Schiit Happens
The Ongoing Story of The World’s Most Improbable Start-Up
2015, Chapter 1:
The Trials and Tribulations of Amazon
Ah, Amazon. One of the biggest opportunities for a start-up manufacturer, especially one that’s avoiding traditional distribution. If you can keep it from eating you, that is…
Disclaimer: This chapter will most likely irritate many an Amazon devotee, since it looks at things from the seller side, rather than simply the buyer side.
However, to be clear, this isn’t an Amazon-slamming screed. This is a realistic, eyes-open guide to the pluses and minuses of selling on Amazon. This is especially important for companies primarily doing direct sale, and are looking to expand their sales channel. For companies selling through distribution, especially those selling through large chains, none of this will be a surprise. In fact, it will probably seem like amateur hour to them, since they’ve probably undergone much larger trials and tribulations than any that Amazon seller can imagine.
“Wait, what are you talking about? Trials and tribulations with big retailers? What are you talking about?” you may be asking.
So, before we dive into Amazon, let’s talk about the alternatives first—looking at both the good, and not-so-good aspects.
Dealers and Direct
In the old days, your success was made (or broken) by your distribution channel—or, in English, “gettin into dem dealerz and movin boxes.”
I’ve already blathered on about the disadvantages of the distributor/dealer margin structure, so I won’t go into that at length here. Instead, let’s look at a couple examples of the dark side of distribution.
Deep breath.
Let’s say your grandest dream has just come true. You’ve built a successful product. Made some good sales. And now, your product has been accepted one of those “big box” national store chains they rail about on TV. They’re placing a huge order with you—bigger than anything you’ve ever seen before.
You’ve got it made, right?
Not so fast. Let’s look at what might happen.
- That order may come in…but with a request for additional margin due to the large volume buy. Note that this isn’t really a request, but more an order. Can you afford to grant this?
- Or, that order may come in with 90 or 180 day terms attached. As in, they pay you in 3-6 months after delivery (you hope—more on this later.) Can you afford to do this?
- In the fine print of the contract, there’s a note that if the products don’t move at the rate the store expects (more on this later, again), they can return all to you at no liability.
- As a condition of getting in, the contract specifies the level of marketing support they expect from you, which can include specific website functionality, colorful multi-lingual packaging, shelf-talkers (marketing wonk speak for stuff to get people’s attention in the store, from small tear-sheets to video demos on a kiosk)—and, by the way, you pay for all of this.
- Once you’re in, you get a call from the chain’s director of sales. Another competitor has shown up and is offering something better/cheaper/more fully featured. They want your margins adjusted down.
- Once you’ve been there a while, you get a report from the sales director showing how your sales per square foot are less than the average for their store—so they want you to do a promotion to get the sales up “to snuff.” More on this, too.
During my tenure at Centric, we saw plenty of this kind of thing. And we’ve seen it kill companies. So, let’s tell some stories.
Takeover by nonpayment. One of our clients got bitten by the 90-180 day payment terms—strained to the breaking point by these unnaturally long terms, they patiently waited for the big payday…only to find out that the “write-downs”—AKA “money not paid due to items being returned, etc” made their position non-sustainable. The company was bought out by the chain at a very discounted price, since the only other option was bankruptcy.
Death by a thousand cuts. Another client got stuck building elaborate pop-up displays for his products, complete with video demonstrations and even more elaborate product packaging, courtesy the largest brick and mortar retailer in the USA. Add in some bad advice from the store regarding product planning, and a “required spend” on advertising, and that one went belly-up, too.
The dreaded zero-price promotion. This one was great. A one-of-a-kind product with over 100% per year sales growth sounds like a dream come true, right? The only problem was that it didn’t meet the national chain’s expected sales per square foot. So what did they do? They came to the client and said, “We want you to do a zero-price promotion.” As in, the customer gets it for free. Who foots the bill for that? The client, of course. That is, unless they want thrown off the shelves. They did it, of course.
“Well, that ain’t realistic when you’re talking about audio gear, is it? Audio dealers aren’t exactly national chains, right?”
No. Not usually. Audio dealers are usually small, and some are very good, and up-and-up about what they sell. However, some will (unintentionally or intentionally) limit an audio manufacturers’ prospects by preferring to sell gear with the largest margins. Hey, they have to eat, too.
And, believe me, if you’re “lucky” enough to get into Circuit City or Fry’s, I bet those stories above wouldn’t sound off-base.
