Navigating Amazon for E-Commerce Businesses: Dancing with an 8,000-Pound Cyborg

When Amazon and Shopify finally and quietly built an API integration, I heralded it as a watershed moment in the history of my e-commerce business. I remember staring, blinking at the screen when the option suddenly appeared, then cheering at their apparently having heard my prayers-slash-feature-requests. I had already joined two million other sellers on Amazon, and was using its FBA (Fulfillment By Amazon) service, whereby Amazon hosts the Amazon listing and also stores and fulfills a seller’s product, offering much lower pricing on (the aggregate charges of) storage, fulfillment and shipping than any other warehousing service that I have encountered. I had long dreamed of linking the two stores and warehousing everything at Amazon, thereby allowing me to unify my logistics into one slick and inexpensive logistics nirvana.

The integration required a few modifications, but allowed me to start routing all new production runs of our yoga mats directly to Amazon’s warehouse, and pushing my Shopify web orders there with a few clicks. Sounds good right? It also allowed me to start enjoying super-low costs and passing those on to customers, thereby boosting sales. These are the types plug-and-play economies that startup dreams are made of.

However the road to this logistical nirvana with its lower cost of goods, lower overhead and increased executive freedom would soon prove to be littered with booby traps. I will illuminate some of those here, offer a few tips on setting up an Amazon relationship with minimum risk and maximum leveraging of the behemoth’s sales potential, as well as a cost-benefit analysis on different selling relationships and their impact on your business model.

Once you start working with Amazon as your warehouse service or your client you are in a sense literally doing business with The Borg — a massive algorithm overseeing miles of enormous warehouses labored by machines. Wrapped around this robot infrastructure is an external human human skin of hundreds of thousands of frustratingly polite but powerless and uninformed humans in far-flung areas of the planet. Meet your new client.

Meet Your New Client: Amazon Warehouse Robots

What is it like doing business with a labyrinthine cyborg? Tricky. There is no complete user guide to Amazon, but basic setup guides exist so I will not cover that here. As a new seller, you’ll soon find out that most customer service people at Amazon don’t really know how Amazon works. In fact it seems that nobody at Amazon really does. It is so large, so baroque in its UX and policies, that optimizing the setup of any one store is a big job. Many sellers make a lot of money on Amazon, but it does require a serious time investment both to set up and monitor, and a correct adaptation of your business model. Here are some insider tips to optimize your selling that you might otherwise have to stumble across.

FBA or drop ship?

There are numerous modes to interact with Amazon as a seller and they are often confused. At the most basic level, if you are selling direct to consumers in your listing, either you ship or Amazon does. You will have a drop shipping relationship with them (they email you orders from your Amazon listing, and you ship) or you send them your inventory and they will warehouse your product and fulfill it. Thanks to that API integration mentioned earlier, it is possible to go all-Amazon, or all-internal-warehouse with your fulfillment but there are some tradeoffs and one caveat.

When I Ship You Ship We Ship: Amazon Relationship Map

Caveat: Amazon does not ship internationally from a US account, so you will need a shadow inventory for manual fulfillment if you are FBA and want to keep taking international orders in your Shopify store (this also creates problems in your Shopify order cue, something Shopify says it’s working on). This means you are in the upper-left corner of the table above for US orders, but you are on the right side of the table for international orders, drop-shipping.

A Tricky Integration

Deciding between a drop shipping or an FBA relationship is an important decision for your company in terms of cost, labor and risk. Outsourcing to Amazon in theory results in lower costs and hassle factor, but there are a lot of ways this can go wrong, and it can introduce a lot of risk into your supply chain as will be illustrated below.

Selling wholesale to Amazon is highly inadvisable and will be covered under risks below.

Tips for Direct to Consumer Drop Ship and FBA Sellers

Now some basic Amazon direct to consumer selling tips not covered in setup guides that will help drive traffic and boost your listing:

