A Guide for Maximizing Profits on Amazon

Over the course of the pandemic, online shopping has soared, and one of the biggest winners has been Amazon.com — the company reported that its full-year 2021 net sales were up 22 percent to nearly $470 billion. It's figures like these that have retail brands and merchants looking to do business on Amazon's platform, which can help them gain the levels of exposure necessary to get their products into the hands of consumers as cost effectively as possible. However, it's important to proceed slowly. Moving to Amazon is more complex than businesses often realize, and many are in such a rush to get started they make uninformed decisions that can hurt them down the road.

These mistakes can lead to eroding profits as well as unexpected challenges around promotions, inventory shortages, pricing, and penalties, all of which can leak revenue. According to our Genpact figures, up to 35 percent of revenue, to be more precise.

The good news is that businesses can clear these hurdles by following a four-pronged approach to managing the relationship. This first step is selecting the right Amazon program.

What Amazon Program is Right for You?

To make the right decision, you must fully understand Amazon's model terminology. There are two models. The first is the business-to-business (B2B) or first-party (1P). Here Amazon buys products directly from brand-name manufacturers and sells them under its name.

The second is the business-to-consumer (B2C) or third-party (3P) model. In this instance, the sellers are manufacturers that use Amazon as a marketplace. Unlike the B2B example, these companies maintain ownership of their goods until they sell them to a consumer.

There are positives and negatives to each model, and it's important to understand them fully to experience the vast benefits that Amazon has to offer. For vendors that choose the B2B model, understand that you're relinquishing certain controls which can affect you in a variety of ways. For example:

• Amazon doesn't always meet minimum advertised pricing guidelines from manufacturers when it sets prices using its algorithms. This can result in lower margins for manufacturers.
• During Amazon's annual vendor negotiations process, it aggressively seeks to recoup its operating costs, which can erode the margins for businesses that fail to make a strong case for themselves. In addition, purchase orders from the vendors can fluctuate, causing planning inefficiencies.

The B2C model also presents challenges. Because brands and merchants aren't handing over their keys to Amazon, they incur the substantial cost of maintaining day-to-day operations. In addition, since products aren't being sold under the Amazon name, these companies are far more dependent on their brand's reputation when it comes to attracting shoppers and turning their visits into purchases.

Those selecting the B2C model are also less likely to be featured on Amazon's Buy Box, the location on the product detail page where customers begin the purchasing process by adding items to their shopping carts. A key feature of the Amazon website is that the same product can be sold by several sellers. Based on our firsthand experience, Buy Box winners capture purchases more than 80 percent of the time.

Not sure which model is right for you? Start by answering these questions:

• What is your overall business objective?
• How are you bringing together your online and offline strategy?
• How strong are your customer service capabilities?
• How much control over pricing, inventory and branding do you want to maintain?
• What is your current operational volume? Can you nimbly adjust when demand fluctuates?
• How mature, flexible, and at the ready is your supply chain?

The answers provided will determine the model that's right for you. For instance, if you want to maintain complete control of supply chain management and are prepared to take all customer service responsibilities, the merchant-fulfilled network model is your best bet.

Pull the Right Value Levers

Now that you have chosen your model, there are six factors — or levers — that can have a powerful influence on your company's growth, profitability and cash flow. These include brand equity and consumer experience, promotions, volume, supply chain, logistics, and provisions. Here's a checklist covering each lever and the elements within them that contribute to business success — or failure — on Amazon.

Naturally, the best strategies work when all six levers are being pulled, but even the effective use of just one or two can increase profits and efficiency.

Close the Loop

Regardless of your model choice, we recommend a closed-loop management system that guides and monitors activities in real time. This system includes inventory levels, production schedules and supply chain functions. It collects information based on feedback from operations across many business units, rather than stagnant forecasts or orders.

Businesses can even use a closed-loop system to predict where revenue losses could occur; so rather than reacting after the fact, they can proactively take action to prevent the loss from happening. By taking corrective measures, businesses gain sharp insights that they can also leverage to protect their interests when negotiating with Amazon.

Build Amazon-Specific Analytics Insights

KPIs are critical to decision making. This is especially true when working with Amazon, which presents a tough negotiation stance that requires companies have 360-degree visibility into their business.

Here are three techniques that we believe are vital to generating analytics and insights that will strengthen your relationship with Amazon:

1. Create agile and flexible processes that allow you to react more quickly.
2. Build governance that supports those processes and helps to enable this quick decision making.
3. Think integrated. Bring together upstream/downstream challenges to form a closed loop.

As we all know, e-commerce is a data-rich environment, and brands looking to succeed must institute key performance indicators across the entire value chain. The KPIs also must be tracked, but not in isolation. That can lead to "double counts." In the world of Amazon, double counts mean that it will penalize suppliers for shortages and promotions of stock it claims never arrived. However, these scenarios can be avoided by connecting the dots across metrics, which reduces overall revenue leakages and inefficiencies.

KPIs aren't the only thing that determines the success or failure of your Amazon venture. We worked closely with a business that was losing market share because shoppers couldn't find its products using the Amazon search tool. In other instances, some products that came up had negative reviews.

We took action by accessing Amazon's data for insights into how customers searched for the client's products and how products sold geographically. We also took time to learn more about alternate purchasing behavior. We were able to use this information to update the company's promotional strategy in order to boost traffic to its products. In addition, we connected with Amazon to show it examples where searches didn't turn up the products or instances when delivery issues resulted in negative reviews. In each case, we resolved inefficiencies and eliminated all unwarranted charges, which allowed the business to boost net sales by roughly 3 percent.

This is a great example of the complexity that businesses can experience when working with Amazon, and why it's important to proceed slowly. When selecting the right model and taking time to monitor information effectively, companies can better understand which levers they need to pull and ultimately experience the full benefits that come with doing business in the world of Amazon.

Guido Castagnola is the connected commerce transformation director at Genpact, a global professional services firm. Tarun Chopra is senior partner, data-tech-AI, consumer and healthcare, Genpact.