“Fine, fine, you convinced me,” you say. “I’ll just go sell direct, like you do.”
Yep. Good choice. Lots of benefits. You are in complete control of your prices and your margin…but you’re also in complete control of your marketing and customer service as well. You won’t have a dealer to be your salesperson, nor will you have them as a buffer for customer support.
So, as long as you can get the word out about your product, and provide good support, you’re golden. Except…
(You knew that was coming, right?)
…except you’re going to be battling two negatives—one relatively big, one relatively small, but only one of which might matter to you.
The big negative of direct. You’re not going to be seen by everyone who might buy your stuff. Like it or not, not everyone goes to head-fi.org, or sees your ads on innerfidelity.com, and it takes some really big-boy pants to do a real ad campaign on sites like Gizmodo. So you’re going to be a niche company. I know that people are still discovering Schiit, and I also know that awareness has been a bugaboo with other direct-sale audio companies as well. But, you know what? It might not matter. Companies can get very, very big while being in a niche. This may not be a negative to you at all, depending on where you want to take your company.
The small negative of direct. You’re also going to have some losses in direct sales—I’m talking fraud here. It’s unavoidable. Your credit card processor is only a partial shield. You have to apply some reasonable intelligence to this to keep fraud to a minimum—like, say, not shipping that order to Malaysia when the credit card is from Tulsa, Oklahoma. This matters to everyone, but it’s not too hard to keep the fraud at the noise level. Just don’t expect that it won’t happen to you.
Okay, so we talked about dealers and about direct. Now, let’s talk about the modern hybrid…Amazon.
Not a Dealer. Not Direct. Amazon.
Let’s start by getting the positives out on the table. At no time in history has it been easier or cheaper to get started selling on a site that funnels people ready to buy right to your products. Period. This is why you want to be on Amazon.
Go back and read that again. Yes, I am saying that your company should sell its products on Amazon. It can increase your sales—without cannibalizing your direct revenue.
Just be careful not to be eaten, yourself.
I’ll get into that later. For now, let’s step back a second and take a long-view look at Amazon.
The consumer side of Amazon. Amazon makes it very easy for people to buy—and to get sucked even further into their ecosystem, with free 2-day shipping and other perks on Amazon Prime, Amazon points, gift cards, easy returns, etc. It’s a buyer’s paradise. If you order from Amazon, you’re assured you’re going to be getting what you ordered, on time, without any liability. Nothing much to complain about here.
The economic side of Amazon. There have recently been articles on Amazon’s new debt offerings, and speculation about how they are burning more money than they might seem. Regardless, Amazon is pursuing market share at all costs. Consider that Amazon buys Google Adwords for Schiit products—and for Rina’s Twilight’s Fancy ribbon clamps! This does raise the question of “how long can this go on,” though.
The seller side of Amazon. Now, this is where it gets interesting. Because there’s a ton of good things about Amazon from the seller side…and some not so good things. To give each a fair shot, let’s start a walk through the Amazon process…
So, Ya Wanna Sell On Amazon?
Go ahead. Go to Amazon, scroll way to the bottom, and click on the “Sell on Amazon” link. Pretty simple, right? Just two choices—Sell as a Professional, or Sell as an Individual.
Har, har. No, dude, that’s just the entrance to the rabbit hole.
But let’s follow it through. Forget the “selling as an individual” thing, unless you have a used Asgard 2 or something that’s already listed on Amazon. Yes, that’s right. Anyone can sell anything listed on Amazon, new or used. Cool if you’re just looking to sell something, but it’s of no use to a business, because you can’t create your own listing. You can only add on to an existing one.
(But—companies take note about the
“anyone can sell anything on Amazon.” Yes, you read that right. Someone can sell a used Asgard 2 right under your main listing. Dealers can also sell their stock. That’s why you sometimes end up with an Amazon listing with dozens of sellers.)
(And companies take another note—it is entirely possible to lose the “buy box” on Amazon—that is, the first listing that appears for the product—if someone else has a better offer. Yes, you read that correctly, too.)
Wait. Stop. I’m getting ahead of myself. It helps to repeat this a bunch of times:
Amazon has one goal—to sell you something.
It doesn’t matter from whom.
Nor does it matter if it’s what you were looking for.
Sorry, back on track. Let’s say you sign up for Selling As A Professional. Now you can list your own products. You’re set, right?
