The Pros and Cons of Outsourcing Your E-commerce to Amazon

Author: University of Texas at Austin
Published: 2024/07/16 - Updated: 2024/08/23
Publication Type: Instructive / Helpful
Peer-Reviewed: Yes
Topic: Work from Home Jobs - Publications List

Page Content: Synopsis - Introduction - Main

Synopsis: Explore the pros and cons of selling to Amazon as a small seller. Learn when this strategy can boost profits and when it might be better to avoid.

Is it better for the seller to retain control over the price of their product, but share a fraction of revenue with Amazon? Or should they sell to Amazon and let it resell their products to consumers?

The agency channel makes more sense when a product's market is smaller, and shoppers have fewer options to find it. With less competition, the seller can set higher prices and reap higher profits. A reseller relationship can be attractive when competition and substitutability are high. If shoppers can buy the same product from several sources, Amazon is more likely to offer a good deal.

Introduction

On Amazon Prime Day, shoppers will be able to browse over 600 million products. They may not be aware that most of those listings are from non-Amazon sellers, who account for 60% of sales on the platform. Most are small- and medium-sized businesses: bookstores selling used hardbacks, toymakers selling original goods, and distributors unloading clothes.

Main Item

What shoppers also don't see is the choice that the platform and the seller make about how to interact. Is it better for the seller to retain control over the price of their product, but share a fraction of revenue with Amazon? Or should they sell to Amazon and let it resell their products to consumers?

New research from Texas McCombs may help them determine when it pays to sell to Amazon - and when it does not. Stephen Gilbert, professor of information, operations, and risk management and the Eddy Clark Scurlock Centennial Chair in Business, creates mathematical models of the interactions between companies and consumers.

With Parshuram Hotkar of the Indian School of Business and Chuanjun Liu at Fudan University in Shanghai, Gilbert modeled the two types of channels that e-commerce platforms such as Amazon offer sellers.

Reseller relationships hold out the hope of higher sales volumes, thanks to Amazon's marketing might. But they come at a cost. Amazon collects $140 billion a year in seller fees, and complaints from sellers about unfair fees have drawn a probe from the Federal Trade Commission.

Amazon, for its part, argues that the fees cover its costs, such as its distribution network, inventory management, shipping, and delivery. Under the agency channel, the seller bears those costs.

The conventional wisdom has been that for sellers with high sales volumes, a reselling relationship is worth the added fees.

"It's true that a high-volume reseller may have a better chance of getting into one of these relationships," says Gilbert. "But we're saying there's more to it than that."

More to Reselling

In constructing the models of seller and reseller channels, Gilbert's team looked at several factors that influence the choice between them.

Other channels

Some manufacturers already sell their goods in other places, such as brick-and-mortar stores, their own websites, or e-commerce storefronts such as eBay and Etsy.

Number of players

The number of other resellers involved - such as traditional stores - affects the intensity of competition in the marketplace.

Substitutability

For mass-market goods, it's relatively easy to substitute one channel for another. A shopper can find Gillette razor blades at a wide variety of outlets that offer comparable convenience.

For more artisanal goods, such as a set of wind chimes, it might be harder to substitute an online channel. A shopper might want to see and hear them in person before buying.

These variables, Gilbert found, can affect a seller's choices.

He notes that sellers have a third choice: neither channel. That might be the best option, if Amazon sales would cannibalize too much of their existing sales.

"If those sales do not generate enough incremental profit to offset a possible reduction in profit from traditional reselling channels, the seller should consider walking away from the platform," Gilbert says.

As with negotiating over a car, a walkout could even lead to a better deal, he adds.

"A seller's willingness to walk away from the platform's agency channel might make the platform more willing to offer it favorable reselling terms."

"Channel Choice via On-Line Platform" is published in Production and Operations Management.

Attribution/Source(s): This peer reviewed publication was selected for publishing by the editors of Disabled World (DW) due to its relevance to the disability community. Originally authored by University of Texas at Austin and published on 2024/07/16, this content may have been edited for style, clarity, or brevity. For further details or clarifications, University of Texas at Austin can be contacted at utexas.edu NOTE: Disabled World does not provide any warranties or endorsements related to this article.

Explore Similar Topics

- Explore the pros and cons of selling to Amazon as a small seller. Learn when this strategy can boost profits and when it might be better to avoid.

- Study findings suggest that husbands could help remote-working wives when they have more flexible work schedules and do more family tasks when their wives have more rigid work schedules.

Citing Information and Page References

Disabled World (DW) is a comprehensive online resource providing information and news related to disabilities, assistive technologies, and accessibility. Founded in 2004 our website covers a wide range of topics, including disability rights, healthcare, education, employment, and independent living, with the goal of supporting the disability community and their families.

Cite This Page (APA): University of Texas at Austin. (2024, July 16 - Last revised: 2024, August 23). The Pros and Cons of Outsourcing Your E-commerce to Amazon. Disabled World (DW). Retrieved February 12, 2025 from www.disabled-world.com/disability/employment/home/amazon-sales.php

Permalink: <a href="https://www.disabled-world.com/disability/employment/home/amazon-sales.php">The Pros and Cons of Outsourcing Your E-commerce to Amazon</a>: Explore the pros and cons of selling to Amazon as a small seller. Learn when this strategy can boost profits and when it might be better to avoid.

While we strive to provide accurate and up-to-date information, it's important to note that our content is for general informational purposes only. We always recommend consulting qualified healthcare professionals for personalized medical advice. Any 3rd party offering or advertising does not constitute an endorsement.