Amazon undercuts rivals by adding discounts to marketplace seller prices

Discussion
Source: Amazon
Nov 06, 2017
George Anderson

Amazon.com appears determined that its marketplace sellers will not be undersold heading into the holidays. According to numerous press reports, Amazon has begun lowering prices on goods sold by third-parties on its site.

While marketplace sellers have traditionally determined pricing for the goods they sell on Amazon, the e-tail giant has been lowering prices on items in key categories and marking the additional saving with a tag that reads “Discount provided by Amazon.”

The e-tailer, which reimburses third-party sellers for any discount beyond the original price, is positioning the tactic a win-win-win.

“When Amazon provides a discount, customers get the products they want at a price they’ll love, and small businesses receive increased sales at their listed asking price,” a spokesperson for Amazon wrote to Reuters in an email.

While many third-party sellers may be fine with Amazon’s actions, others may be less sanguine. Some with a luxury price positioning may be concerned that excessive discounting will wear away at brand equity. Others, such as home recreation retailer Dazadi.com, may face business complications on other marketplaces where it also sells its products.

Jason Boyce, CEO of Dazadi, told The Wall Street Journal that Amazon’s discounting may have a downside for his company, which sells on Walmart and other marketplaces.

“At first glance, we thought [Amazon’s discount] was great,” he told the Journal. He then realized that price parity agreements signed with Walmart and others would mean Dazadi is “violating our seller agreement with every other marketplace that we sell on.”

While research typically points to Amazon having lower prices than its online rivals, the e-tail giant is facing stiffer competition from Best Buy, Walmart and others looking to claw back market share.

Recently released research from Profitero, for example, shows that Amazon’s pricing across 13 categories including beauty, beauty, consumer electronics and pet supplies is only 2.9 percent less expensive than Walmart’s. A 2014 study by Profitero found that Walmart’s prices were nine percent higher than Amazon’s on average at the time.

DISCUSSION QUESTIONS: On balance, do you see Amazon adding discounts to items sold by third-party sellers as a net positive for the e-tailer and those retailers on its marketplace? How will “Discount provided by Amazon” affect other online marketplace operators this holiday season?

Braintrust
"Ultimately this is good for the customer, but I am not so sure it is good for all of Amazon’s third-party sellers."
"A customer shopping on Amazon’s marketplace is their customer, not yours. Despite the illusion of control on the Amazon marketplace..."
"Marketplace sellers need to document their own pricing and Amazon-imposed price cuts very carefully..."

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27 Comments on "Amazon undercuts rivals by adding discounts to marketplace seller prices"


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Max Goldberg
BrainTrust

Competing for the lowest price may be great for consumers, and reinforce Amazon’s overall brand positioning, but it can be a slippery slope for e-tailers. As discussed in the article, having Amazon cut a price might cause problems for the seller with other retailers. And what happens to price perception once the sale is over? Offering discounts may be great for Amazon, but could cause long-term damage for sellers.

Bob Amster
BrainTrust

We came out with diametrically-opposed opinions about the same situation. The proof will be in which factors are more important. And it could be that it’s a wash in the end …

Jon Polin
BrainTrust

This is Amazon, once again, pushing the race to the bottom and, on the way down, squeezing both rivals and brands who sell on Amazon. Maybe at some point more manufacturers will join Dyson and others who have vowed to not work with Amazon because of the corrosive effect doing so has on their brands.

Bob Amster
BrainTrust

I agree with your “race-to-the-bottom” perspective. This is not healthy, unless you are the last man standing. Then you can do what you want, but only until the next competitor starts nibbling at your heels.

Bob Amster
BrainTrust

If Amazon is taking the discount hit, it’s great for the retailers in the marketplace and not good for Amazon, who is marginally making a profit (if at all) except for its Amazon Web Services business. This could be a battle of outlasting the competition until there is no one else left standing. Then, watch out consumer!

Charles Dimov
BrainTrust

Amazon can do whatever they want. After all — it is their marketplace. For a non-luxury retailer, the challenge is that customers may become accustomed to the lower price (brand erosion), and they may become accustomed to coming to Amazon’s marketplace to get the same products cheaper. Great, you get the sale. But it also erodes the very limited brand loyalty that you have been trying to build. Interesting conundrum.

Neil Saunders
BrainTrust

Ultimately this is good for the customer, but I am not so sure it is good for all of Amazon’s third-party sellers. Some of them may not wish to use low price tactics to grow their businesses. For some, it might cause problems in other sales channels they use where Amazon can’t reimburse them for lowering prices.

All in all, Amazon needs to take care to work with its sellers rather than dictating to them.

