Amazon, the 800-pound gorilla of online retailers, negotiates with vendors every day. You can face them from a position of strength…if you prepare properly.
It’s important to keep in mind that Amazon sees itself as not in the business of selling things, rather the business of helping people buy things. They focus squarely on the customer’s desire for the most choices at the best prices. The keys to profitability for them are in the deals they strike with vendors.
In negotiation with vendors, Amazon Vendor Managers (VMs) measure contractual terms called “contra-CoGS.” These contra-CoGS are balanced against the Cost of Goods Sold and form the heart of Amazon’s incredibly successful business model. When choosing what makes sense for the Amazon marketplace, VMs want profitable goods, the widest assortment possible, reliable availability and the most favorable contract terms. Those terms are negotiated with vendors, who can and should be well-prepared for the process.
Terms You’ll Likely Hear
Amazon will use terms like “co-op” fees, return fees and allowances:
- Co-Op Fees: When Amazon uses terms like “contra-CoGS,” “funding,” or “vendor spend,” these terms are synonymous with Co-Op fees. It’s through these devices that Amazon can recoup their operating costs. These will likely be central to their negotiating strategy, the largest “ask” that they make and usually the most disputed. And they can be alien to those with primarily brick and mortar experiences. This is true because a vendor’s ROI from these is not always obvious. However, it’s a cost of doing business with Amazon. Also, like most things in life…they are negotiable.
- Return fees are optional and some brands may be better suited not using Amazon for returns. For example, it might make sense for a vendor to opt out of this fee if they have a refurbish and resell program that makes return fees less of an issue. This is common with higher-priced electronics like Dyson vacuums.
- It’s also important to understand allowances, which can be a great financial win for a vendor. An example of an allowance is freight consideration. Often, a better deal can be struck if the seller has a solid fulfillment network capable of shipping to Amazon fulfillment centers at a lower cost than the freight allowance Amazon offers. Allowances are optional and, for larger brands, it might be better to handle freight and returns internally. Successful brands strategize to make contractual commitments with long-term goals in mind. A short-term gain may not look so good in six months when you’re locked into a poor tactical situation.
Let’s Make a Deal with Amazon
The “nuts and bolts” of negotiating with Amazon will vary based on the size of vendor and if they offer a unique selection, but there are things that every vendor should know.
Large national or global businesses are handled by their Vendor Manager. Think of a brand like iRobot. A joint business plan is created, the deal relies on robust and detailed data, negotiations are live, with extensive back-and-forth communication and they tend to be ongoing, rather than “set and forget” annual agreements.
Smaller organizations get different treatment, mainly because of lower sales volume and less selection. Amazon has significantly more leverage with vendors of this size and automates as much of the deal as possible. They tend to be brief and offer less room for negotiation, with Amazon setting the terms.
Most often, the Vendor Manager in charge of the process from the Amazon side is involved in many such deals– with limited knowledge of the individual vendor’s businesses.
What to expect in your negotiations with Amazon
Regardless of the size of the vendor, understanding Amazon’s pressures and priorities will give you a clearer picture of the negotiations “playing field.” From that point forward, good negotiation techniques apply.
- Prepare for the process. This means knowing your business’ key metrics. Have a calculator handy to help you understand exactly what the terms and possible changes mean to your bottom line.
- Don’t expect a partnership. Amazon is looking for the best terms for Amazon, so you should be prepared to ask a lot of questions that keep your best interests in mind.
- Be ready for multiple voices. There is significant turnover in vendor management at Amazon. While this may be intimidating or frustrating, don’t let it affect your stance. Also, be prepared to drive a stalemate, don’t be rushed into an agreement, and keep asking those important questions.
- Beware of closing the deal too soon. Take the time to come to the right terms. Amazon doesn’t want to remove items from its site. Keep your cards close to the vest, you are your best advocate in the deal. Pick and choose the line items on which you have room to move and know which agreements to avoid (like margin guarantees) that may be a problem in the future.
Forewarned is Forearmed
Comprehensive preparation for negotiations with a Vendor Manager from Amazon will pay multiple dividends for a company of any size. Each step in the process and each piece of information offers opportunities to learn what’s most important to both sides and drive the deal in a more favorable direction. Knowing what your business means to Amazon, what to expect in the process and asking the right questions is a recipe for success.