Introduction
When I started my first business, I created an online store but also listed my products on Amazon. As a new entrepreneur with little experience, I was expecting to get a few more sales from Amazon than my own website. It turns out that for each order I received on my website, I got almost ten orders from Amazon. There are many great things about selling on popular marketplaces, the most important being piggybacking the marketplace customer base and the built-in trust with customers.
Yet, there are a lot of issues with online marketplaces that are not obvious before you start selling on one of these channels. It took me years before I started to fully understand the challenges and issues that came with online marketplaces. I do not blame the marketplace operators for all these issues, but I want to discuss the dark side of these important online channels so you are better prepared for the day you join one of them, if you have not already.
Platforms fees and costs
I’ll start with what is often an important expense for ecommerce entrepreneurs. Selling on a marketplace isn’t free, and platforms will charge you for a lot of things. Multiple articles claim that Amazon takes, on average, a 50% cut from each seller’s sales. While this 50% includes many things, such as logistics or listing fees, it is a huge part of the sale that goes directly into the operator’s pocket.
First, there is sometimes a fixed monthly membership fee, which isn’t bad, often around a few dozen bucks. They sometimes charge a “listing fee”, a small fee they charge to post an item for sale on the marketplace, whether it sells or not. But in addition to that, there is a percentage or a flat fee charged on every sale called a referral fee. Each marketplace has its own set of rules and charges, but they can really cut into a seller’s profit margins. See below a few examples of referral fees for some popular marketplaces as of 2023:
| Marketplace | Fee |
| Amazon | 8 to 15% of the sale price per item, depending on the category |
| Walmart | 6 to 15% of the sale price per item, depending on the category |
| eBay | $0.30 per order, plus around 13% of the sale price, depending on the category |
| Etsy | 6.5% of the sale price |
These fees are non-negotiable and represent huge amounts for the top sellers.
Next are the fees tied to logistics. Sometimes, marketplaces also offer optional fulfillment services (like Amazon FBA or Walmart WFS), which can be very helpful for many sellers who don’t have the resources to store their inventory, fulfill orders, and handle customer service. Even though these fees cannot be negotiated (just like any other fee), shipping and storage fees are usually competitive with other 3PL logistics and national carriers. Yet, sellers must be aware of these expenses so they can monitor their costs and optimize their operations. Many newbies underestimate or are unaware of all of the fees and wonder why their profits are not as good as expected.
Finally, while not technically mandatory, I want to talk about advertising expenses. Selling on marketplaces is becoming more and more competitive. Not only do marketplaces attract new sellers every year (from less than 3 million sellers in 2017 to over 6 million in 2021), but the game has changed and has become pay-to-win. As explained in a previous blog post https://fmaingret.com/2023/06/understanding-the-most-important-ecommerce-expenses/, Amazon used to dedicate 20% of search results to sponsored ads in 2019. Now, in 2023, about half of the page is sponsored posts and listings. Their ads’ revenues keep increasing, hitting over $10B in 2023. Organic sales continue to get more difficult, and advertising is now more important than ever. It can be, however, costly, especially in the most competitive categories.
Review manipulations
If you’re anything like me or the vast majority of buyers, you pay attention to reviews and rankings before making a purchase decision. Social proof matters to buyers, and we all like to hear someone’s opinions on a product before reaching for our credit card. I always get amazed at how passionate some customers can be when writing reviews. I’ve seen people writing short essays, including pictures, for toilet seats on Amazon. Ultimately, I am grateful some of them make so much effort to highlight the pros and cons of everyday products.
However, if you have a little experience in ecommerce, you probably know that not all reviews can be trusted. Review manipulation affects everyone: it is misleading customers, damaging sellers, and even affecting the credibility of marketplace operators. It can take the form of fake product reviews (either positive to boost product sales or negative to kill a competitor’s listing), inventoried reviews (asking for a positive review in exchange for a reward), or review bombing (posting a large number of negative reviews on a seller/company to destroy their image). These “black-hat tactics” can be highly effective and help unscrupulous sellers gain an unfair advantage.
Fortunately, marketplace operators are becoming stricter on review manipulations. They are improving their false review detection algorithms and are more efficient at banning malicious sellers. The problem is, their systems are not perfect, and their support teams are not always efficient at helping those who play by the rules. This is why review manipulation is still a huge problem these days and can hurt most sellers on a marketplace.
I would say the best ways to prevent damage from fake reviews are:
1 – Have a value proposition so strong and unique that the competition is nonexistent/irrelevant
2 – Sell on other channels and have customer testimonials on multiple channels (Google, blogs, social media, etc.)
Unfair competition
In addition to review manipulation, malicious competitors have many other ways to mess with sellers. Intellectual Property Infringement is common. It involves the unauthorized use of a trademark, copyright, or patent. It can also be the sale of counterfeit items, as well as the unauthorized use of images, brands, names, or marketing materials. Intellectual Property Infringement is, of course, illegal and against marketplaces’ terms of service, but it can be difficult and time-consuming to go after offenders.