Meaghan Brophy
BrainTrust

Amazon has always sided with what is best for the customer. They also accept short-term losses to gain long-term control of the marketplace. This situation is no different. “Discount provided by Amazon” will absolutely hurt other online marketplaces, who will essentially be forced to adjust their prices as well. Brands who don’t want their prices dropped will have to remove themselves from Amazon altogether and miss out on sales.

Ken Cassar
BrainTrust

While, at first blush, this seems like a clear win for all, it can create sticky issues for marketplace retailers that are required to abide by rigid brand pricing guidelines. Marketplace sellers need to document their own pricing and Amazon-imposed price cuts very carefully in case key brands threaten to cut off their supply for violations of MSRP.

Dave Bruno
BrainTrust

Besides the challenges Amazon is creating for marketplace sellers around brand, pricing parity, etc., Amazon is putting unsustainable margin pressure on everyone who competes with Amazon (and who isn’t competing with Amazon?). Offering discounts when there isn’t enough margin to support them is a retail killer. However, until the stock market holds Amazon’s retail business accountable for profits, I fear these pricing practices will continue.

Phil Masiello
BrainTrust

Part of my business is managing Amazon selling accounts for our clients. Amazon has put discounts on several items. We have seen growth come from these discounts. Since it has not cost the brands any funds and increased the item sales, we view it as a positive.

Although we are not fans of competing on price, Amazon clearly wants to dominate the holiday shopping season. We are seeing 32 percent growth across all categories in the marketplace. I am in favor and think it is a smart move for the consumer.

Ben Ball
BrainTrust

So what’s new?

(N.B. the comments below generally pertain to FMCG products. Luxury brands trying to maintain a price image do have more of a problem. But that is why they didn’t sell through “mass” outlets to begin with. And you can’t get much more “mass” in the online world than selling on Amazon.)

I am having flashbacks to panic meetings with OTC client sales teams. Walmart would demand retribution when Walgreens would run their items at BOGO pricing every other week — Walgreens’ way of combating Walmart’s EDLP price positioning. Walmart would argue there was no way Walgreens could do that — due to higher system costs — if the pricing structure was “fair and equitable.” The answer “that’s how they choose to invest their margin” was seldom accepted. In this case the shoe is on the other foot with the 600-pound gorilla doing the self-funded discounting instead of the challenger. Otherwise the dynamics are the same. Welcome to the wonderful world of retailing.

Steve Montgomery
BrainTrust

There have been several comments about Amazon wanting to do what’s best for the consumer. Amazon is not a charity. It is doing what it believes is best for Amazon.

What it is doing is good for the consumers in the short run but, as has been pointed out, it may not be in the long run. Without Amazon Web Services to provide profits it would be forced to change it pricing philosophy. Would that be better for consumers in the long run? I’m not sure.

Chris Petersen, PhD.
BrainTrust

When does Amazon become too big? Do retailers really want a third party to establish prices for their products?

Pricing is not only a slippery slope, it’s temporary. Once a season passes or competition erodes, it is entirely possible that prices could be raised again — even higher than the baseline. What happens if Amazon turns around and sets MAPs (Minimum Advertised Prices) post-holiday?

Are we entering an era where Amazon and Walmart set the pricing standards for e-commerce marketplace retailers? That era will be much more than a “slippery slope” on price.

Peter Messana
BrainTrust

This is a not a positive for retailers and will likely get many prohibited from selling products due to Manufacturer Advertised Pricing (MAP) Policies. In most cases the vendor will tell the retailer that if they cannot control the final price then they cannot sell through that channel.

Jasmine Glasheen
Staff

Here’s the fact of the matter: for many online customers, it all comes down to price. Although customer who can afford it might make the effort to support small businesses, they won’t go out of their way to shop at competitors like Walmart (since Walmart and Jet are hardly small or local).

With that said, Amazon is at risk of losing sellers and customers due to fast and excessive expansion. As George stated, many sellers will be in violation of their contracts with other marketplaces by selling on Amazon under the newest discounts.

Furthermore, Amazon is already competing with itself in grocery, where buying a product with their conflicting carts and boxes has become too obnoxious to be worth the extra 5 cents off. If they do the same thing in other categories such as home goods and apparel, sellers like Walmart will be in a prime position to steal center stage.

Harley Feldman
BrainTrust

The fact that the gap between Amazon and Walmart pricing is so narrow tells us why Amazon is lowering prices. Lowering prices may bring additional sales to Amazon third-party sellers, but a consumers purchase is not only about price. Delivery times, being in-stock with the looked-for SKU, customer service and in-store pickup are the attributes that a consumer will weigh before making a purchasing decision.

