakingly built can be completely eroded in a month when review manipulation occurs. One of most defensible aspects of your business just went bye-bye. Sadly this could be the beginning of the end for your Amazon business.
What’s the impact when you’ve lost your review moat?
All of a sudden one (or more) new competitors have just eliminated one of the most important differentiators you had to get sales. In fact you may now be at a disadvantage as your competition could very well could be at 5.0 stars overall with more reviews. Said differently, you now have fewer reviews in total and a worse star rating. Ouch.
Now that your newfound competition is on equal or better footing on reviews they can attack you on price. And if they’re closer to the factory than you (or in many cases actually are the factory) then that’s a game you can’t win. At the end of the day you need to have positive unit economics. You can only compress your pricing so much for so long.
Here’s a fun scenario Amazon sellers face:
- Your review moat has been comprised by an influx of fake reviews.
- Your competition undercuts you on price; now they have you beat on reviews and price.
- Your conversions are going down while your newfound competition is converting better.
- Amazon’s algorithm lowers your listing in search and raises their listing. Now your sessions are going down too.
- Because sessions and conversions are going down your sales are dropping rapidly.
- The only other lever you can pull is price. You desperately lower your price to slightly undercut your competition even though it severely hurts your unit economics.
- Your competition is likely has a lower cost of goods than you (chances are they’re from China) so they quickly match or beat your price.
- Your unit economics are shot because of the pricing pressure from your competition.
- You end up with declining sales and declining unit economics on those sales.
Welcome to the Amazon death spiral. It ain’t pretty.
Unless you have a seriously powerful brand prepare to feel the pain. Fake reviews are killing honest sellers and it shows no signs of slowing down.
Save me Amazon!
Surely Amazon will step in and suspend these bad actors that are so obviously cheating on reviews right? Amazon is either largely indifferent to stopping review manipulation or are woefully ineffective at combating it.
Sadly I wouldn’t advise anyone to hold their breath waiting for Amazon to come in and clean up their category. I’ve seen first hand Amazon’s inability to act even when present with airtight proof of review manipulation.
Let’s talk about a real world situation in involving fake reviews for a large Amazon account that I manage. Here is the fact pattern:
- We launched in 2018 and went from zero to 7 figures in revenue extremely quickly
- My partners are an actual manufacturer so we have a variety of advantages over private label sellers (cost, technical knowledge, etc)
- The products we sell are highly specialized and difficult for someone to easily private label
- We followed Amazon TOS every step of the way and have now obtained about 400 reviews and rate as 4.5 stars overall. People love our products and service and we continue to grow month over month
Onward and upward from here right?
Not so fast. Two months ago a competitor came into the category and they now have 400+ reviews. 5 star overall rating. They are an unknown brand, new to the world. Their product is inferior and less safe. They are now ranking on page one and pulling significant sales from all the honest players in the category. We are still putting up huge numbers but they could be even bigger if not for this new play.
How did an unknown brand with only two months of sales history exceed the reviews of our 2 year old Amazon business?
Easy. They cheated! They obtained loads of fake reviews on underground channels like Facebook groups, WeChat groups, or Tomoson. Using an in-box insert card offering free product or a gift card is another go to tactic when it comes to review manipulation. The consumer gets free product and the seller gets 5 stars.
What’s that old saying… cheaters never prosper? That doesn’t hold true on Amazon. This story isn’t some outlier; it’s happening in virtually every meaningful category on Amazon.
It’s unfortunate but the bottom line is that if you’re a current Amazon seller you should expect any review moat you have to be eroded.
#2: Chinese Competition
The other big challenge is competition from Chinese sellers. It’s increasingly harder compete if you’re in-between Amazon and the factory (which in most cases is China). This ties into the above point on review manipulation too; I don’t have hard data but anecdotally it seems many Chinese sellers are very comfortable playing the fake review game resulting in a cost advantaged competition on equal or better review footing.
Perhaps the natural end game of globalization is all manufacturing and the heavy hitters in distribution (i.e. Amazon) connect and eliminate the middle men. US based 3rd party sellers are largely just middlemen. Eliminating middlemen in theory would l create value for consumers (lower prices) and manufacturers (higher margins). Everybody wins here right? Well everybody except the middlemen of course.
I’m not an economist or in general smart enough to have a great take on this but I do know there is one question every Amazon seller should ask when it comes to his or her business.
How can I compete with China?
