Three Surprises From Amazon Earnings Release for Q2 2020

Three Surprises From Amazon Earnings Release for Q2 2020

It’s the moment we’ve all been waiting for – Amazon earnings for COVID impacted Q2 2020.

Since the COVID-19 pandemic began, many of us are shopping on Amazon more than ever. My Amazon Echo pings all day with deliveries for my family of five. My kids open the front door several times per day just to see if any cereal or batteries or Legos have arrived. I’ve seen more Amazon delivery trucks on the streets than ever before, and you have to sell your firstborn child in Seattle to get an Amazon Fresh delivery appointment.

In Q1, we know Amazon saw such a demand spike that they had to focus entirely on essential goods and restrict everything else. But how much volume? And at what cost? Read on for three things that surprised me about Amazon’s Q2 2020 earnings release.

Link to the earnings call transcript (registration required) and link to Amazon’s press release about it.

1. Amazon’s inventory strategy is scarily lean

Amazon earnings release reveal that revenue came in at $88.9B, +40% Y/Y (vs +26% the previous quarter), and +18% Q/Q. Categories like fashion and electronics likely saw softer sales, dampening the overall growth rate. However, some categories saw huge spikes. Throughout the end of Q1 and much of Q2, Amazon struggled operationally.

According to Brian Olsavsky, Amazon’s CFO, “Online grocery sales tripled year-over-year.”

What’s incredible is that an additional 14 points of sales growth (vs. previous quarter’s run rate) created that much disruption at Amazon. They continued to miss and delay Prime shipping promises and restrict inbound and outbound shipments.

This doesn’t seem like so much extra growth. Could your organization manage an extra 14 points of growth without too much disruption?

The level of disruption made me realize how thin they keep their inventory (typically 2-3 weeks of cover, and often less for tail assortment.) When coronavirus hit, their lean strategy backfired. Not that anyone planed for a global pandemic. However, it shines a spotlight on how lean they run.

WHAT THIS MEANS FOR MANUFACTURERS

Amazon’s lean inventory strategy, and how sensitive their network is to fluctuations in demand underscores the importance of having a hybrid selling strategy, or multiple ways to sell goods on Amazon. At the onset of the pandemic, many of our clients rushed to get a 3P account set up, dropship capabilities, etc. Better to be prepared for future demand fluctuations and have your hybrid strategy ready-to-go.

Also, Amazon’s going to run out of space (for real) in Q4. This comment from Brian O. was shocking:

“Now as we move into Q3, we’re starting to – we need to build the inventory more for Q4, and we’ve run out of space. So we’ve got our hands full on that challenge, but we’ve got a really good team that’s been working very hard probably since late February on this issue.”

Well I’m glad you have a team working on it, Amazon. Manufacturers: better get your goods in now!

2. Where did all of that profit come from? If we believe Amazon’s position, their normal corporate marketing ad spend must be *huge* during non-COVID times.

Amazon earnings release show that net income came in at $5.2B, up 107% Y/Y. Earnings per Share increased 94% Y/Y to $10.30. Even looking at Net Income as a % of Sales, they improved 76% Y/Y to 5.9%. They made more overall profit (which makes sense, because they had more sales), but also a higher profit margin. Yet, they spent over $4B on COVID-related expenses, such as protective equipment, cleaning, safety protocols, additional family care benefits, and a $500M employee thank you bonus, among other things.

I was convinced all the low-profit grocery sales and increased cost of doing business would severely negatively impact profit. Heck, the analysts expected Earnings per Share to be $1.46. However, Amazon earnings show they managed to deliver 7x those expectations! How did they do this?

Apparently, I’m not the only one with this question. Analyst Mark Mahaney of RBC asked,

“…these profit levels are super high now. Is Jeff aware of how profitable the company is becoming? Is he happy about it?”

Sigh. Finance humor.

Osalvsky says it came from a 1/3 reduction in Marketing expenditures. Amazon must have previously spent a LOT on marketing for this to drive EPS up 7x analyst projections.

WHAT THIS MEANS FOR MANUFACTURERS

I guess the great vendor profit claw-back I predicted is not coming after all. Manufacturers, you are safe…for now. You may want to bring up Amazon’s stellar profit performance in your next vendor negotiation. Do they really need that extra 50 bps of co-op improvement?

