It’s a dilemma facing more and more brands: Should your business sell on Amazon?
It’s the most visited e-commerce platform in the U.S. and the dominant retailer in 28 other countries. But that reach comes at a price. Harvard Business School associate professor Ayelet Israeli says there are downsides for many Amazon sellers, like costs, competition, and the lack of data.
In this episode, Israeli offers a scorecard that can help you decide, step by step, whether or not the Amazon marketplace is right for your business.
Key episode topics include: strategy, innovation, leadership, scaling, Jeff Bezos, long-term thinking, customer focus.
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HANNAH BATES: Welcome to HBR On Strategy, case studies and conversations with the world’s top business and management experts — hand-selected to help you unlock new ways of doing business.
It’s a dilemma facing more and more brands: should you sell on Amazon? It’s the most visited e-commerce platform in the U.S. and the dominant retailer in 28 other countries.
But that reach comes at a price. Harvard Business School associate professor Ayelet Israeli says there are downsides for many sellers – like costs, competition, and the lack of data.
In this episode, Israeli offers a “scorecard” that can help you decide, step by step, whether or not the Amazon marketplace is right for your business.
This episode originally aired on HBR IdeaCast in August 2022. Here it is.
CURT NICKISCH: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Curt Nickisch.
It’s a dilemma facing more and more brands nowadays. Should you sell your goods on Amazon? At first glance, the answer has to be yes, right? Amazon is the most visited e-commerce platform in the United States. Two-thirds of U.S. customers start their product search on Amazon. Plus, it’s the dominant retailer in 28 other countries. And it grew so big thanks to its fulfillment speed and quality of the buying experience. How can you say no to that that kind of reach?
Turns out, there are a lot of reasons. There’s costs. There’s more competition, even from Amazon itself. And then there’s the data and feedback from customers you give up by not selling directly. What is a brand to do? Our guest today is here to help businesses that are struggling with that decision.
Ayelet Israeli is an associate professor at Harvard Business School. Together with her HBS colleagues Leonard Schlesinger and Matt Higgins, as well as consultant Sabir Semerkant, she wrote the HBR article “Should Your Company Sell on Amazon?”
Ayelet, how are you? Thanks for coming on the show.
AYELET ISRAELI: I’m great. Thank you so much for having me.
CURT NICKISCH: Now, you write in your article that, “Every brand should consider selling on Amazon.” Why?
AYELET ISRAELI: In the decade or so that I’ve been researching retail, everyone mentions Amazon at some point. In the earlier days, companies basically had a yes or no, very clear cut strategy. And nowadays, we hear more about what is your Amazon strategy rather than should you be on Amazon or not.
Amazon is just so huge. I think the latest estimates I’ve seen is that roughly 40% of all online retail in the U.S. is on Amazon. So, it’s quite large. And then we’ve seen in recent years also the increase in e-commerce in general and how important it is for brands to have their own online presence so that customers can find them, which makes Amazon an important consideration because you need to be somewhere online, you need to serve your customers. And Amazon does such a great job in both having customers arrive to the website, as well as giving them amazing service. So, therefore every brand should, at the very least, consider if they can be on Amazon or not.
CURT NICKISCH: This whole debate reminds me a lot of debates in the past of big box retailers like Walmart in the United States. Like if you were a consumer goods product, you basically had to be there, right? But those very same companies really complained about just how much the margins got squeezed. They really lamented how hard they had to keep driving costs down and not enjoying bigger profits because Walmart made them do it.
AYELET ISRAELI: Yeah, and it’s a very similar story, the only difference is just the online presence. So, Walmart is of course, still a huge retailer in the U.S., but their online presence out of total U.S. e-commerce sales, Walmart is roughly 5% to 6%. So, they’re much smaller than Amazon when you think about online presence.
But they are still a big player and brands still have the struggles where they essentially understand that in order to be where customers are looking for you, in the U.S., about two thirds of product searches start on Amazon rather than on search engines. So, that means most customers don’t even go to Google or Bing or a search engine where they’re looking for something, they just directly go to Amazon. And therefore, if you are not there and if you’re not a brand that people definitely want to buy, then you probably are not going to be found by the majority of customers.
CURT NICKISCH: But this also comes at a big risk too, right? What are some of the top line complaints about Amazon, if people used to complain about margins getting squeezed at Walmart?
