Online marketplaces are usually the most important sales channel for brand manufacturers in E-Commerce who do not pursue pure D2C sales strategies. The rapid, always double-digit growth of online marketplaces was accelerated significantly by the COVID-19 pandemic. Reason enough to look at negotiation strategies from a brand manufacturer’s point of view. In practice, these negotiations often represent the biggest value driver of all E-commerce sub-projects.  

1    Overview of relevant online marketplaces in Germany

There are already numerous marketplaces in Germany. This trend was additionally increased by the fact that various pure players such as Zalando, but also multi-channel formats such as OTTO, became an online marketplace as part of their own business model evolution. If one considers the reach of the marketplaces and the associated sales potential, few marketplaces remain with which it is worthwhile to take a closer look from the brand manufacturer’s point of view. Figure 1 shows a selection of relevant online marketplaces in Germany:

Figure 1: Evaluation of relevant marketplaces in Germany

While eBay, OTTO Market and Real present themselves as cooperative marketplace operators towards suppliers by proposing transparent terms and conditions and the onboarding of a new supplier is usually very cooperative, Amazon makes high demands on the enforcement of its desired terms and conditions. Now this is not surprising, since more than every second euro in German B2C E-Commerce is transacted via Amazon. Reason enough to focus primarily on Amazon in the vendor model with regard to the negotiation strategy from the perspective of a brand manufacturer.

 

 2    Negotiation strategy for brand manufacturers on Amazon

“Everything is negotiable.  Whether or not the negotiation is easy is another thing”.

Carrie Fischer, US-American writer

As easy and pleasant as it is for customers to order on Amazon, it is challenging for manufacturers to exploit the potential of their own brand on Amazon, to hold their own against a multitude of D2C brands in terms of visibility and to remain profitable at the same time. At the latest since the strategy change at the end of 2019 in Europe, which means that the goals of wanting to offer customers the largest selection of items has now had to give way to achieving profitability, negotiations and annual meetings with Amazon have become even more challenging and are gradually approaching the level of the US. Working with Amazon consists of both ongoing operational collaboration, which involves “more or less” communication with the vendor manager, and annual negotiations. Brands that want to realize Amazon’s potential should be good at both. Annual discussions with Amazon often present particular challenges for brand manufacturers in terms of long-term item profitability, as Amazon has traditionally exerted constant pressure on item pricing, contract terms, and penalties. In January 2019, Amazon sharply increased its profitability requirements for all items (see Interview by Markus Fost, 08/03/2019). This change will affect brand owners who sell their goods to Amazon in the vendor model due to the following factors:

  • The introduction of permanent new chargebacks (compensation payments) by Amazon complicates margin planning for manufacturers;
  • It is becoming increasingly difficult to reach the vendor managers directly, as each Amazon buyer is responsible for more and more suppliers. The ticket system via Vendor Central has proven to be the most effective way of contacting the vendor manager, although this results in relatively long processing times;
  • As a solution, an Amazon Vendor Service (AVS) is offered, which should explicitly take care of all concerns of a manufacturer. The price for an AVS is about 180k EUR p.a.. However, an AVS not only looks after one vendor, but 8-12 suppliers, which makes its availability for a specific vendor more difficult and also shows the generally unattractive price-performance ratio;
  • Amazon’s requirements for purchase prices, contract terms (so-called “front- & backend terms”) and marketing budgets are continuously increasing. This puts downward pressure on the profitability of many brands, as such additional expenses cannot always be overcompensated by higher sales;
  • For some time now, manufacturers have increasingly reported cases where their items are not reordered by Amazon. While in the past this was mainly due to reasons such as the CRAP-Out (Cannot Realize Any Profit) or the Buybox loss, nowadays such delisting decisions are often not justified by Amazon at all.

The aforementioned points make it clear: Amazon will continue to try to exert influence on suppliers in the future and to achieve this through annual negotiations. To avoid this, manufacturers should prepare for annual negotiations with Amazon in good time with a professional strategy. In order to do this, the following procedure with 5 steps is ideal for successfully conducting annual negotiations with your important online partner.

 

2.1    Step I: Introduction of Amazon Performance Management (APM)

A first cornerstone for successful negotiations with the non-margin-driven online company from Seattle is an actual analysis of one’s own assortment performance on Amazon. This is what we call Amazon Performance Management (APM). We have written a detailed white paper on this subject, which you can download at following link. This includes a holistic picture of sales, profitability, and marketing performance at the individual product level. The important thing here is to back up the as-is analysis with actual numbers. Here, Amazon gives its suppliers the best example, because Amazon’s decisions are always purely data-driven, both in terms of vendors and its own organization. For this analysis, the setup of an Amazon Performance Management (APM) tool is a good idea (see Figure 2).

