Inside the Reality of the Amazon Profitability Trap
You’re an Amazon seller with dreams of turning a profit, but you’re starting to feel like you’re stuck in an Amazon profitability trap.
You’ve put in the work and followed all the tips and tricks to promote your products. You have great reviews, but you can’t seem to reach the level of success that other sellers have experienced. And every time you try to increase your prices, you lose out on potential customers.
So why can’t you make a profit? What is keeping you in an Amazon death spiral of lower prices and offering deep discounts just to stay competitive?
In this article, we take an in-depth look at the reality of the Amazon profitability trap—what it is and why it keeps happening—and offer seven tips for getting out of it for good.
What Is the Amazon Profitability Trap?
Identifying the Components of Amazon’s Profit Problem
When it comes to the Amazon Profitability Death Spiral, it’s important to identify the components of the problem. According to various experts, three main elements contribute to the trap:
- Low Margins – Because Amazon competes on prices, there is often little room for profit margins, as Amazon carries a wide range of products and competes fiercely with other online retailers.
- High Advertising Costs – Amazon’s advertising costs have risen substantially in recent years due to increased competition from other online retailers and Google Ads. Moreover, many sellers are forced to increase their ad spends in order to win the Buy Box or stay competitive on product listings.
- Fulfillment Fees – The fees charged by Amazon for handling and shipping orders have also skyrocketed recently, resulting in a significant portion of profits being swallowed up by warehouse costs.
When all these factors are combined with rising competitors, it’s not hard to see why an aggressive pricing strategy from Amazon can cause a death spiral for small margin businesses who don’t have the means or resources to compete.
The Role of Seller Central in Profitability
Many Amazon sellers reach a point of diminishing returns when attempting to increase profitability. The main culprit of this phenomenon is Seller Central, Amazon’s suite of tools for third-party sellers. Although it helps to streamline the process of selling on Amazon, it also has a few drawbacks that make it difficult for sellers to make a profit.
Using Seller Central can:
- Increase your costs in fees, providing less value for money over time.
- Make it difficult to scale up sales, as only certain products and categories are accepted by the platform.
- Limit the options you have for customizing your store, meaning you may miss out on key opportunities to increase visibility and sales.
The lack of control over pricing on Amazon also plays its part in preventing sellers from turning a profit. There is no easy way to adjust prices without risking negatively impacting your sales data and potentially triggering penalties from the platform. This means that even if increasing the cost per sale may improve profits in the short term, it could have an adverse effect in the long run.
Ultimately, Seller Central can be a great way to enter the world of ecommerce but is not always conducive to sustained profitability if not managed correctly.