AYELET ISRAELI: Yeah. So, definitely margins getting squeezed is one of the big ones, especially these days when Amazon is doing a lot more in terms of advertising. I think last year, their revenues from advertising were roughly $31 billion and they’re increasing those revenues. They have a very large media platform. They can use not just the retail part of Amazon, but also Amazon Video or Amazon Music and other channels for their advertising. And so, not only you get squeezed on margins in the same traditional way like Walmart used to do it, but you also have additional costs in terms of advertising. You want to be featured in the website in a prominent place, you want to be able to be the first brand in the buy box where consumers see you as the default brand. And for all of these things, you essentially have to give up some of your margins.
CURT NICKISCH: Now, your article has a really thorough scorecard that you can follow. If you’re a brand, you can answer questions and score whether you should be selling on Amazon or not. So, let’s go through the key benefits of selling on Amazon and some of the considerations there.
AYELET ISRAELI: One of the things that we consider other than margin, which we just talked about is the product category. Of course, there are some categories that you simply cannot sell online.
CURT NICKISCH: Pretty simple answer if you’re selling tobacco, right? Yeah.
AYELET ISRAELI: Yeah, exactly. There are also categories that have suffered from what we call commoditization. Essentially, being on Amazon turned them, even if they weren’t considered by consumers as commodities before, turned them into complete commodities. Because you can see so many brands and even unknown brands and sellers sell a version of this product. They’re all side by side. They kind of look the same. There is no big differentiator. And then you’re basically price shopping and considering that everything is kind of the same, which turns every product into almost a commodity and not a brand. And therefore, if you’re in a very commoditized market, it’s hard to stand out on a platform like Amazon’s.
CURT NICKISCH: Are batteries an example of this? Because you search AA, sort of a standard battery in the United States there on Amazon and you get name brands, but you get a lot of competitors you wouldn’t even know about. And you also have Amazon Basics brand competing side by side.
AYELET ISRAELI: Yes. So, Amazon has quite a few private label brands. One of them is called Amazon Basics that you just mentioned, and batteries is a category where Amazon Basics did phenomenally well and was able to get consumers to buy their batteries. Their batteries are as good as others and consumers just bought into it. Just a couple of weeks ago, Amazon announced that they’re going to reconsider their private label strategy. So, that might change over time. But one thing that is exciting for me as someone that researchers retail and especially online retail is how things constantly change. And it’s the same with Amazon.
CURT NICKISCH: Now, you’ve got to be looking at what you’re shipping, right? Because Amazon has, for many people, really incredible shipping service and there are millions of Prime members. So, people who can order something and have the promise of getting it delivered for free with that membership within a couple of days. But if you’re selling stuff that’s hard to ship, or if it’s oddly sized or needs customization, that becomes more of a problem.
AYELET ISRAELI: Yeah, and that’s going to cost you a lot more. Now, of course, if you’ve never developed a strategy to ship your product and you only worked through distributors, then perhaps Amazon solution could work for you if you have sold online and another platform.
CURT NICKISCH: And why? Just because you’re used to paying somebody to ship it for you essentially?
AYELET ISRAELI: Yes.
CURT NICKISCH: Okay.
AYELET ISRAELI: Yes. So, there are differences. For example, if you’re selling ice cream or something that requires refrigeration, you typically work with distribution that has trucks that are freezers and things like that. And converting that into selling online is a little bit harder because now it’s not just a huge truck going to a physical store or going from and to a warehouse, but rather you need to ship to individual consumers, you need to have individual solutions from them. Maybe they can’t pick it up right away when you deliver it, so you need some kind of freezer. So, all of these are additional costs that might be much more expensive than shipping through an established traditional distribution system.
CURT NICKISCH: Yeah, because part of what makes Amazon so cost effective is that they standardize a lot of that.
AYELET ISRAELI: Right. So, if you have a product that can be completely standard and use the standard boxes, standard shipping, you’ll have a much easier time than with complex products. In a similar manner, products that are highly personalized, you want to match for every individual consumer are going to be tougher on Amazon because they are, like you said, they just work with more standard products with things that can fit mass market. You just choose one, and that’s it.
