While it has been credited for putting many traditional retailers out of business by offering lower prices, easy delivery options, and 24/7 customer service, Amazon.com (NASDAQ:AMZN) might be a key business partner for your small business. As a business owner or entrepreneur, you can sign up to sell on Amazon Marketplace and have your own storefront in a matter of minutes.
Your items could even be selected for Storefronts, the company's new curated selection of more than 1 million goods from small and medium-size businesses. Storefronts offers seasonal products, along with a rotating selection in categories including home, pet, and kitchen. Amazon, which claims that half of everything it sells comes from small and medium-size companies, is clearly courting those businesses. The online retailer offers access to a huge customer base, but that comes at a cost that not every business can pay.
How does it work?
It's easy to set up shop on Amazon, but it's not free. The company has two pricing plans. For those who expect to sell fewer than 40 items per month, the seller pays $0.99 per item as well as a "seller fee" -- a percentage of the cost of the sale -- which varies by item category and ranges from 6% to 20%. Companies that plan to exceed the 40-item threshold pay a $39.99 subscription fee plus the varying per-item selling fee. In addition, Amazon has 20 categories in which any seller can list items and 10 others (including auto parts, collectible coins, and fine jewelry) that require permission from the retailer in order to maintain quality standards.
Amazon also offers sellers two choices for shipping. Businesses that ship the items themselves pay the cost of shipping, which is calculated by Amazon, with the added fee credited to the seller's account to cover the cost. Companies can also elect to have the retail giant fulfill the orders, which requires that products be stored in an Amazon fulfillment center. Those items are eligible for two-day free delivery for Prime members, but participating companies pay for warehouse space as well as shipping and packing services. That adds to your cost but makes it more likely that Prime customers -- who have come to expect two-day shipping -- will buy from you.
Which companies benefit?
Amazon offers you access to hundreds of millions of customers, but the relationship really only makes sense in a couple of situations. First, if your products stand out and aren't comparable to what's available from bigger players, they may turn up in searches. If you're the only answer to what shoppers are looking for (or one of a few) you have a better chance of making a sale. For example, dozens of companies sell charging cables on Amazon. If you sell "bedazzled" charging cables, you may be the top result when a shopper uses that search term.
Selling on Amazon also makes sense when you have in-demand items you need to liquidate or have obtained at below-market prices. Back when I managed a large independent toy store, for example, we used Amazon to sell excess inventory. We couldn't compete with Amazon or stores in its marketplace on selling inventory we purchased through traditional channels. We knew this for a fact, because Amazon's pricing tool shows sellers the lowest current price an item is selling for on its site. This was often close to or even below what we paid our suppliers for the item. However, when we bought inventory from stores that were closing or items our suppliers were looking to get rid of, we often could sell the products for less than anyone else on the site and still make a profit.
When you sell through Amazon, you agree to its terms. That includes giving the online retailer the ability to arbitrate disputes between you and your customers on the platform. That can result in having charges reversed if the buyer is unhappy -- which means you foot the bill.
Still, while the costs can be high and the margins low, the audience potential is enormous. You might make more money selling items on your own website, but Amazon may enable you to sell at a much higher volume. If you have a unique product or can offer items at below-market prices, Amazon can be a powerful channel that can bolster your bottom line. Just be very careful in tracking your margin, selling costs, and other expenses to make sure the effort is actually worth your time.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.