It’s Amazon Prime Day again, so get ready for all of the savings on those big deals. However, the day may not be so great for small businesses as new research has found that while sometimes it pays for them to sell through Amazon, sometimes it does not.
A new study by Professor Stephen Gilbert of the McCombs School of Business at the University of Texas could be a game-changer for small businesses. Gilbert, known for his expertise in modeling company-consumer interactions, has developed mathematical tools that can help these businesses decide when it’s most profitable to sell through Amazon.
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The researchers explained that what shoppers also do not see is the choice that Amaon and the seller make about how to interact. “Is it better for the seller to retain control over the price of their product, but share a fraction of revenue with Amazon?” they asked. “Or should they sell to Amazon and let it resell their products to consumers?”
With Parshuram Hotkar of the Indian School of Business and Chuanjun Liu at Fudan University in Shanghai, Professor Gilbert modeled the two types of channels that e-commerce platforms such as Amazon offers sellers.
The agency channel is the most common one and the most independent. The seller lists its goods on the platform but keeps control of inventory, pricing, and possibly fulfillment.
The reseller channel is a partnership, in which the retailer buys the seller’s inventory, sets prices, and ships products. Reseller channels are more exclusive, with Amazon’s being invitation-only. Amazon, for its part, argues that the fees cover its costs, such as its distribution network, inventory management, shipping, and delivery. Under the agency channel, the seller bears those costs.
“It’s true that a high-volume reseller may have a better chance of getting into one of these relationships,” says Gilbert. “But we’re saying there’s more to it than that.”
Amazon collects $140 billion a year in seller fees, and complaints from sellers about unfair fees have drawn a probe from the Federal Trade Commission.
“If those sales do not generate enough incremental profit to offset a possible reduction in profit from traditional reselling channels, the seller should consider walking away from the platform,” Gilbert says.
As with negotiating over a car, a walkout could even lead to a better deal, he adds. “A seller’s willingness to walk away from the platform’s agency channel might make the platform more willing to offer it favorable reselling terms.”
Amazon Prime Day is a two-day shopping event exclusively for Prime members. It’s known for offering deep discounts on a wide variety of products, from electronics and appliances to clothing and home goods. This year, Prime Day falls on July 16th and 17th, 2024.