Well, um, no.
Signing up to Sell As A Professional is just a gateway to a complex morass of options, some of which are not well-documented, and some of which are evolving in real time. Let’s break it down:
Basic Sign-Up and Set-Up Stuff. Once you’ve gone through the process to Sell As A Professional, which includes typical businessy stuff like providing a Tax ID number, bank account info, and credit card, you can list pretty much anything you like. If you’re a dealer, you can simply add your inventory to a product already in the system. If you’re a manufacturer, you’ll have to create your own listings. Sit down for that…you’re talking 6+ pages of info, with over a hundred options to fill out, including make-or-break stuff like keywords.
Self-Fulfilled Orders. Once your listings are live and you get orders, you can fulfill them (that is, ship the dang things) just like you normally do with direct orders. And here’s where the gotchas begin.
- Referral fees. Yep, Amazon needs its cut too. In this case, it’s 8% for consumer electronics. Better bake this in.
- Shipping fees. Amazon is stunningly bad at calculating shipping, and requires you to use a flat fee or zoned approach. Which means you’ll lose money on some shipments, and overcharge on others. Choose well, or you’ll lose too much money—or irritate too many customers.
- Amazon policy. If you sell something on Amazon, it can be returned within 30 days. Period. Even if your policy is “no returns.” Better plan for this.
- No Prime. You won’t be eligible for Amazon Prime if you are self-fulfilling orders. Sorry, tons of people only buy Prime.
Fulfillment By Amazon. You also have the option of shipping your product to Amazon and having them ship it from their own warehouses. This also gets you the coveted “Amazon Prime” logo. Sounds great, right? Send one big shipment, then let Amazon take care of the rest. Well, again, there are caveats.
- Shipping fees. Remember, you’re on the hook to ship to Amazon. To wherever they want you to send it. Don’t forget this cost.
- A complex morass of referral fees, pick and pack fees, return fees, ad infinitum. Amazon has seemingly engineered its fees to be as incomprehensible as possible. Forget that 8%—it applies below a certain amount, but not above a certain amount, but there’s also packing and warehousing and returns and probably fees for the wrong color shoes, as far as we can tell. Plus, the even easier returns through prime mean that your returns are gonna be 10-30x higher than you expect. Want a rough number? For consumer electronics, expect your real costs to be about 25-30%.
- Amazon policy. Remember those 30-day returns? Now you’re also on the hook for return shipping. And when Amazon decides to extend their return period for the holidays, so do you. Tough if you don’t like it.
- Amazon reselling. So what happens to those products that people ship back? You’d think they come back to us, right? Wrong. Amazon decides if they are resellable—sometimes reselling them as new, sometimes selling them through Warehouse Deals. Makes a great impression when Amazon decides to ship an Asgard 2 in a 12 x 12 x 12 box with no cord, no feet, and two paper-thin inflatable bags for shipping protection. Yes, this has happened.
- Amazon delays. We’re promised that stuff shipped to an Amazon Fulfillment Center will be available to ship in 72 hours, typically. Note the “typically.” Sometimes it’s much more. This sucks, bad, when you’re out of stock…because if you’re out of stock for too long, you may not be the first option that comes up anymore…
Sales by Amazon. Once you reach a certain size, Amazon wants to become your dealer. The plus side of this is that you’ll always have the buy box, because your stuff is being sold by Amazon. The minus side is that the margin they want is pretty much the same as a dealer. Beyond that, we don’t know anything about this, because we didn’t take the bait. But if you read about some of the tricks that big-box stores do to their brands, I think that’s a pretty good primer on what to expect here.
Sounds confusing, right? Wait. It gets even more fun.
Amazon Brand Registry. Okay, let’s say you’re selling on Amazon…and one day, you find that you’ve lost the “buy box.” That is, you’re not the first result listed—when someone clicks on “buy,” they’re not buying from you. Worse, your replacement is claiming to sell the exact same product you make…but they are not you. They’re not your brand. Their product might do something similar, but it’s most definitely not you…and you don’t have any authorized distributors.
Impossible? Not at all. It happened to Rina, in her business. Multiple times. She sells ribbon clamps that are custom-manufactured for her, as well as ribbon choker necklaces that she makes, under the brand “Twilight’s Fancy.” Yes, there are other ribbon clamps and ribbon chokers out there, but they are not hers—and she has no distributors.
