Are You Set Up to Win With Amazon?
As Amazon breaks into the Grocery industry and demands a set of pricing and terms, the way that suppliers react will make a huge difference to both their growth with Amazon and their core customers. As part of our Revenue Management service, we offer extensive help on how to set your terms and pricing for this most disruptive of retailers. In this article, Director of Consulting Peter Chapman gives his view on the challenges that Amazon brings, and what you can do to win with them.
In just over 20 years Amazon has gone from launch to one of the world’s largest and most influential retailers. It now dominates sales and KPI price management in many categories – and yet groceries have a scale, purchase frequency and complexity that is taking them longer to crack. But there is no doubting Amazon’s grocery ambition in Europe – in the last few years they’ve bought Whole Foods, partnered with Monoprix in France and Morrisons in the UK, and launched AmazonFresh in the UK and Germany. Their influence is growing exponentially – are you set up to win with them?
For many branded suppliers Amazon is currently a small, non-strategic account with fast growth potential, which typically means it is hard to justify any significant resources to manage the account. Following a number of recent projects with our clients, we’ve noticed that suppliers are often making the same mistakes when dealing with this retailer, that is genuinely different from the standard bricks and mortar retailers.
At minimum, suppliers should be applying the same standard account management best practice to Amazon as they do with other accounts on both a local and regional level. However, there are a number of unique challenges in managing Amazon, including;
a) Market Pricing differences in Europe are relatively visible: Amazon treats Europe as a single market with some local variations – and have established their fulfillment centre network on this principle. So, it makes sense for Amazon to source product from the cheapest market to its’ centres – whether it’s inside or outside of the country border. For example, a centre near the France/Germany border will look to source the best available price in both markets and will supply to both countries from this one source unless there is a legal restriction that prevents them.
b) Fuzzy line between fixed and discretionary terms: for bricks and mortar customers there are well-established standards for fixed terms such as payment terms or supply chain efficiencies, and discretionary spend for promotions and instore investments. For many starting out with Amazon, the pricing adjustment needed on core skus to get listed is already quite high – should this be a temporary or a permanent discount? What about marketing support – is this discretionary? The lack of understanding around ‘how to win’ with Amazon can lead to some early mistakes that may be hard to correct later on.
c) Start-up €€ investments turn quickly into high ongoing % commitments: the natural inclination is to over-invest at the start-up phase in order to gain positive momentum. But beware an affordable €20k investment (in a business worth €200k a year) from turning into an unaffordable 10% ongoing investment…
d) Confusion over terms, acronyms, names and services: in some ways this is standard retailer practice – but there is a noticeable proliferation of names and services offered by Amazon. Should you invest in AMS, SVS, PCS or Amazon Vine (or all of them)? How much impact does ‘Subscribe & Save’ have? What does ‘automated marketing’ really mean? Amazon has a well-developed list of options and for busy account managers the menu can be overwhelming.
As Amazon matures into a sophisticated retailer with scale – the only question is when, not if – then suppliers need to ensure they are set up for success with Amazon sooner rather than later. With our clients, we recommend a 4-point approach to win with Amazon:
- Establish a sustainable regional pricing framework for Amazon
The range of pricing that is ‘sustainable’ will vary by category and brand strength. Generally the high-value, high-margin small items (such as batteries or razor blades) require a tighter price range than low-margin, large items (such as toilet tissue) due to the relative costs of distribution, and on average a 5-10% price differential between adjacent markets can be sustained. While this sounds easy to do – for many suppliers there is low awareness of what their net or dead net price corridors actually are, once ALL customer terms and discounts have been included.
- Ensure terms are as conditional as possible
While this may sound obvious – it is too easy to write a generic commitment to an MDF (Market Development Fund) initial investment only for this to turn into a high, ongoing percentage commitment with poor conditions. We always recommend terms to be as conditional as possible, but most Account managers inherit terms with long-standing customers and rarely get to write new ones. This is a chance to set off on the right foot with a long-term legacy.
- Only pay for what you use
The full mix of the Amazon marketing suite is impressive, and when used correctly with the right resources then it can be highly impactful. For most suppliers though, there is no need to invest in most of the initial menu of offerings as the resources are either not capable or well-funded enough to exploit them fully. We recommend a stepped approach to investment in the Amazon menu to allow capability growth over time, and to avoid paying for items that do not deliver value in the early years.
- Leverage the 6 P’s of online sales fundamentals
Winning online requires a different set of investment priorities to winning instore, and exploiting the 6 P’s of online sales fundamentals is a good place to start. We define the 6 P’s of online fundamental as Product, Price, Page, Promotion, Place and Performance and more details on the capability offer at Sellex in this area can be found here.
At Sellex we have an outstanding track record in the areas of Terms, Pricing and e-commerce and have worked with a number of clients to fine-tune their approach to Amazon. So whatever stage you are at, we can help you set up to win with this unique retailer customer.