CURT NICKISCH: This brand question is interesting, right? Because you have to know whether… I don’t know, it feels like you have to know how differentiated your product is and how strong your brand is before you sell on Amazon, because you have the risk of, if it’s not strong enough or it doesn’t stand apart enough, you can really dilute your brand.
AYELET ISRAELI: Absolutely. There is this interesting conundrum here where if I’m a big enough brand and that I have enough customers that like me and will go to my website anyway, then I don’t need to be on Amazon because my customers will find me and buy my product. At the same time, I’m a strong enough brand that can actually survive on Amazon. So, I can do both things, right?
We have examples of very well known brands that have done well even being on Amazon. For example, Apple. We have other brands like Nike that have piloted selling on Amazon and just decided to quit the platform after a couple of years and instead develop and double down on their own direct-to-consumer channels and not use Amazon.
AYELET ISRAELI: And so, part of the question can be, how many customers would actually prefer my brand over other brands, or maybe an Amazon basic brand, like we talked about earlier with batteries? Maybe there are some consumers that really believe in Duracell or Energizer, and that’s what they’re going to buy regardless of the price, regardless of the offerings. But a lot of other consumers are just going to say, “Batteries are just batteries. It has the Amazon name, it’s probably good enough, and that’s what I’m going to use.” So, you need to figure out where you stand as a brand and whether you can actually stay strong on Amazon or be completely diluted.
CURT NICKISCH: Anytime you join a new platform, you have to be concerned or pay attention to reviews, right? How many stars you have. And if you haven’t sold on Amazon before and if your products don’t have listings or reviews yet, what do you need to think through?
AYELET ISRAELI: Yeah. You need to figure out how do I get reviews, right?
CURT NICKISCH: Yeah. It’s interesting, Amazon is also very careful that people don’t juice their reviews and they have a lot of restrictions about how you gather reviews.
AYELET ISRAELI: Yeah. So recently, they actually had major crackdown of fake reviews and also Facebook groups that pay people for reviews and things like that. You’re definitely not allowed to pay for your reviews and you cannot offer a free product for your reviews. Although I think all of us as customers have seen brands do that? Really the question is then, how do I get reviews? Because reviews are so powerful. And there are a few solutions for that.
One of them actually Amazon itself provide. If you have very few reviews, Amazon has a program called Amazon Vine, where they send free product to their most trusted reviewers in order to review those new products and help you start on the platform. There are also third-party companies that contact your people or your customers after they bought the product and ask for a review. The idea is to ensure that the person actually bought the product and not give them anything in exchange for the review.
Another phenomena I have seen is brands playing a little bit with the price. So, lowering the price so that people would pick their product based on low price. And then people then would write reviews. And after they have enough reviews, they would actually increase the price and be able to thrive on the platform.
CURT NICKISCH: I mean, I bought something on Amazon recently and I noticed that for this item that was being sold, underneath it, it says, “Brand:” and it was the name of the company. And you can click on that theoretically to see products of the other company, other products from the same company. But it actually went to another company that was making a different product, but a company that had the same name or the same part of the name. So, it was listed incorrectly.
AYELET ISRAELI: Right.
CURT NICKISCH: Really messy, right?
AYELET ISRAELI: Yeah.
CURT NICKISCH: For that brand. And I did wonder, are they doing this themselves? Are actually managing this and paying attention to this, or are these third-party sellers who’ve just bought these products and are reselling them on Amazon? What’s happening here?
AYELET ISRAELI: Yeah. So, we see, the technical term is just a mess of how when brands first start out on Amazon, especially if they weren’t there before, because there are all these savvy sellers that are able to find their product for a lower price, maybe a store went out of business and sells it to them or something like that, and then they go and sell it online under a bunch of different names. You’ll find for one specific product, like 10 different versions.
CURT NICKISCH: Right. Right.
AYELET ISRAELI: All of them look like it’s the same brand, but you have no idea what to do with this. But people kind of buy. Now when a brand then sees that, it means that you have to deal with this mess, but it means that there is also at least some demand for your brand on the platform.
And what we’ve seen is when brand actually try to clean this up by either selling directly on Amazon or opening their own storefront on Amazon, they’re able to clean up the offerings. Essentially create an Amazon store, which is a place where there is some information about the brand, but also all of the brand’s product are displayed in a manner that tells the story of the brand, makes it very clear to the customers what they’re buying.
