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I must be misunderstanding this. Are you saying that if I have a product that sells for $1, my costs would be: $0.50 actual cost $0.34 Amazon fees So

I must be misunderstanding this. Are you saying that if I have a product that sells for $1, my costs would be: $0.50 actual cost $0.34 Amazon fees So Amazon gets $0.34 and I get $0.16? I don't know anything about retail, but that doesn't seem like a very good deal. Amazon is taking virtually no risk. Why should they get 2x what the seller does?

Spooky23 5y ago
Amazon is handing discovery, payment, fulfillment, warehousing, etc. You are fronting the capital to buy the product. Walmart makes $0.02-0.03 on the dollar in margin. Retail is either speciality or volume driven.
- xyzzy123 5y ago
  I've never thought about it this way! Have always thought of Amazon as "providing services / platform" to seller. But from the reverse perspective, Amazon is outsourcing to sellers. Amazon is handling so much of the transaction, the seller may never actually see the product. Sellers are getting paid, primarily, for managing inventory risk.
  - Spooky23 5y ago
    The Amazon marketplace thing is genius because it hacks the metrics that Wall St likes. By converting inventory to a service, they transmute a liability into an asset. Amazon is a retailer without stock. The liability (from an accounting perspective) of the inventory lives with the mostly small business sellers who don’t care as much.
mediaman 5y ago
Let's keep it simple and comparable, and say the traditional retailer also has 34% gross margins. In the wholesaler-retailer model, the process looks like this: Wholesalers buys item from manufacturer for, say, $0.25. They sell item to retailer for $0.50, and keep $0.25 in gross profit. Retailer sells for $0.76, for a selling margin of 34%. The $0.26 of profit the retailer gets pays for the store, staff, logistics, net profit etc. In Amazon's third party model, it looks like this: Wholesaler buys item from manufacturer for $0.25. They sell item to end-customer for $0.76. They get $0.51 of profit! But now they pay Amazon a litany of fees amounting to 34% of the price the item sold at: 34% of $0.76, or about $.26. That leaves the wholesaler with the same $0.25 of profit. The main difference in these two processes is that in the third party model, the wholesaler keeps the inventory on their books for longer, because they ship it to Amazon and then the inventory sits at Amazon (but is still owned by the wholesaler) until it sells. That means that even if they get the same profit in the end, they've employed more capital, and it gooses Amazon's return on invested capital (they don't have to own that inventory) while reducing the wholesaler's.
- donmcronald 5y ago
  Wouldn’t it be significantly cheaper for a wholesaler to have a small number of B2B relationships selling to retailers than to have a ton of B2C relationships selling directly via the Amazon marketplace? The immediate post sales support could be pretty huge and typically the retailer would handle most of that, wouldn’t they? Your example made it more clear, so thanks.

Spooky23 5y ago

Amazon is handing discovery, payment, fulfillment, warehousing, etc. You are fronting the capital to buy the product. Walmart makes $0.02-0.03 on the dollar in margin. Retail is either speciality or volume driven.

xyzzy123 5y ago
I've never thought about it this way! Have always thought of Amazon as "providing services / platform" to seller. But from the reverse perspective, Amazon is outsourcing to sellers. Amazon is handling so much of the transaction, the seller may never actually see the product. Sellers are getting paid, primarily, for managing inventory risk.
- Spooky23 5y ago
  The Amazon marketplace thing is genius because it hacks the metrics that Wall St likes. By converting inventory to a service, they transmute a liability into an asset. Amazon is a retailer without stock. The liability (from an accounting perspective) of the inventory lives with the mostly small business sellers who don’t care as much.

mediaman 5y ago

Let's keep it simple and comparable, and say the traditional retailer also has 34% gross margins. In the wholesaler-retailer model, the process looks like this: Wholesalers buys item from manufacturer for, say, $0.25. They sell item to retailer for $0.50, and keep $0.25 in gross profit. Retailer sells for $0.76, for a selling margin of 34%. The $0.26 of profit the retailer gets pays for the store, staff, logistics, net profit etc. In Amazon's third party model, it looks like this: Wholesaler buys item from manufacturer for $0.25. They sell item to end-customer for $0.76. They get $0.51 of profit! But now they pay Amazon a litany of fees amounting to 34% of the price the item sold at: 34% of $0.76, or about $.26. That leaves the wholesaler with the same $0.25 of profit. The main difference in these two processes is that in the third party model, the wholesaler keeps the inventory on their books for longer, because they ship it to Amazon and then the inventory sits at Amazon (but is still owned by the wholesaler) until it sells. That means that even if they get the same profit in the end, they've employed more capital, and it gooses Amazon's return on invested capital (they don't have to own that inventory) while reducing the wholesaler's.

donmcronald 5y ago
Wouldn’t it be significantly cheaper for a wholesaler to have a small number of B2B relationships selling to retailers than to have a ton of B2C relationships selling directly via the Amazon marketplace? The immediate post sales support could be pretty huge and typically the retailer would handle most of that, wouldn’t they? Your example made it more clear, so thanks.