3. Amazon continues to invest, while other retailers scramble to keep pace

Amazon is continuing to build fulfillment centers. They’re listening to and learning from us using our Alexa. They’re moving forward with international expansion. Their competitive advantage is that it’s always Day One. According to Jeff Bezos in the Amazon earnings press release,

“Lastly, even in this unpredictable time, we injected significant money into the economy this quarter, investing over $9 billion in capital projects, including fulfillment, transportation, and AWS.” 

No one asked Amazon anything about their foray into healthcare, and Amazon didn’t mention it. Amazon has quietly been acquiring all kinds of voice-enabled health technology companies (check out their Alexa Fund). They’ve launched a healthcare system for their employees. They’re doing their own COVID testing. They have like a million Healthcare experiments running, and likely COVID-19 is accelerating the customer need and general interest in all of these. Do you wonder why they’re keeping that under the radar for now?

WHAT THIS MEANS FOR MANUFACTURERS

Amazon will win by continuing to invest while others cannot. This is also how you, brand manufacturers and sellers, will win. Keep focused on your long-term initiatives. Stay strategic. Keep your head up. Finding ways to thrive, versus just survive, will put you ahead of your competitors as we adjust to the New Normal.

Also, the current coronavirus pandemic is crowding out any news about Amazon’s expansion activities. Keep reading, stay curious, and continue to dig. You definitely don’t want Amazon to surprise you!

Andrea K. Leigh Ideoclick

About the author: Andrea K. Leigh is both an e-Commerce strategy enthusiast and expert. She works with suppliers on e-Commerce strategy and execution, and writes, speaks, and teaches on commerce-related topics. She is the VP of Strategy and Insights for Ideoclick, an e-Commerce managed services agency that empowers manufacturers to take charge: e-Commerce without compromise. A 10-year former senior exec at Amazon, she worked on the launch and management of automated pricing, the Prime program, Amazon Fresh, and even Harry Potter book launches.

Timely Check-in on Amazon Predictions for 2020 and Beyond

Timely Check-in on Amazon Predictions for 2020 and Beyond

Back in November 2019, Andrea Leigh, Ideoclick’s VP of Strategy and Insights, recorded her predictions for Amazon’s business during 2020 and beyond. Since then, the ecommerce industry has shifted dramatically, but many of these Amazon predictions are still very relevant, and are especially interesting today.  

Leigh preceded the content of the video with the statement that her Amazon predictions are not based on any inside information. Leigh’s predictions are formed through her knowledge of Amazon’s behaviors in the past, Amazon information in the news, and her personal opinions. 

Prediction #1: Amazon Will Spin-Off a Business Segment 

The prediction was that Amazon will spin-off its AWS and/or its advertising business. This was based on the observation that Jeff Bezos prefers to resolve issues his own way instead of waiting for the government to get involved or provide guidance. For example, recounting the reaction to the headcount tax in Seattle, Bezos responded by stating that he will stop hiring in Seattle.  

“This [spin-off move] would distance Amazon a little from the question the government is asking about whether they are taking funds from highly profitable segments and shift to help their retail business, therefore making their retail anti-competitive,” Leigh explained. 

UpdateThe heat is on with Jeff Bezos being called into a congressional antitrust hearing to testify along with other technology leaders from Google, Facebook, and Apple. Although Amazon is not being charged with antitrust violations at this hearing, it’s a solid reminder that the government will always be curious when one company wields such a vast amount of power.   

Prediction #2Grocery Consolidation 

Considering the many different grocery formats Amazon has (Amazon Fresh, Prime Now, Amazon Go, Pick Up Points), Leigh’s next Amazon prediction was that they will create some integration between the different formats. She noted that the platforms are growing and likely becoming more costly to operate separately, which creates a good business case for consolidation. “I would expect some integration here,” she said. “Maybe some rebranding [to alleviate format confusion] and potentially some consolidation.” 

Update: Now that consumers are navigating social distancing orders due to the COVID-19 pandemic, Amazon Fresh has become a heavily relied-upon method for many families to receive their groceries. This may lead the direction for Amazon’s grocery consolidation decisions.  

Amazon Pantry has recently paused taking new items, indicating that it may be folded into another program. Ultimately, there’s still a need for Amazon to at least repair the confusion around how the different Amazon grocery formats work.  

