We’ve seen a big shift recently in brands’ goals for their ecommerce performance. In the not-too-distant past, most brands focused on revenue as their most important goal on Amazon and other ecommerce marketplaces. Now, brands understand that profitability is paramount. If your products can’t deliver a consistent profit on Amazon, you’ll be quickly overtaken by others that can.
So, what influences profitability? And why are so many brands seeing their success plummet on Amazon? Over 10 years in ecommerce, along with our proprietary software tracking trillions of data points and expert teams that know the ins and outs of the platform have given Pattern the answers. Read to find out if you’re on the Amazon Profitability Death Spiral and how to climb back out.
Amazon Profitability Death Spiral Overview
- Your product revenue soars
- 3P (third-party) sellers take notice
- Seller competition drives down pricing
- You lose the Buy Box
- Brick & mortar channels match online prices
- Retail profits erode
- Amazon price erodes
- All channels are less profitable
Why Do Brands Lose Profitability on Amazon?
Let’s take a look at how, without the right safeguards, each step leads to the next, slowly devaluing your products online.
Step 1: Product Revenue Soars
If you have a great product, chances are that launching on Amazon will generate a lot of revenue for you at first. All of these product sales can lead to leaky distribution if you don’t have the right safeguard in place—your initial, rapid growth might be setting you up for the second step in the Death Spiral.
Step 2: 3P Sellers Take Notice
If you don’t have a firm, effective distribution strategy in place, third-party sellers that notice your products’ success on Amazon can take advantage of your growth. It starts when they buy large quantities of your product at discounted prices, often without you knowing.
Step 3: Seller Competition Drives Down Pricing
Now that 3P sellers have your products, they’ll start to list them. And, as more of them show up on your listings, they start to compete. The ultimate goal is to gain control of the Buy Box, and the fastest way for a seller to get that control is to lower your product price. As sellers fight for the Buy Box, your price will continue to lower slowly over time.
Step 4: You Lose the Buy Box
When the Buy Box is hijacked by other sellers, you won’t be able to move your own product on Amazon. This is when the Death Spiral starts to feel real for most brands, and it’s an issue that happens to brands selling through both 1P and 3P.
Step 5: Brick & Mortar Channels Match Online Prices
As you lose control of your pricing on Amazon, it starts to impact your brick and mortar sales and profits. Shoppers frequently search for products online before buying in store, and finding a lower price online means they’re less likely to buy your products in person. Your brick and mortar retailers have no choice but to lower your prices or offer price matching to stay competitive.
Step 6: Retail Profits Erode
Lower pricing through brick and mortar leads to eroded retail profits as your retailers require price matching guarantees, buybacks, and other concessions. It’s not uncommon to see retailer partners threaten to pull your products from their shelves if prices are lowering too far.
Step 7: Amazon Profits Erode
Lower retail profits inevitably lead to lower Amazon profits—sellers continue to drive down prices to stay competitive to win sales over any other channel. And, when brick and mortar prices erode, Amazon has to ask you for even lower prices that just aren’t sustainable for your brand.
Step 8: All Channels are Less Profitable
Before you know it, you’ve reached the bottom of the Death Spiral—Your products may be in danger of CRaP-ing (can’t realize a profit on Amazon) out, all channels are less profitable than when you started, and you can’t seem to find the momentum to work your way back to where you started.
Escape the Death Spiral with Pattern
So, did you find yourself on the Profitability Death Spiral? If you notice this pattern in your Amazon strategy, all is not lost. At Pattern, we’ve helped numerous brands work their way back out of the Profitability Death Spiral. With the right brand control safeguards in place and a rock-solid selling and distribution strategy, you can achieve true, profitable success with your products both on and offline.
Click here to get in touch and escape the Death Spiral today.