Keyword manipulation can be a thing, too, to artificially increase a product’s visibility and mislead customers. A commonly-used tactic on Amazon is listing hijacking, which is the takeover of a product listing by someone with no rights to distribute the product, followed by selling counterfeit items.
There are many instances of unfair competition, and it also happens a lot outside of marketplaces. But marketplaces make it easier to see what the competition is doing and give the opportunity to mess with them.
Weaker brand experience
Visiting a retail store can sometimes be a unique experience. You get to see interesting layouts of merchandise and cool lighting, and there can be unique music and even scents. I love visiting the Lego store when I go to the mall; it makes me feel like a kid again. Some brands use special technologies that highlight aspects of the brand and help improve the shopping experience—if you’ve been to an Apple or Lego store, you know what I’m talking about. Many successful brands are replicating their in-store atmosphere by tailoring their website and social media identity to their brand experience.
Things are a lot different on marketplaces. Customers are not shopping on Apple.com or Lego.com; they are shopping on Amazon or Walmart.com. So they get the Amazon customer experience and not Apple. That is a problem because branding helps communicate the brand value proposition and helps with recognition and consistency. It is very important for a business to set itself apart from the competition and doing that is a lot more difficult on marketplaces. Companies can be creative in the product images and videos they upload, and some marketplaces like Amazon provide tools to enhance that experience. Still, it is very far from a fully custom website. It is also common to see your competitors’ products featured on your own product pages (“customers also bought…”). Not to forget that the product arrives in a standard box if you opt for the marketplace fulfillment services, and you can’t include marketing inserts or free samples.
A good comparison would be shopping at an Apple store vs. shopping for Apple products at BestBuy, where Apple products are on the shelves next to Samsung products and every other competitor. The customer entering the store does not get the Apple branding experience and has less chances of becoming a loyal customer or even a fan.
No data or interactions with customers
This brings me to my next point: most marketplaces do not allow you to interact with your customers other than to provide customer service. You can, of course, answer their questions on your products or logistics if you fulfill the orders yourself. But you can’t build an email list, ask them to subscribe to a newsletter, or follow you on social media like you would on your own website. It makes sense; they’d miss out on fees if the customers left the marketplace to shop on the brands’ websites.
Building a relationship with customers is particularly important in the online space as it is a way to differentiate your company from competitors while promoting your products and learning about your customers. This brings me to another issue: you don’t get data from your customers when selling on marketplaces—no demographic data, behavioral data, or feedback of any kind. And if you are a seasoned entrepreneur, you know how important it is to understand who your target audience is. Data analytics is crucial to gain a competitive advantage, and if you can’t get data to analyze, you’ll miss out on important opportunities to grow and improve your business.
Frequent price wars
Lower-priced items tend to have more visibility on marketplaces. This is due to multiple reasons: some marketplaces may push lower-price items organically, they may have more reviews because of the higher volumes, customers may sort items by price low>high, etc.
Also, competition can be rough in many industries, and some sellers will do anything to grab the customers’ attention. More specifically, many are willing to lower the price of their items to increase their sales volumes. Generally, price wars are to be avoided as they never bring anything positive to the sellers.
That is a dilemma for sellers on marketplaces; lower-priced items attract much more traffic and get a lot of organic visibility, but the margins are thinner, and the competition is tough. More and more manufacturers are selling their items directly on these marketplaces, cutting the middlemen. Their lower costs make it difficult for many sellers to compete.
The solution is to have unique products and a strong brand so they don’t suffer as much from competitors cutting prices. But the issue is that these more unique (and maybe more expensive) items will get less organic visibility on the platforms.
Lack of control
This point is the most important and includes most of the points listed above. When selling on a marketplace, you are only partially in control. If a business relies entirely on Amazon, the day Amazon decides to terminate the company’s account for any reason, the whole business collapses. If a marketplace operator decides to double or triple their referral fees, there is no room for negotiation.
But even outside of these catastrophic scenarios, there are some restrictions and policies that can hurt sellers. Marketplace operators sometimes incentivize (or even force) sellers to lower their prices. They want their customers to get the best possible deals, making it difficult to have a premium pricing strategy. They also have control over what marketing content sellers can and cannot post and can impose many restrictions and unexpected fees. There are thousands of stories of bad experiences from sellers all over the internet.
It is always more comfortable for an entrepreneur to be in control and limit the risks. This is why I believe that lack of control is the biggest issue when selling on marketplaces.
Conclusion
Selling on marketplaces offers sellers various advantages, from access to large customer bases to logistics capabilities. However, it is important to understand that selling on these channels comes with several issues: mainly the lack of control, but also unfair competition, limited interactions with customers, and price wars or review manipulations. These are still very important channels for entrepreneurs, and being aware of these challenges helps gain and maintain a competitive advantage.
https://www.campaignasia.com/article/amazons-ad-revenue-surges-to-11-6-billion-in-q4/483105