Prediction #3: Retail Acquisitions for Amazon 

Leigh predicted more retail acquisitions would be being targeted by Amazon, specifically in the small drug-store chain and fashion categories. An Amazon purchase of a small format drugstore chain would enable the company to gain an instant geographic footprint versus negotiating leases one by one, noted Leigh. She explained that this model can be especially helpful in creating locations for order pickup in more densely populated neighborhoods with apartment dwellings where ecommerce tends to struggle.  

Fashion is another acquisition category Leigh predicted. With Nordstrom aligned in technology, innovation and customer focus, she thought they would be an ideal acquisition target. Amazon is after credibility in the fashion space, she explained, and was previously unable to achieve it.  

“They’ve been unable to break into this space in a meaningful way,” Leigh said. “I think [Amazon] believed in the past that they would be able to sign some higher-end [lines] and fix their site to make the navigation and discovery experience different for fashion.”  

Leigh noted that Amazon’s private label fashion assortment has become interesting and could conceivably be sold through acquired retail locations.  

Update: As the coronavirus pandemic has caused tremendous economic strain and even closures for retailers, especially in the fashion sector, the price tag for another retailer acquisition could be decreasing. The company’s recent talks with JC Penney wouldn’t gain Amazon much fashion credibility but could provide them with real estate for their own fashion endeavors.  

From a fashion image standpoint, Amazon has made progress with the introduction of Amazon Prime’s “Making the Cut” fashion reality show featuring Heidi Klum and Tim Gunn – enabling them to become affiliated with a higher fashion sense and bridge the gap between fashion and online purchasing.  

In March of this year, Vogue and the CFDA partnered with Amazon to create Common Threads fashion storefront to support the financial pressures independent designers are experiencing during coronavirus. The storefront, promoted heavily in the Amazon Prime Wardrobe try-before-you-buy shopping service, is where fashion-savvy consumers can find designer $1,200 summer dresses and $85 face masks. This has opened yet another area where Amazon is sidling up to well-respected brands and hand-selected designers to improve its fashion reputation.  

Prediction #4: Voice is the New Search 

“I think we’ve all been underestimating the power of voice,” said Leigh, when talking about her fourth Amazon prediction for Amazon’s upcoming year. She explained how her belief is that Amazon’s entry into Voice is not directly about shopping, but about the company’s quest to know the consumer.  

The reason Amazon wants to know a consumer’s likes, dislikes, and search behavior is for them to continue growing as a company. “They need to figure out how to continue to monetize the traffic they’re experiencing on their website.”  

With a shift to thinking about Amazon as more of a search engine than a retailer, the company can leverage their traffic on a whole new level, Leigh speculated. There’s a compelling reason why Amazon, through its Alexa Fund, has invested tens of millions of dollars to help the Voice industry move forward, and it will be interesting to watch the platform and voice technologies open new possibilities in the future. 

Update: Amazon has announced a huge increase in the use of Voice in the home for music, skills, and search while people are spending more time in the home due to the COVID-19 pandemic. “In many ways, Alexa acts as a search engine but without the need for an extra device. There’s also a more personal element to the voice interactions,” said Tom Taylor, SVP for Amazon Alexa in this recent Geekwire article

It also seems that every week, new and more affordable products are being added to the IoT household voice-controlled list. The depth of data collection in this realm is enormous and will be in high demand by CPG companies. It may be a matter of time before that data becomes a selling point for Amazon’s demand side platform (DSP) advertising. Amazon can keep its commitment not to store personal information from its Alexa smart speaker devices while still leveraging the behavioral data. 

We frequently post tips and insights on how to succeed on Amazon. And, be sure to subscribe to our YouTube channel so you will be alerted when our next prediction video is aired!

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How Product Innovation Creates Wins in the New Commerce Landscape

How Product Innovation Creates Wins in the New Commerce Landscape

Adapting Product Innovation Strategies to Pandemic and Post-Pandemic Realities

Retail has always needed to adapt to shifting trends in the marketplace. With the onslaught of the COVID-19 pandemic, companies of all types have been forced to reassess marketing programs, product offerings, and supply chain strategies in warp-speed. Many companies have learned that product innovation can create wins in connecting with consumers during the new commerce landscape.

At the forefront has been a notion of “essentials versus non-essentials” and how manufacturers and suppliers approach the pandemic-induced transformation of shopping behaviors, manufacturing capabilities, and supply chain disruption.