So, when this happened, she went to Amazon and said, “What the heck? (but spelled with F and U). Amazon eventually replied that she had to get into the brand registry to protect her brand—something they offered to Schiit at the beginning.
One catch: she had to have a registered trademark.
Yes, that’s right: with Amazon, the rules change depending on who you are…and who you are rhymes exactly with “how much you sell.”
Well, okay. She went out and got a registered trademark. Her business was already legally sound, as an LLC. She applied for Brand Registry, and got it.
Problem over, right?
Wrong. To this day, she has to chase off competitors who glom on to her listings.
Big deal, right? She’s the brand owner and registered trademark holder.
Again, wrong. Amazon doesn’t understand—or seem to care—that a manufacturer with a registered trademark and no distributors is the ONLY entity that can list its particular products. It does NOT allow the trademark holder to approve and disapprove resellers of their product.
Go back, read that again. And tell me if your jaw isn’t open.
So what does she do? She follows Amazon procedure: she buys the competing product, describes the differences, submits to Amazon, and gets the competitor thrown off.
Yes. On her time. At her cost.
This is wrong, guys. Simple as that.
(Experienced legal types may be salivating at the prospect of a class action against Amazon, since this is such a blatant violation of trademark and copyright that it isn’t even funny.)
So what do you do, if you’re a manufacturer and want to sell on Amazon? The only thing you can do today is get into the Brand Registry, cross your fingers, and take the time to defend yourself when necessary…
…and, of course, factor that into the total cost of sales.
And it gets even more fun.
Amazon International Sales. For a while now, Amazon has been promoting itself as a convenient way to reach the international market. To date, this is pretty hilarious. All I can say is, if you think Amazon is your international savior, it’s time to think again. Best to simply avoid it for now.
Why? Let’s break it down:
- Limited international reach. There are some places where Amazon is strong (some parts of Europe, Japan, Canada), and some places where it’s essentially nonexistent (Australia, China.)
- In-frigging-comprehensible SKU conflicts. Amazon international supposedly uses the same database as Amazon US. Not in our experience. Trying to simply add or list products internationally results in a disabling amount of product conflicts. Want to re-enter everything manually? If you can (see below.)
- In-frigging-comprehensible Brand Registry conflicts. Rina also had the fun experience of being told by Amazon UK that she couldn’t list her products because they were already locked up in the Brand Registry. They were. By her. In the USA. Amazon is still apparently working this crap out.
- You’re still on the hook for shipping. Remember, it’s not like the magic Amazon fairies come and pick up your stuff and fly it over the Atlantic with their levitation booties. You still have to ship it…wherever Amazon says.
- If you think FBA fees are incomprehensible, imagine what they’d be like with customs and VAT mixed in. This is pure speculation, because after #3, we decided to hang it up for a year to see if Amazon got it fixed up.
So, if it’s this much fun, why bother with Amazon?
Great question. I was just getting to that.
Why Amazon At All?
It’s really simple:
- Incremental sales. Amazon allows you to reach people who you may never have reached selling direct. There is the real potential for significant incremental sales from Amazon.
- Amazon-only buyers. There are a shocking number of people who won’t buy anything if it isn’t on Amazon—you’ll be reaching them, too.
- Potential for positive exposure. Good reviews reflect positively on you and your products, and get you out of the audiophile niche.
- Great way to get feedback on operations. Amazon does keep you on your toes—if you have customer service issues, or product issues, they’ll be fully exposed. This gives you the chance to identify them and improve.
- Helps buffer out-of-stock situations. If you’re in a situation where you’re frequently out of stock, your FBA stock can help keep things moving.
To be clear: Amazon can be very, very good on a sales front. Don’t dismiss it. Don’t run away from it.
But, be aware of the not so good stuff:
- Confusing and time-consuming. It’s not easy to understand the nuances of the various Amazon sales options. It takes significant time to get your listings right, especially when you factor in proper keywords and a complete, formatted description.
- Complex costs that are higher than you expect. Amazon’s actual referral fees, packing fees, warehouse fees, shipping fees, return fees, etc will be higher than they seem based on the Amazon overview—and good luck figuring out what all the fees will be from the start.
- Amazon’s own operational problems. As mentioned, there’s no mechanism for a manufacturer to properly manage their own distribution network, nor to easily enforce trademarks. Expect delays on getting product into inventory, and sometimes incorrect products placed into inventory, or lost products.