CURT NICKISCH: Yeah, especially for something like, I don’t know, shoes or things that have a lot of different sizes. Like you may, in a search, find the wrong one, but then you kind of land in the store and you’re in that universe looking around to find the right one that you’re looking for.
AYELET ISRAELI: Yeah, and we’ve seen this even with candy that has many different flavors or something like that. So, it could be anything. But what we see that happens is that these sellers that I mentioned earlier, the opportunistic sellers, once they see that the brand took ownership, they kind of back down and they then move to a different opportunistic opportunity in terms of something else to sell on the platform.
CURT NICKISCH: Let’s talk about something that is just a key, key consideration and one of the big reasons that many companies decide to not sell through Amazon, and that’s data. In the modern age, as a business, you collect customer data and you get a lot of insights about how customers use things by seeing who buys it and how they use it and what reviews they do and what other applications there are. All of this data is extremely valuable to you as a maker of goods. Here, Amazon is the one that’s really collecting that data and isn’t necessarily collecting and sharing it with you the way that you might like. So, what is practically the amount of data that you get from Amazon from when you’re selling there and is this something you can negotiate with them? What are the big data considerations?
AYELET ISRAELI: Yeah. In some ways, selling to Amazon is like selling to any retailer where if this is your distribution channel, you’re selling to them for a price. You know how many orders came in, you know when you need to replenish, but any other information would require additional services from Amazon. You of course can see the public reviews on the website. You’ll definitely hear from them if there were any issues, but everything else is kind of, you don’t know.
If you are a traditional brand that never sold directly to customers, you never knew this information. So, if I sold whatever, a CPG product to Walmart and Target and all these offline stores, I also didn’t know anything. I knew what time of the month I have to come and give them products. I knew if there were returns, I knew if there were issues, but I never knew the identity of single customers.
On the other hand, we have brands, especially digitally native brands, but not only that always had direct relationship with the customers. Some of them are brands like Gap that always operated their own stores and sold direct and had kind of a loyalty program, a Gap card, you learned about your customers. Some of them are these brand new DTC brands that see the customer engage on their website, leaves reviews. They see when they add to cart. When they leave, they can nudge them, they can talk to them-
CURT NICKISCH: Give them newsletter, send them coupons. Yeah, all that stuff, right?
AYELET ISRAELI: Exactly. And all of these kind of loyalty type programs are what we think about as kind of relational marketing or everything is a relationship and not just a transactional thing. Whereas, if you’ve never done direct distribution, then Amazon is just the same as you knew before.
So part of the question is really, what do you care about as a brand? And it might not matter to you. But we’ve seen in recent years, how important data is. And some of the trends that we’ve seen in retailers in the last few years as they develop their retail media network and advertising is also selling aggregate levels of data to give you some insights about customers in general.
Some pieces of data that Amazon provides to brands is actually not about their customers, but rather on performance on the website. So, which competitors come up when people search for your brand, how frequently you are in the top searches, what people search for. Things like that, that are meant to help you better manage the platform, but less information about customers.
CURT NICKISCH: Yeah. It strikes me that you almost have to have like SEO and a sales and marketing team that is really focused on the platform. Like you can’t just-
AYELET ISRAELI: Yeah, not almost.
CURT NICKISCH: Yeah.
AYELET ISRAELI: Definitely.
CURT NICKISCH: Yeah, right, yeah.
AYELET ISRAELI: There’s a whole Amazon SEO category where you have to figure out. Because essentially, it is like a search engine just for product. And like we said earlier, a lot of consumers start their search there. So, you need to be able to do that and you need to be able to appear as much as possible for searches.
CURT NICKISCH: That’s interesting. I heard recently from somebody in private equity and they were looking at a company that was selling on Amazon and they realized when they were looking carefully at how they were selling there, that they were missing a big opportunity. And that was one of the reasons that they went ahead and purchased this private company because they thought they could do a better job of selling than that private company was doing. I guess I’m surprised a little bit that Amazon doesn’t provide more data as a service.
AYELET ISRAELI: They might be selling these services, I don’t know.
CURT NICKISCH: Yeah, or maybe doing more so in the future, yeah.
AYELET ISRAELI: Yeah. But what we’ve seen companies for which the relational element is important for do is try to still incite customers to go to their website, sign up for their newsletter, or things like that, that would still close the loop and connect the customer directly with the brand.