Kristine Urea of Market Performance Group commented on this from a product innovation viewpoint, in the “Adapting Your Products” session of our Deinvest to Reinvest Virtual Leadership Summit.

“Innovation is going to be critically important across the board, as it relates to the essential category. I think there will actually be a push by a lot of retailers to expand offerings in those areas and then make room for that expansion in some of those higher-demand categories.”

Urea also noted that companies will have to “sharpen their pencils” as it relates to non-essential categories. Companies will have to account for progress in areas like differentiation and incremental category growth, as a part of what they are bringing to the table from a product innovation standpoint.

Refocused Product Development, Based on Consumer Needs

In terms of new product development, some companies have refocused their efforts. Sean Riley of Dude Products shared with the panel the example of his company’s Dude Bomb product, which was deemed non-essential throughout the depths of the pandemic. As a pivot, Dude Products launched an at-home bidet attachment to supplement the demands of the toilet paper supply craze that occurred at the beginning of the pandemic.

“It was important to step back and ask, ‘What is something core that the consumer needs, and how can we do that better?’ It’s almost going back to your roots, simplifying and then innovating your way back. [The bidet] was a way for us to double-down on innovating. We may have to pull back [certain] innovation dollars and redeploy them into what we do best.”

How Product Innovation Helps Connect to Your Consumer Base

One key point, specifically among retail brands, is being conscious of the messaging and content being promoted during the pandemic universe. Ideoclick’s Andrea Leigh referenced the dichotomy between Banana Republic, who was still deploying “work wear” digital advertisements and Anthropolgie, who immediately recognized the risk of appearing tone-deaf and created an entirely new lifestyle section on its website that covered things like working from home, sprucing up your home office, and creating WFH playlists.

“Where the innovation has to come from now is around messaging and content; being more timely and relevant. And, figuring out different ways to engage with customers, even though [companies] may not be in what’s considered an essential category. It’s not necessarily about products, but rather how you’re thinking about the customer and really understanding where they are at.”

Jessica Hauff of L’Oreal echoed Leigh’s sentiments about keeping the customer as the focus—and even redeploying internal resources in order to meet consumers’ needs.

“Hair color was becoming the new toilet paper. So many women were buying at-home hair color for the first time in their lives. But, it can be a very intimidating process. It’s messy, it smells, there’s a four-page pamphlet of instructions and warnings. We really ramped up content—especially digital content—around helping people pick the right shade, helping with their first-time application, how to follow it up.”

L’Oreal also utilized its tech center participants as company ambassadors, since those individuals were no longer able to go into a physical office. “They started creating content, doing live chats, webinars, etceterra with consumers. We just really tried to think about creative ways to connect with consumers and make sure they know we’re still here,” added Hauff.

SKU Rationalization: Keep the Discussion Going

With many retailers (supermarkets, drug stores, some “bigger box” retail players) grappling with the essential versus non-essential argument, session mediator Kevin Coupe of Morning News Beat raised the very pertinent and prudent question about reducing SKU count. All panel members agreed this approach is not simply black-and-white.

Riley proposed that certain suppliers can actually benefit from a bit of diversity, instead of “betting the farm” on two or three big brands—citing the shortage of toilet paper and related items. “I agree about making the selection simpler. But, suppliers that don’t have a lot of diversity in one category—[leads to] why they ran out of toilet paper and flushable wipes. Suppliers that carry more brands were actually able to serve the customer better.”

For retailers that are still very focused on a brick-and-mortar presence, Leigh cautioned they are going to need a reason to draw people back into the stores. “If they really shrunk their assortment, I think they run a risk. You have to do what you have to do, but you also have to be careful about what you’re cutting and why.”

Hauff reinforced this necessary balance, based on customer-centricity and the costs involved with supply chain issues and in-store stocking. “Each [retailer] is going to find this a bit differently. Take Target, which people think of as a place to go and discover new brands; new products. For them, not to offer that breadth of assortment wouldn’t be in line with their positioning in the marketplace. Other retailers that are more of a replenishment mindset, they probably have an opportunity to scale back.”

Message of the Day: Be Quick on Your Feet

As all panel members look to the future, they are cautiously optimistic about pandemic recovery—but are also cognizant a post-pandemic recessionary period is likely inevitable. Ultimately, a company’s ability to nimbly adapt and implement change will determine its continued success in the months, and years, to come.