The consumer might in the end buy directly from the sellers’ website or may decide to buy from a retailer where the consumer can look at the product or have it delivered to a store nearby. Some other marketplace operators may chase Amazon, but lower margin is not a winning strategy. Offering better service and in-store pickup will be more valuable to the consumer.

Kai Clarke
BrainTrust

Amazon can decide what it decides to sell listed products on its website for. Their ability to determine the final selling price is what their retail position is all about. The same holds true for any retailer.

If a product is sold at Walmart, it is Walmart that determines the final selling price, not the seller. This price positioning can be seen as price erosion, or as a reflection of marketplace competition.

Either way, Amazon will be flexing its retail strengths to capture greater marketshare and increased revenues.

Mark Nicholson
Guest

Seeing how Walmart might be Amazon’s biggest competitor, they have no choice but to compete on price. With Amazon taking the discount hit, it’s good for e-tailers, but not great for competing marketplaces. During this time of year, sales often involve loss leaders to attract customers, but there is little loyalty with bargain hunters that will flock to where ever the best deals are found. This might be a short term win, but questionable whether it’s a sustainable long-term approach.

Robert DiPietro
BrainTrust

Great for customers, tough for the seller. It will be interesting to see if the sellers have issues as now they might be undercut on price without even knowing it.

Kiri Masters
BrainTrust

Many brands choose to sell on the marketplace rather than through a wholesale “vendor” relationship with Amazon precisely because being a marketplace seller provides more control over brand elements, including product pricing. With this action, Amazon has just demonstrated that they can and will change the dynamics of their platform. And these changes will always serve to benefit the end customer, sometimes at the expense of the brand.

A customer shopping on Amazon’s marketplace is their customer, not yours. Despite the illusion of control on the Amazon marketplace, brands must recognize that complete control is an illusion.

Alex Levashov
Guest

When I read this it was exactly my thoughts Kiri: as a seller on a marketplace you expect to have control on prices.

Amazon demonstrated that at their marketplace such control is an illusion. One more reason to double think if you want to be there for brands.

Kenneth Leung
BrainTrust

Being the king of the low price is a slippery slope. For years Walmart was the king of low price until Amazon stepped in. The issue at this point is low price is never sustainable and you condition the shoppers to wait for low price and erase your margin. Amazon has the advantage over other retail competitors since it can use Amazon Cloud service margins to subsidize its retail operations, but makes one wonder how much that can be sustained.

Jett McCandless
BrainTrust

Amazon is already set to do some incredible things this holiday season. Providing discounts on third-party suppliers only strengthens that effort. This holiday season is going to be a bloodbath for companies not called Amazon.

Min-Jee Hwang
BrainTrust

This is great for customers (lower prices) and Amazon (increased marketshare, although it will have to pay for it), but third party sellers and the brands they sell may take a hit here. Amazon is positioned as a loss leader and they have fought hard to gain that perception. Even when they are priced higher than competitors, they can fall back on this perception, their excellent shipping policies, and customer service. But third party Amazon sellers are stuck between a rock and a hard place in terms of brand value. Selling on Amazon offers access to the lion’s share of online shoppers, but many sellers may find themselves in a sticky situation both with other marketplaces they sell on and with brand MAP policies. It will be interesting to see how third party sellers, brands, and Amazon competitors react to this.

Jeff Miller
BrainTrust

Welcome to the ever increasing “race to the bottom” where there will be only one large giant remaining. Like all things with Amazon this one has a double edge to it. Great for customers which is their primary goal. Great for a large % of their marketplace sellers who for the most part are always just competing on price and speed of delivery for products that are widely available. Damaging to any brand or retailer who value brand equity and control but who want to balance that with reaching the Amazon consumer. I wish I could take credit for it but stealing it from Scott Galloway but “it is clear that Amazon is out to destroy brands.” He cites Alexa, private label and access to historic cheap capital. I would add ability to set prices for 3rd party sellers as yet another arrow at brands.

Paul Donovan
BrainTrust

Amazon’s “referral fees” or otherwise known as “margin erosion assists” of up to 15% of sales price is the real pressure for the marketplace sellers. Unless their gross margins are significant to begin with, making a profit is already tough, I guess some commentators would respond, welcome to retail…! The price control seems it may be a step to far for many sellers.

wpDiscuz
Braintrust
"Ultimately this is good for the customer, but I am not so sure it is good for all of Amazon’s third-party sellers."
"A customer shopping on Amazon’s marketplace is their customer, not yours. Despite the illusion of control on the Amazon marketplace..."
"Marketplace sellers need to document their own pricing and Amazon-imposed price cuts very carefully..."

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