- Potential brand reputation hit from Amazon’s policy of reselling. Whether they try to resell it as new or as a Warehouse Deal, you’re taking the chance that a customer is not gonna get what they expect, right down to a naked product carelessly thrown in a box. Several of our negative Amazon reviews are directly related to this practice. And no, they won’t automatically send everything back to us at our cost, even though we’ve asked.
- Defects in the Amazon review system. Did you know you can leave a review for a product you haven’t even bought? Talk about a dick magnet. And good luck getting the trolls removed.
Amazon Abuse
Amazon makes it insanely easy for customers to buy…and insanely easy for them to return. You go into an Amazon purchase with no skin in the game. You didn’t spend two hours listening to the dealer blather at you. And, there’s no restocking fee if the product goes back. It just disappears. Gone.
This is great for the consumer, but any manufacturer selling on Amazon needs to be aware of it. Once customers discover how easy it is to return products, some of them will abuse it.
We’ve been watching the stats on Amazon, and have noted an increasing number of serial returners—some of which have bought the same product multiple times, or all products multiple times.
Hey guys—this ain’t what Amazon is for.
And that’s what manufacturers need to know, if they’re getting into Amazon. Take a look at Amazon’s acceptable return rate. It is shockingly high. This is a good indication of where you’ll be, once your Amazon presence matures. Better factor that in at the front. We didn’t—and we got bitten.
Which is why you’re going to be seeing some changes on how we sell on Amazon. Expect higher prices, beginning now. The lowest price you’ll pay will be via our site—every time. If you want the convenience of purchasing via Amazon, there will be an incremental cost involved.
An Amazon Strategy
“Okay, fine, I want to sell on Amazon, what do I do to avoid your problems?” you ask.
Well, I can’t say this is a universal panacea, but here’s how I’d go about it, if I was to do it again. This is based on two years of experience and (redacted) sales—well, just consider that we’re big enough that Amazon wants to be a dealer.
- If you can, wait for Amazon to contact you. If you do, they’ll help you get set up with Brand Registry. They’ll also even list your products (sometimes with quite hilarious mistakes—check them!) Amazon came to us. They didn’t come to Rina. We get very different treatment.
- If you can’t wait, go direct to Brand Registry. Fill out the Brand Registry form and go through the necessary hoops, or you will have ZERO protection for your brand.
- Pay close attention to your listings. Most of the product listings we’ve seen are astoundingly bad—limited detail, no keywords, sometimes even placed in the wrong category. Unfortunately, there’s no big entity or network you can go to (like a Google Adwords expert) to help with this, but pay attention to the top-selling products in your category, take notes…and be prepared to tweak if things don’t work.
- Go direct to FBA in the USA. Seller fulfilled? You’re just paying a referral fee to ship what you’d already be shipping, and gambling on shipping costs. FBA gets you into Prime, and even though the costs are more complex, they may not be much more than seller fulfilled. You also don’t have to deal with UPC codes.
- Raise prices on Amazon to offset Amazon costs. Yes. Seriously. Don’t be shy about this. Rina’s prices on Amazon are sometimes 2-3x higher than she sells for on other sites—and Amazon is her biggest channel by far. If people have Amazon points, or if they want to be absolutely sure they’ll get the product—and be able to return it—they’ll pay more. Don’t use Amazon’s referral fees alone as a metric. Calculate your costs for shipping and returns as well. These costs can eat you alive if you aren’t prepared.
- Don’t waste time on International—yet. Amazon is still working on this. Maybe they’ll get it worked out. Right now, it’s not very workable.
- Know that things can change at a moment’s notice. You are not in control of this channel. Amazon’s 8% fee for consumer electronics could be 20% (like Jewelry) tomorrow. Or, they might roll in the ability for a trademark holder to easily manage their distribution network. Changes can be positive or negative…but you don’t get to choose when they will happen.
- Keep watching…and adjusting. Your results, too, will change over time. Don’t be afraid to make changes to pricing and availability in order to ensure you aren’t caught out.
Now, I know this isn’t a complete guide. Hell, I haven’t even gotten into Amazon’s own advertising platform, nor into how to choose categories and keywords, nor on the need for patience—it takes Amazon some time to ramp up to maximum effectiveness after you add a new product.
But if this guide helps someone get onto Amazon, make additional sales, and save their own skin in the process, it’s done its job.
Jump in…but don’t get eaten!