To learn more about how Ideoclick helps brands build velocity on Amazon, connect with us here.

Amazon New Product Launch Ad Spend

Amazon New Product Launch Ad Spend

How to Determine the Duration of Ad Spend Boost

When you launch a new product on Amazon, how long must you boost ad spend before organic search begins to take hold? Unfortunately, there is no direct recipe or formula to calculate the necessary length of time for aggressive new product launch ad spend. However, we have some consideration guidelines that can help you determine when you might begin letting your foot off the gas. 

It is important to note that for these suggestions to apply, we are first assuming that you are launching an item with all the winning attributes: it has proper R&D behind it, is produced well, offered at a compelling market price, is an e-commerce aligned product, is desired or needed in the market, and is supported with Amazon-optimized content and images. 

A necessary premise exists here as well, and that is: you understand to launch a product on Amazon, you should budget and plan for a healthy ad spend. This is the stage in which you are building awareness and traffic on Amazon and should plan for sub-optimal ROAS. 

The first element to consider is your existing brand equity. When launching a product with existing strong awareness in your brand and category – for example, you’re launching a product update or variation – then it’s safe to figure that organic search of your new product will take hold faster than an item in a new category or lesser-known brand.  

It’s All About the Amazon Relevancy Score 

When planning for your new product launch ad campaign, the intensity of the program will affect the amount of increased spend-time required. Are you willing to direct traffic to Amazon from other channels? To run a 25% off coupon? To shift ad dollars from other platforms? The more you front-load your campaign with these efforts, intensify the ad-spend and ultimately build the new product’s Amazon Relevancy Score, the quicker your success will be. However, even new products with the best brand equity, strong social presence and robust plans for directing traffic to Amazon will still require a minimum of two months before desired organic results are achieved. 

Next, consider the competitive dynamics. The initial spend to dominate search rankings in a highly specific or niche category will look very different than the spend required in a highly competitive and saturated category. We recommend ample competitive research and set your expectations on timing accordingly.  

Determining Performance Metrics 

When assessing the results of your new product launch campaign, isolate performance metrics from other variables. Understanding the difference between category share and share of search results on Amazon is critical. On Amazon, there are unique ways consumers find your products – unlike typical store categories – so setting realistic expectations to see share of search improvement over category dominance could very likely translate to a winning scenario for your new product. Simply put, your product must be discoverable on Amazon to get sales, so you should not take pressure off your campaign until your product is landing on page one of relevant search results. The ideal goal is to appear in the top 10 search results; top three is better yet.  

Additionally, new product launch ad campaigns require careful monitoring and maintenance. It is not a “one and done” endeavor. Competitors will change their strategies, which will affect your item’s search results. Consumer online shopping behaviors are also changing more quickly and drastically now, with brand loyalty being increasingly up for grabs. Success in new product launch advertising on Amazon depends on strategy in planning, measuring, and adjusting. If all adjustments are made and desired success is still not achieved, you may need to perform a gap analysis to address potential problematic attributes of the product. 

We have multiple proven tips and best practices for new product launch advertising on Amazon, including up-front gap analysis, competitive review, HERO product or brand leverage, and off-channel presence. Contact us to learn more about how our e-Commerce optimization platform works to craft an effective Amazon new product launch plan. 

Avoid Amazon Out of Stocks

Avoid Amazon Out of Stocks

Information on Setting up an Efficient Carrier Pick Up Program

With many of Amazon’s categories now completely suppressing out of stock (OOS) items, being in stock is more important than ever. If your items are not in stock on Amazon, they are simply not on the digital shelf and you’ll lose ground to competition. However, getting products picked up from your warehouses and delivered to Amazon in a timely manner is harder than it sounds – especially in a Collect model where Amazon controls the freight carriers. Here are some tips and tricks to avoid Amazon out of stocks and ensure your products get picked up on-time and efficiently so you can focus on selling, from one of our resident operations experts, Brian Butts.

Proper Escalation

Please see the linked carrier escalation paths document for detail on how to troubleshoot a pickup or delivery issue with Amazon’s transportation team. We have provided solutions for both Vendors and Sellers to troubleshoot carrier related issues and seek a timely resolution that appeases all parties.