Figure 2: Overview of an APM Cockpit from FOSTEC & Company

 

2.2    Step II: SWOT Analysis for the Annual Meetings

A second step on the way to successful annual meetings with Amazon is a detailed analysis of your own position vis-à-vis Amazon. What are the strengths of your own brand? What is the market share in the German market? What further development opportunities does the company and its products have? Figure 3 shows an exemplary evaluation of a company as part of a SWOT analysis as preparation for the annual negotiations with Amazon.

Figure 3: Exemplary SWOT analysis for determining your own position in the Amazon negotiations

The results of the SWOT analysis are not released to Amazon and are used as the basis for determining your own location vis-à-vis Amazon. The manufacturer should not only look at himself critically, but also determine whether and how he can achieve his own goals by working with Amazon. Which goals you should set yourself is explained in step III of our negotiation strategy.

 

2.3   Step III: Clear objectives and negotiation techniques

The basis for the development of the negotiation strategy is not only the actual figures from step I and the SWOT analysis from step II, but also clearly defined goals of the manufacturer with regard to the upcoming contract negotiations. What does the company want to achieve with these negotiations? What conditions are the manufacturer aiming for? On which conditions can the manufacturer give in and on which should he reduce the value? The extent to which these goals can be achieved essentially depends on the relevance of the manufacturer from Amazon’s point of view. The latter is primarily determined by the supplier’s market share on Amazon in the respective product segment in addition to the brand strength. This should be measured in the run-up to the negotiation.

Figure 4: Two exemplary negotiation techniques for manufacturers

In the first strategy approach, a draft contract is first created by the manufacturer, setting out its terms and conditions for the coming year. This offer is submitted to Amazon, which then sends its own counter-proposals back to the manufacturer in an iterative process. This approach is characterized by a not inconsiderable amount of time and resources that must be invested in each iteration. Nevertheless, this path also offers some advantages for the manufacturer: For example, the manufacturer shows its willingness to negotiate with Amazon, which allows a good relationship to be established with the online partner.

In contrast to the first approach, the second strategic approach “One offer to close” does not include individual iteration loops. The goal in this approach is to define the conditions to be negotiated in advance internally at the manufacturer and to present this offer to Amazon only once. The manufacturer thereby also demonstrates its strong negotiating position. This negotiation approach is not without its disadvantages, because the exclusion of compromises can lead to the fact that no agreement will be reached. Furthermore, this negotiation approach only comes into question with strong suppliers who have a significant market share.

 

2.4   Step IV: Negotiation scenarios

Based on FOSTEC & Company’s many years of project experience, five different scenarios can basically be defined (see Figure 5). Each of these scenarios has a direct impact on both the short-term and long-term profitability of the manufacturer and should therefore be worked out with great care:

Figure 5: Exemplary negotiation scenarios for manufacturers

 

2.5   Step V: Sound preparation is the be-all and end-all

One of the most important negotiation principles in practice is called 5P: Proper Preparation Prevents Poor Performance. This means that manufacturers should start well-founded preparation in good time. In particular, role-playing is recommended for the negotiation scenarios, which is carried out with the manufacturer’s negotiating team and a moderator. In this role play, the moderator often takes on the role of the vendor manager and goes through the individual scenarios with the manufacturer team. The goal here is for their own employees to gain a clear sense of what the vendor manager’s goals are in the annual negotiations and how both sides (vendor and Amazon) can help each other achieve their goals.

 

3    Conclusion

This article makes it clear that negotiations with Amazon are not an easy station for most manufacturers. Those who want to achieve good results in the annual talks should therefore invest sufficient time in the preparation, simulation and consistent implementation of the developed negotiation strategy.

Above all, before entering the Amazon Vendor Model, an optimal contract and conditions model should be established, because this represents the baseline of a successful business relationship with Amazon for the following year and is elementary with regard to the sustainable profitability of a manufacturer on Amazon.

 

Components of an Amazon Strategy

Contact one of our experts

Markus Fost, MBA, is an expert in e-commerce, online business models and digital transformation, with broad experience in the fields of strategy, organisation, corporate finance and operational restructuring.

Learn more

Markus Fost

Managing Partner
Markus Fost, MBA, is an expert in e-commerce, online business models and digital transformation, with broad experience in the fields of strategy, organisation, corporate finance and operational restructuring.

FOSTEC & Company is known from

View more

FOSTEC & Company GmbH

Marienstraße 17, D-70178 Stuttgart

info@fostec.com

+49 (0) 711 995857-0

+49 (0) 711 995857-99

Contact us now