If you haven’t read it, Bloomberg’s recent article Amazon’s Clever Machines Are Moving From the Warehouse to Headquarters is a must-read on the future of the business of E-Commerce.
The Amazon Algorithm Key Takeaways
First, the punchlines:
- Algorithms are outperforming people on critical purchasing and inventory decisions
- Marketplace is bigger by dollar value than the retail business—and generates twice the operating profit margin
- Brands urgently need strategies and tools to compete
What does this mean for suppliers?
I surveyed our domain experts who hail from Amazon, Walmart, Target and leading brands to get their thoughts.
The #1 Takeaway: Automation puts more pressure on suppliers.
The faster you setup your items, the faster you can get volume commitments.
Until items are setup, the algorithms can’t evaluate them. As a result, suppliers can’t get quantity commitments until their items are setup to run through the system. The longer it takes you to get a new item setup, the longer it will be until you have a chance of getting a volume commitment for that item.
Bad content can mean the difference between 100 orders and 10,000.
The algorithms look at attributes to see how “like items” performed. If you misspell an item color or mis-categorize an item, it could end up falling into a bucket where the forecast is much lower.
For example, red sweaters sell really well during the holidays. If you are launching a new red sweater and somehow spell the color “rad” it could get a forecast of 100 units instead of 10,000. Amazon is adding more rules to normalize this data—but the more bad data you submit, the lower the likelihood your item will benefit from the proper forecast.
You need different strategies for different channels.
Retailers with a large brick and mortar presence are incented to weight owned items over marketplace items. Walmart, for example, has a heavy incentive for owned (1P) items with its ship to store and pickup fulfillment options, because there’s always the chance that a shopper will buy more if they step foot in a store.
In contrast, Amazon, with its Fulfillment by Amazon (FBA) program enables marketplace sellers to leverage Amazon’s warehousing and shipping capabilities.
So suppliers need to think about different strategies for different channels—one size doesn’t fit all.
Supporting 1P and 3P
Fortunately, our platform supports both channels: those who sell directly TO Amazon (called first party or 1P) and those that sell directly ON Amazon (called third party or 3P).
Having a platform that can support both channels allows brands to toggle back and forth, A/B test which channel best supports their business, and pivot as Amazon continues to push the boundaries of automation.
David Feinleib is the author of Bricks to Clicks—Why Some Brands Will Thrive in E-Commerce and Others Won’t.