Risk Mitigation

Per Amazon, Collect/WePay Vendors must consolidate all Purchase Orders (POs) that share the same ship/delivery window, origin, and destination into a single routing request while adhering to the parameters provided by Amazon. By consolidating POs, you are effectively increasing the volume of your shipments and hopefully forcing a Less-than-truckload (LTL) or Truckload (TL) tender from Amazon. At the same time, you are also limiting the number of shipments that could potentially result in a pickup or delivery issue. Vendors who consistently submit consolidated and accurate routing requests will be in a strong position to maintain or even lower overall freight costs, which will help with Amazon funding asks during annual vendor negotiations (AVN).

For all Vendors and/or Sellers that have justifiable volume, we recommend following these steps from the North American Vendor Transportation Manual to work with a carrier for arranging a Drop Trailer to alleviate dock congestion.

  • You must initiate communication with the carrier to see if drop capacity can be offered.
    • The carrier will do an analysis of all business lines shipping out of your location to determine if enough consistent volume exists to support drop trailer capacity.
    • You may be required to sign the carriers Shipper Load and Count (SLC) agreement.
    • You may be required to follow the carrier’s PRO sticker guidelines in order to establish drop trailers.
    • Once drop trailer is initiated, you must load Amazon orders first.
    • You are responsible for notifying the carrier that the drop trailer is ready for pick up. The local terminal must be contacted by 10AM local time to schedule a driver for same day pick up. If the carrier is contacted later in the day, driver capacity is limited, and the load may roll to next day.
    • When scheduling a pickup for a drop trailer, the mandatory requirements are to provide trailer number, ARNs/FBA IDs, and pallet count or cube. If there are only a few pallets loaded, the carrier may wait until the vendor/seller has additional freight to load prior to pick up.
    • Upon pick up, have BOLs ready to hand to driver

Ideoclick seeks to provide clients with operational assistance as part of its complete Amazon managed services. Helping you avoid Amazon out of stocks is part of that formula. Contact us to learn more.

Amazon Free Shipping: The History of and Truth About Who Pays Shipping Cost

Amazon Free Shipping: The History of and Truth About Who Pays Shipping Cost

Amazon free shipping isn’t actually free. Many consumers and brands are unware of just who foots the bill when it comes to “free” shipping provided by Amazon. Someone pays for the shipping – and it’s not who you think. Discover if the consumer, brand, or Amazon ultimately pay for the cost of free shipping.

“There’s scarcely tastier bait for American shoppers than free shipping,” according to a recent Atlantic article, “and it’s been transformed from an occasional incentive into something that closely resembles a consumer requirement.”

As consumers, we expect delivery. We really, really, need delivery. But pay for it? No way.

When is shipping truly free for the customer? When is it not? Who pays, and why? Is this sustainable? Let’s find out.

The History of Amazon Free Shipping

Back in the olden days, people rode their horse and buggy to the physical stores for all our needs. If the physical store didn’t have what we needed, we’d go without (a concept my kids still can’t wrap their heads around). The product price was a “box price” which is the price of the item only. Alternatively, people could order from a catalog. For the privilege of ordering a seemingly endless assortment (often from a rotary phone or fax machine), we paid a “landed price”, which is a box price plus a shipping fee.

Then along came eCommerce – where competing for sales is hard, and the delivery fees for space heaters, diapers, and big screen TVs are expensive. However, shipping costs are a major deterrent to online shopping (still the largest driver of all cart abandonments.) If customers were responsible for the actual, itemized delivery fees, they would feel guilty and lazy for paying to shop in their pajamas. They would go to the store.

Barbara Kahn, Professor of Marketing at Wharton, calls this the “pain tax”: “If the shipping price is incorporated in the price of the good and customers don’t have to think about that pain tax, they would definitely prefer it.”

To get people to shop online, retailers must make shipping free. So, who pays for it?

Does the Customer Pay?

Let’s say an item’s retail price is $20, and it costs $5 to ship. If the retailer charges $25 and announces, “free shipping”, then the customer is paying.

This approach is still common among many third-party sellers on sites like Amazon and eBay. These sites have toggle buttons to help customers filter for items with “free shipping”, and you want your products to show up. (On Amazon’s web site heatmap, for example, those filters are the hottest places on the page.)

Alternatively, retailers or sellers will charge shipping overtly, in the form of a shipping charge (i.e., Land’s End). Order minimums (i.e., Free Super Saver Shipping) are also a way of having the customer share the burden. Larger orders drive incremental revenue and profits for the retailer.