Finding a way to successfully compete against cost advantaged Chinese sellers is essential for anyone hoping to have a long-term business on Amazon. Why? Amazon is courting Chinese manufacturing in a big way. It’s called Project Dragon Boat. They are bringing on thousands upon thousands of new Chinese sellers onto the US marketplace. From the WSJ article:
Mr. Sagar’s discovery came as Amazon was expanding a campaign it started around 2013 urging Chinese businesses to sell directly to consumers abroad. An Amazon sales director, Alicia Liu, at a 2017 conference told Chinese business people she was leading a team in China, drawing on her previous experience cutting out middlemen in Walmart Inc. ’s supply chain.
“We help factories directly open accounts on Amazon and sell to U.S. consumers directly,” a video shows her telling them. “This is our value.”
A wave of Chinese merchants have joined Amazon’s millions of third-party sellers worldwide, who collectively represent more than half of Amazon’s physical gross merchandise sales.
The Chinese sellers are coming in droves. I’m sure the majority of these sellers are good people just trying to make a buck like the rest of us but, as middlemen, US sellers are at a huge cost disadvantage. They are the middlemen and they (and their margins) are getting squeezed. If you’ve studied the history of Walmart you’ll recall that a significant driver of their success was squeezing suppliers and delivering consumers low prices. Amazon is running a similar play but the 2020 version of it. They’re simply on-boarding Chinese sellers onto the US marketplace effectively squeezing their suppliers (i.e. US sellers).
The threat of cost-advantaged Chinese sellers is real and only going to grow. Because of that I believe all sellers need to be asking themselves how they can compete with Chinese manufacturing. I’ll share a few ideas below.
Now What? | Future Proofing Your Amazon Business
Are you sufficiently paranoid now? Scared for your business? If so that’s probably good. Show me an entrepreneur who isn’t sufficiently paranoid and I’ll show you an entrepreneur that won’t have a business for long. Fake reviews and China are tough hurdles but they can be overcome. Just takes a little more thought than it did a few years ago. The bottom line is on Amazon (or really any entrepreneurial venture) you need to keep innovating and evolving if you want to survive.
7 strategies to help Amazon sellers succeed in 2020 and beyond.
#1: Pair Content AND Physical Products on Amazon
I LOVE this strategy. If I jump back on Amazon full bore this is 100% going the play I’m going to run.
- Build a blog/content site: in a particular niche (e.g. think Wirecutter but for a very specific niche)
- Generate content: video reviews, Product A vs B, new product news in the category
- Grow an audience: Expect to spend ~6 months building your audience
- Launch my own product into the niche: Use learnings from reviews and audience to improve and crowd-source how to make better
- Use audience to drive traffic to Amazon: Now that you have traffic you can point it towards your Amazon listing
- Get paid twice: In this model you get paid twice. You get paid when someone buys your product and when they buy from your content site you generate affiliate income from Amazon Associates.
This strategy gives you an edge. It also gives you multiple income streams. If you’re interested how to start a blog/content site you can check out this write up.
#2: Don’t Source From China
If you are sourcing from China you’re inherently at some risk based on the factors noted above. If I were starting all over today ideally I’d look for a domestic supplier that has an advantage that is difficult for China to match. If you follow #1 above (content site) then this is less important.
#3: Develop A Durable Edge (e.g. food, games, etc)
Until pretty recently most Amazon sellers could run this play:
- Use Helium 10 or Jungle Scout to find a product with a reasonably high amount of demand and a reasonably low amount of competition
- Source something on Alibaba (ideally something that fits in a shoe box to keep shipping low and without moving parts to keep execution risk low)
- Put your item in a pretty package with a nice sounding brand name
- List on Amazon with pretty photos and a few good reviews from family and friends
- Mark up goods 3x-5x and profit
- Rinse and repeat
That was the play. And it still can be the play depending on category. But by running this play you don’t really have an edge. What happens when your supplier decides they’re going to sell on Amazon and has huge pricing advantage (and oh by the way they’ll get 500 fake reviews in the blink of an eye)? What happens when your competition flags you as adult or unsafe and your listing goes inactive? You live and die with Amazon and that means huge platform risk.
That’s why it is critical to develop your edge. What do I mean by this? You need to find something that is hard to replicate.
For example, I used to work in CPG (i.e. food) and feel comfortable in that industry. It is pretty hard for a Chinese manufacturer to come in sell a granola bar to the US market. The expertise required is different… you need to know how to work with US co-packers, how to pass food safety regulations, etc. It’s just a more difficult model to execute. More difficulty means harder to easily knock off.