CURT NICKISCH: You can still put a card in the package.
AYELET ISRAELI: You can still put a card in the package. Warranties is something of the past I think, but maybe that works for some people. Maybe you tell them they can get exclusive offerings if they visit your website, or maybe you can do something with packaging and just entice people to go.
Another strategy we’ve seen is brands actually having only a subset of their assortment on Amazon. And then if I really enjoy the product and I want to buy a similar one, I might then search a little bit more and find the website with another assortment that I can buy from. So, we’ve seen a few strategies of how to try to get people to still go to your website and essentially use Amazon more as a discovery platform where they discover your brand. But then for the actual relationship, we want them to go to our website.
CURT NICKISCH: What company did that or what companies have you seen just put a loan product or just a selection of products for sale on Amazon, but then the full offering is where they are handling the relationship and managing the lifetime customer value?
AYELET ISRAELI: Yeah. So, one brand we’ve seen that did this pretty well is called Magic Spoon. They sell cereal.
CURT NICKISCH: Quick disclosure here. One of your co-authors on the article is an investor in Magic Spoon. Cereal seems like it could be a commoditized thing. You put that up for sale and you put something with a similar box next to it and you’re in trouble, right?
AYELET ISRAELI: Right. So, Magic Spoon has a high-protein cereal and they’re one of these DTC brands that developed a unique look and packaging and something cute like that. They started out just selling on their website, DTC. They essentially sold full size boxes of cereal there.
When they first started on Amazon, what they did is they created a single serve version and they only sold those on Amazon, which is really what I just was talking about, about you discover the product on Amazon, you just get a taste. Think about sampling in a Costco or a Walmart in the physical world. And then when you actually want to buy it, if you want to buy the full size, you would have to go through their website. I think now they also sell full sizes on Amazon, but what they do on their website is they have special flavors, new products, more of an innovative lab of new cereal that they’re offering so that consumers will still want to go to their website and not just buy them on Amazon.
CURT NICKISCH: I’m curious, you’ve developed this scorecard and you’ve worked with companies that are thinking about selling on Amazon or not and you know, answer a lot of these questions. Is there a pattern to the type of companies that do want to sell on Amazon versus those that don’t? Does the size of your company really matter? I’m just curious how you see some of this breaking down or is it really just a case-by-case basis?
AYELET ISRAELI: I think it’s really a case-by-case basis. And I think the answer is going to be completely different based on how well the company has been doing in terms of its brand and differentiation as we’ve discussed, how its current distribution model works, how well do they actually enforce brand and control their distribution. Of course, how much margin they have. And all of this is completely individual for each and every single company. So, it’s actually hard to say or to recognize clear patterns.
One thing we’ve seen is that very high-end luxury companies tend to stay away from Amazon and develop their own sites. Part of it is because of the commoditization issue, which are complete opposite from what you want in a luxury experience. And part of it is also to double down on what luxury means. The same place where you buy your toilet paper and your Tide detergent or whatever you’re subscribe and save, is probably not the same place that you want to buy a new Rolex, right?
CURT NICKISCH: Right, right. Yeah, exactly. I can see that. What’s the biggest misconception about selling on Amazon that you want to clear up for companies?
AYELET ISRAELI: I think that people are often so obsessed with the fact that Amazon, there are nearly three billion visits a month on the platform. So much traffic on the platform. So many users you can potentially get and people think about that, but a very important element of Amazon from inception has been how customer obsessed they are and how they build a platform to cater to customers, to have the best service, the best experience. And that’s why people kind of stay there. So, it’s not just about the competition or about the number of users, but also this is where they want to be. And every company wants to be where the customers are. And at the end of the day, you meet your customers where they are. You can’t convince them to buy somewhere else if they don’t want to. So, it’s almost like you need that reach, but it’s not just about traffic, it’s more than that. It’s the other services that Amazon provides to consumers, which make us love it as consumers, but worry about it as brands.
CURT NICKISCH: Ayelet, this has been really, really fascinating and helpful I’m sure to many listeners out there. Thanks for talking through this with us.
AYELET ISRAELI: Thank you so much for having me.
HANNAH BATES: That was Harvard Business School associate professor Ayelet Israeli in conversation with Curt Nickisch on HBR IdeaCast.
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