In these cases, the customer pays for the benefit of having products delivered to their homes.

Does the Retailer Pay?

Many eCommerce players got their start this way, matching competitors’ in-store, box prices, AND offering free shipping. In this case, the cost of the shipping comes out of the retailer’s profit margin. This helps the retailer buy customers, but it is not sustainable as a long-term strategy. If you operate in a margin-rich category, this works. It also works if your shipping costs can be reduced over time by economies of scale. Yet Amazon’s retail business is profitable…likely even before advertising.

However, cat trees, toilet paper, and Campbell’s soup carry high shipping costs. Contrary to popular belief, Amazon and Walmart have moved away from this. While Amazon has economies of scale, it would be difficult for them to ship most of their merchandise profitably – especially with One-Day shipping – without some help.

Doesn’t Amazon’s Prime Revenue Help?

It helps, but it’s likely not enough. It’s estimated Amazon spent $5-6B last year on digital content for Amazon Prime, or $40 per Prime customer. That leaves only $79/customer to allocate to Amazon’s shipping costs. This probably doesn’t cover the 24 orders per year that Prime customers place. Of course, the math is more complex, LTV, etc., but you get the picture…

So, you guessed it, someone else is subsidizing shipping.

The Manufacturer Pays (ding ding!)

Amazon is in the middle of Annual Vendor Negotiations with vendors. This year’s top request by Amazon? To increase funding, especially freight, to help pay for Amazon’s launch of One-Day shipping.

Manufacturers heavily subsidize the cost of both the pricing war between Amazon and Walmart AND their free shipping programs.

Manufacturers are also feeling the squeeze of Amazon and Walmart.com to keep on subsidizing.

Years ago, these (1P) manufacturers happily loaded their products onto Amazon with minimal trade funding. Amazon came to represent their primary eCommerce customer and a profitable growth channel.

However, in the past five years, manufacturers have consistently told me that Amazon’s gone from their least expensive channel to their most expensive – by a long shot. That’s because over time, sites like Amazon have shifted the burden of price matching and shipping costs to the manufacturers.

Amazon reports vendor profitability numbers back to vendors, requesting to be compensated when their item-level profits aren’t hitting targets. They receive this funding in the form of margin guarantees, freight allowances, accruals, CRaP allowances, straight payments, AVS/SVS programs, and Amazon Advertising. If Amazon can’t get subsidies for these products, the products are often deemed CRaP – in which case, you can’t advertise, you fall out of search, and Amazon may stop ordering. Why would Amazon drive sales of unprofitable products?

If you’re a typical manufacturer that does more than half of your eCommerce sales on Amazon or Walmart, they yield a tremendous power over your business.

In Amazon and Walmart’s defense, I don’t think anyone could have predicted how technology would drive such a pricing race to the bottom. Price matching in-store box prices carries a huge burden for an eCommerce retailer, who must ship products. Not being beat on price is an expensive proposition. On the flip side, not being competitive on price is a major trust buster for someone like Amazon or Walmart.

Please, please have a channel strategy

Manufacturers’ channel strategy – or lack thereof – plays an integral role. If you’re tied to an old-school promo calendar that gives each retailer their “turn”, you’ll always be on sale online.

If you think Amazon is your most expensive channel, take a hard look at your promotional strategy. 

Also, pay attention to which retailer drives pricing in your category. Consider whether you want everyone to have the same assortment. Best-in-class manufacturers are differentiating. If you give everyone the same thing, expect a race to the bottom and a bunch of emails from eCommerce retailer buyers asking for help with profits.

Is this sustainable? What’s going to happen?

No, it’s not sustainable. Why do we rarely see third-party sellers eating the cost of shipping? Because they know that a business built on negative profit margins is generally not a good business.

Major retailers are still competing over eCommerce customers. However, over time, manufacturers are going to run out of money to subsidize retailer profits. When that happens, I believe we’ll eventually see eCommerce pricing adjust up to reflect the true cost to serve customers. (Sorry, customers.)

In the meantime, the customer wins

Unless it’s clear the customer is paying shipping, someone else is. Therefore, the customer wins. Yay customers!

One thing’s for sure – you’ve got to appreciate Bezos’ customer focus. In a recent shareholder letter, he said, “There are two kinds of companies: those that work to try to charge more, and those that work to charge less. We will be the second.”