• Amazon SEO. As the first stop for many people wanting to buy… anything, Amazon has an incredibly powerful search bar. It has its own internal “SEO” which operates by totally different rules than Google. Get someone on the phone at Amazon to give you the latest tips for your listing. Not only is the keyword algorithm different, but seller ranking and product ranking affect SEO.
• The Buy Box. Are you a manufacturer? Anyone that you sell to (or that gets their mitts on your product) can offer it for sale on Amazon. If they outrank you in seller ratings, they will take over what’s called your “Buy Box” — this is the dominant seller’s listing. At this point you do not have control of the listing any more and must submit updates by way of complaint or nice requests to the seller, so consider this carefully before letting someone (including Amazon) to carry your product. If you are the manufacturer, and an unauthorized third-party seller does get ahold of some units and lists them, you can shut their listing down by complaint. However Amazon permits itself to sell any units that its robots accidentally step on as ‘used’ at a discount inside your listing.
• Product ratings. This is very important. Your product ratings are linked to the color variants of your products. For example if you make bouncy balls, there will be a master listing with no ratings, and maybe five color listings. When buyers are asked to rate their purchase this is linked to the variant or “child” listing. The reason this is important is that if you delete an old color variant listing, you will delete your ratings. Nowhere is this written that I am aware of. There is a way to potentially recoup old ratings if you JUST deleted them but like most functions in Amazon’s system nobody can say for sure.
• Brand Registry. Are you the manufacturer? Do you have a word trademark? Register your brand right away even if you are thinking of selling. This will allow you to protect your brand and push interlopers off it.
• You will be communicating service tickets with Amazon through their byzantine on-website messaging system, and every time you call you will first be put in contact with someone cheerful who knows very little about Amazon and will look answers up for you in their search bar or put you on hold to ask somebody that does know. Expect two hours of back and forth to get to someone that understands your question, a ticket finally created, but then abandoned (no action taken).
• Amazon does not let you see or export the real emails of your customers. It has an obfuscated email function like Craigslist. If you would like to send follow ups to your buyers you can email them each individually which requires about 5–7 clicks to get into each order, or you can get an affordable set-it-and-forget-it app like Feedback Genius, which will send nice branded messages for you. Luckily, Amazon has spawned plug-in services just like Shopify has apps. Note: Amazon may or may not crawl your emails and look for URLs and delete the message if it finds them, including in attachments, so don’t link to your site.

Major Risks

Now for the worst booby traps, and some ways to avoid falling into them. Amazon changes its own policies frequently, sometimes in contradiction to existing agreements. It does not adhere existing published policies, is impossible to negotiate with as a small business, and is highly unaccountable when it does something wrong. To a certain extent this diffusion of responsibility might be due to the dozens of sub-businesses within Amazon with separate P&Ls; on the other hand it may be the result of a poor incentive structure plus a vast cyborg brain that just optimizes for price, irrespective of the costs pushed onto sellers. Despite third-party seller fees making up about 40% of Amazon’s income, you and your store are just a dust mote in its vast universal system and have very little bargaining power.

We Have Not Seen Your Yoga Mats

Like the Hindu god Vishvarupa but much less holy, Amazon seemingly has endless forms, incredible power, and no beginning or end. How does one do business successfully with an insensible player like this? Very carefully.

Wholesale

Wholesale is a third relationship option that I will demystify and warn against here. Amazon Vendor Express and Amazon Launchpad feature wholesale relationships whereby Amazon buys your product and becomes the seller on Amazon.com. If you are doing well, certain algorithms will trigger Amazon to invite you to these two seemingly promising services, but you should know a few things about them. If you sell wholesale to Amazon it will become dominant and replace you as the main seller — this means all your sales on Amazon go away and you only sell to them. Due to Amazon’s stronger seller rating, at first this may seem worth it to you if you think it will sell a lot more volume than you can but be careful. Amazon asks for very aggressive terms which could easily put you out of business. If anything goes wrong in the relationship, because it is so asymmetrical and Amazon does not adhere to its own contracts, it will be impossible to enforce your rights and you will lose everything as will be illustrated below. Be VERY careful dealing with Vendor Express — I strongly advise not setting up a trial account because Vendor take over and restructure your listings, which you cannot fix even if you close the account (you will lose control and have to convince them through all sorts of proof that you are the owner). Vendor will destroy your store even if you decide not to sell to them.

Next, Vendor Express at first offers, but later does not adhere to any minimum pricing. That means it might at any time undercut you and your other wholesale partners if it likes (and it probably likes because it can operate on razor-thin margins). In fact, before it even has your product in its hands, it may start siphoning your orders by taking lower-price pre-sales (see below).

This opaque behavior is very different than dealing with a wholesale buyer with negotiated contracts — your Amazon contracts will be utterly one-sided in every imaginable clause. Volumes have been written about how to protect one’s minimum pricing and it is a requisite to getting good wholesale customers, so Vendor Express is probably a poor match for a business seeking to scale through multiple wholesale accounts.

