Three months after the first interview on negotiation strategies for companies working with Amazon, Kassenzone podcast host Alexander Graf and Amazon expert Markus Fost discuss strategic negotiation options and address the many questions of listeners from the first interview.

Insights: Amazon negotiation strategies

In this in-depth discussion on the subject, viewers also learn important information about the sanction options Amazon levies against vendors. In the later part of the podcast, the experts discuss the different options for manufacturers and retailers seeking to operate seller & vendor accounts in parallel.

View the interview now and start optimising your Amazon negotiation strategy! Go to the podcast here.

Virtually all major manufacturers are now experiencing unusual negotiating situations with Amazon. For many, the Amazon marketplace strategy has become a real challenge.

Overview

In this interview, Amazon specialist Markus Fost transports listeners and viewers into the world of marketplace strategies, both on Amazon and in terms of From his expert perspective, he explains how particular negotiating situations arise and how they can be dealt with. Fost has been advising a range of manufacturers and retailers since 2009 and draws on cross-industry expertise and experience. Covering everything from brand shops and backend conditions to strategic vendor services, he gives in-depth insights into the background of an Amazon retail strategy and offers valuable tips on the best ways to conduct Amazon negotiations.

Who is the interview at?

The interview is aimed not only at those preparing to negotiate such conditions, but also at anyone currently selling products via the Amazon vendor program or marketplace. Fost uses his specialist knowledge to carry out a comparison of the two programmes in regard to how and from which point in time each Amazon business model is suitable.

Insights: Amazon action strategies

As part of a deeper insight, the audience also learns about sponsored products and the effectiveness of marketing services: it’s important for vendors to identify the best marketing services for their individual needs and then to professionally manage and monitor them. Fost illustrates his statements with concrete examples that make it easy for the audience to follow along.

For those offering products via the vendor program, in particular, things can get interesting regarding Amazon sanctions. Fost explains Amazon’s own strategies in detail and illustrates them with specific example to ensure that the background is quickly understood by the viewer – for example, how a product can be blacklisted as a result of CraP. If none of the products in a product range have ever been subject to a “CRaP-out”, advises the expert, margin potential is being gifted to Amazon.

Suggestions regarding Amazon optimisation from the perspective of the retailer are given at the end of the interview. Three important points are raised in this regard: country-specific content optimisation, management of complex marketing measures and account handling.

Watch the interview now and optimise your own Amazon action strategy! Click here to go to the podcast.

Why Amazon Demands Multi-Channel Performance Pricing (MCPP)

Amazon’s status as a company driven largely by economical concerns is now widely recognised. The effect of this on its own revenue performance is felt by manufacturers and distributors when Amazon ceases to order a product on account of so-called “CRaP-Out” status. CRaP stands for “Cannot Realize Any Profit” and effectively means that end users can only obtain an item from Amazon Marketplace distributors from thereonin. The reason for the occurrence of a CRaP-Out status is typically a lack of pricing strategy on the part the respective manufacturer/distributor. In order to better understand the precise background, it is first necessary to understand the differences between the two different business models operated by Amazon on its online marketplace: “Amazon Vendor” and “Amazon Marketplace”.

• Amazon Vendor: In this business model, Amazon functions as the seller to the end user. Accordingly, Amazon purchases the goods from manufacturers and/or other distributors beforehand and sells them for as much profit as possible on their own account. From the perspective of the manufacturer/distributor, Amazon is essentially a “classic” B2B customer.
• Amazon Marketplace: In contrast to the vendor model, it is not Amazon that functions as the seller, but rather the respective marketplace distributor (for example, a manufacturer or  wholesaler). In this case, Amazon merely provides the online marketplace infrastructure (and, where required, additional services against a fee, such as the logistics service Fulfillment by Amazon). From the perspective of the manufacturer/distributor, Amazon is a direct sales channel.

Which of the two business models makes most sense – or whether it might be worthwhile to operate the two in parallel – depends on a manufacturer or distributor’s respective Amazon strategy. Regardless of which of the business models is chosen, it is important to understand that pricing – that is, deciding what prices to charge Amazon in the vendor model or what prices to charge consumers in the vendor model – has a significant influence in both cases. As previously mentioned, Amazon is a company driven largely by economical concerns and, accordingly, prioritises the goal of profit maximisation in their deployment of these business models. This means that from Amazon’s perspective, the trading margin that can be earned in the vendor model stands in direct competition with the sales commission that can be earned in the marketplace model. As can be seen from Figure 1, the minimum trading margin earned by Amazon in the vendor model typically lies at around 20% of the net online streetprice (OSP) – that is, the price for which the product is sold to the end consumer minus VAT. It is comprised of three components: frontend, backend and marketing fees (see Figure 1).

Figure 1: Price & margin system for the Amazon vendor business model

If Amazon’s trading margin is below approximately 20% of the net online streetprice, Amazon sets the status of the respective item to “CRaP-out” and ceases to order the item from the manufacturer/distributor, eliminating revenue generated by the vendor model.

The reason for the minimum trading margin of 20% (of net OSP) is that in the marketplace model, Amazon generates at margin of approx. 18% (of net OSP) from the marketplace fee alone (see Figure 2).  Since Amazon also then generates margins via other services – e.g. the logistics service Fulfillment by Amazon, or marketing expenses from marketplace players – the marketplace model is preferable to the vendor model in such cases and is implemented by means of the above-mentioned CRaP-out status.

In light of all this, the topic of pricing strategy is a highly relevant one, since the CRaP-out risk must always be borne in mind when determining prices for the Amazon vendor model. To this end, current market prices (online streetprices) are retrieved by means of comprehensive price crawling to enable a corresponding price corridor for Amazon negotiations to be ascertained.

For a holistic pricing strategy, however, considerations must go significantly further: to earn the Amazon Buy Box (items in the Buy Box tend to be the ones that are purchased by customers), marketplace providers frequently set prices below the Amazon vendor price level. As such, they are a driver for the erosion of online streetprices and ultimately increase the CRaP-out risk. From a manufacturer’s perspective, it can be noted that wholesalers frequently distribute products via the Amazon marketplace due to the fact that the purchase conditions governing their relationship with manufacturers leave sufficient room for a trading margin to be generated through resale on Amazon. A tried-and-tested concept offering solutions for the pricing challenges described above comes in the form of a systematic multi-channel performance pricing (MCPP) strategy with a market data and performance-oriented conditions model. This involves defining a cross-channel pricing strategy that avoids such margin-damaging distortions and damage to a brand through price erosion.

Our experience has shown that a multi-channel performance pricing (MCPP) strategy is essential, particularly for the successful pursuit of business on and with Amazon.