Maybe your edge is designing a board game from the ground up and working with influencers to sell it. Maybe it’s something that is oversize, has electronics, and is expensive. Perhaps it’s building a content site as I described in #1. You’re looking for anything that isn’t easy to knock off. The bottom line is you need to develop an edge that isn’t easy for other sellers to replicate.
#4: Decrease Platform Risk; Develop Other Channels Starting Day One
If Amazon represents 50%+ of your overall revenue you are playing with fire and putting your business at risk. Full stop.
Many sellers have 99% of revenue from Amazon. There are just so many ways this story can end badly.
When you only sell on Amazon you are exposing yourself and your business to an incredible amount of platform risk. Amazon owns the platform and controls your distribution. You can go from hero to zero in a day. Subsidized Chinese competition, increasing Amazon costs (PPC, fulfillment, etc) that kill your business model, loss of organic rank, account suspension, review sabotage by competition, etc.
Use Amazon for what it is and grow on that channel. But recognize putting all your eggs in that basket is extremely risky. It’s very intoxicating because the sales can come in so fast and easy. Why focus anywhere else? But you are tying your fate to the Amazon gods and that’s a risky bet to make long term.
Because of this risk it is imperative to build out other channels. Some examples:
- Going direct to consumer (DTC)
- Sell on Target.com via their 3rd party marketplace program (it’s not open to anyone… figure out how get to an invite!)
- Get into physical retail
- Build an email list and sharp email marketing sequences
- Lead the industry and conversation by running a significant Facebook group
Admittedly it’s not easy building out other channels. But savvy sellers and entrepreneurs that will succeed in 2020 and beyond will figure out how to make it work.
#5: Innovate & Add Value
Continuously looking to innovate and add value to your offerings is another strategy to stay one step ahead of the competition.
- Continue to innovate and improve your products
- Add perceived value to your offerings via bonus items
- Look for opportunities to bundle complementary goods; you can see the ‘frequently bought together’ section on Amazon for ideas
#6: Become Operationally Excellent
It is more important than ever before to be a great operator. A few examples:
- Beautiful listings are table stakes (Enhanced brand content, videos, etc)
- Find efficiency in your supply chain to keep costs as low as possible
- Manage PPC more efficiently than competition
- More tightly plan inventory
You need to constantly be getting faster, cheaper, and better to stay ahead of your competition.
#7: Stay Vigilant | Keep Reporting Bad Actors
In the end having all these fake reviews and problematic products flowing from China isn’t good for Amazon. I’m not holding my breath but I have to think at some point they will get better. They’ve got some of the best and brightest minds and know the integrity of the reviews and safety/legitimacy of products is fundamental to the success of Amazon.
Keep reporting your competition to Amazon. Do it in a dispassionate and fact based way. And re-submit a month later if you haven’t seen results.
Yes, it’s largely a game of whack-a-mole and if you get one bad actor taken down another one will likely crop up. But either way keep reporting and making your case to Amazon.
If you have the budget hire someone like Chris McCabe to help cut through the red tape and increase your odds of getting your competition booted.
Challenges Are Opportunities
The silver lining of these Amazon challenges is that they create opportunities. Savvy entrepreneurs will play the hand they’re dealt and find a way to make it a winner. This is the new reality so you can fight it or work with it.
How can you capitalize on the state of Amazon?
I’ve been thinking more and more about how to capitalize on the current state of Amazon. For instance, if Amazon is working to ‘cut out the middlemen’ then perhaps it’s better to stop trying to be a middleman.
Here are a couple ideas I have bouncing around in my head:
- Content + Products: As I mentioned above, I love the the idea of pairing a content site with a physical product. I think this is the model a lot of the big winners of tomorrow will follow.
- Direct-to-Consumer: Who needs Amazon anyway?!? So many people have crushed it with DTC brands. So another approach is to build a DTC brand and stay off Amazon altogether.
- China Value-Adds: This is my “if you can’t beat em, join em” idea. I’ve long considered starting a business to help Chinese sellers better market themselves on Alibaba and Amazon. Many of the listings on Alibaba and Amazon are really sub-par. If a factory could list in a highly professional way it would help immensely with conversions and overall success. I’m not advocating working with dishonest companies that break TOS but instead working with companies that want to do things the right way but need expertise of someone in the US market.
Thanks for reading! Remember all of the above is just the perspective of one third-party Amazon seller. There are millions of us out there and I’m sure many of my fellow sellers hold different opinions.
Drop a comment or hit me up on Twitter if you want to share your thoughts on Amazon FBA. And good luck in 2020 and beyond.