No Pricing Protection: Amazon’s Vendor Express

Above, Amazon cheerfully confirms to me that despite having agreed to adhere to our MAP, it will price product however it pleases. Do not be fooled by the option to set a minimum price at setup, because “for legal reasons” Amazon will price your product “independently”. Also note that Vendor Express will encourage you to purchase advertising to “help them sell your product”, that is, pay for their advertising. This is also not typical for a wholesale relationship. Amazon will become your only Amazon customer, set your market price to a razor-thin margin that nobody else can compete with and put your store and all your other wholesale clients out of business. Amazon Launchpad is a service where Amazon will make a video of and promote new crowd-funded products for free, but this is set up through through Vendor Express, so all the above risks apply.

Long Term Storage Fees and The Great Purge

About a year ago, the company announced a new “long term storage fee” policy, in an apparent attempt to become a higher-margin fulfillment service instead of a storage-and-fulfillment service. They implemented this change in business model by purging their entire stock of seller merchandise with onerous fees on all products that had been in storage for over six months, irrespective of how well they were selling, and in contradiction to existing seller agreements. With typical aplomb, it encouraged all FBA sellers to ship their entire inventory back to themselves at their own expense if they wanted to the avoid fees. (This meant 100% of each SKU inventory, even if it was selling well.) Any e-commerce business owner reading this post knows the financial implication of shipping one’s entire inventory across the country not one but three times. These purges are now periodic every 6 months and you may not send it back in for 4.5 months.

Borged if you do, Borged if you don’t

For scale, the above fee is equal to approximately 31–60 months of storage. Amazon is no longer a viable storage solution. In sum, if you sell FBA you will now need a primary warehouse for storage, so that you can ship them just-in-time inventory on a monthly/cyclical basis.

Cyborg in a China Shop: Lost and Damaged Products

The biggest risk in working with Amazon is its tendency to destroy or lose inventory and not pay for it. It is almost impossible to get Amazon to pay for destroyed inventory without taking it to court. This is the main reason to limit how much inventory it has.

Retrieving your merchandise from Amazon is very risky. Make sure to note the difference between Removal Orders and Fulfillment Orders. Removal Orders (even though they are frequently recommended by Amazon) are slow and non-tracked and cheap and Amazon frequently loses or destroys inventory sent via this message (in 100% of the cases in our experience). Fulfillment Orders are more expensive, (as if you placed an order for a client) but tracked and less likely that Amazon will lose/destroy it.

Even if you remove inventory as a Fulfillment Order however, you’ll see your shipment batched by a computer like the below, with 30 individual shipments. This is an illustration of the insane outcomes of low price optimization and cost externalization. The below shows all the shipments of one removal order for a mere 267 units, and photographs of how the boxes looked when they arrived a month later. Each line in the table is a separate shipment. When 34% of the shipment went missing or was damaged (a total of $8,000) Amazon refused to honor its own FBA Lost and Damaged Inventory Reimbursement Policy which promises 100% reimbursement for any damage or loss. To be very clear, Amazon does not honor this policy.

This is What One Removal Order Looks Like

Without boring the gentle reader, in the above claim Amazon refused to pay for the lost/damaged units, a value of $10,000, even after about 200 email exchanges and hundreds of photos exchanged. According to certain client relations reps, this happens “a lot” (refusing to pay). Arguing with Amazon about whether they should pay for inventory that they lost is a poor use of executive time indeed, a meaningful financial loss for a small seller, and certainly not a cost-saver. But there are easy ways to avoid this situation.

In summary, the cost and marketplace exposure benefits of working with Amazon as a listing and fulfillment partner are potentially enormous, but great care should be taken to reduce inventory risk should an FBA relationship be set up. Two main solutions emerge from this analysis:

1. If you want to use Amazon FBA to fulfill orders through Shopify API, the number one way to mitigate the risk of damage is by only sending them enough inventory for one month of sales at a time. This is probably more expensive in shipping but mitigates risk. It means you will need an additional primary storage warehouse (but it does not need to be a fulfillment warehouse).
2. If you have a business model that in any way allows for affordable warehousing and fulfillment on site, because of the risk of inventory damage, it is probably a better financial bet to do your own fulfillment and storage and just list your product on Amazon. Foregoing a robot warehouse affords you much greater control over your company. This is true even if that looks more expensive on paper — Amazon fulfillment services can easily become a false economy with such high risks. Using the tips above you can take advantage of all the demand on the site but still avoid lost inventory.

In the end, due to the travails of dealing with Amazon’s warehouses, in-house fulfillment linked to double e-commerce and Amazon storefronts might counter-intuitively be the fastest way to launch on a shoestring, and keep all the upside of working with the giant.