Peter Hatfield is a Director and Andy Roderick is a Senior Consultant at Vendigital. They recently shared their insights with Business Reporter.
Joining an online marketplace can provide a quick and easy route to market for small to medium sized businesses, giving them access to literally millions of potential customers. But could it be too good to be true? In business, cash is king, and any kind of delay in payment or penalty for non-compliance could have serious consequences. With so much to lose, growing businesses need to understand the risks of using sales platforms before signing up.
Online marketplaces including Etsy, eBay and Amazon can be great ways for entrepreneurs to be open for business and get their products in front of potential customers, but each comes with its own challenges.
For example, getting your product offering noticed on these highly competitive platforms can be difficult, particularly for new entrants. Distributors on eBay, for instance, may find that they are selling the same products as several other sellers, and the ease of online price comparisons may require them to reduce margins to drive sales.
The business may also need to find a way of differentiating their product or service, helping it to stand out.
Challenges also come in the form of online reviews, which can impact a business’ reputation. Operational issues, such as running out of stock, can attract criticism and undermine the vendor’s ranking in search engine results.
Whilst staying competitive and optimising sales are key areas of focus for businesses looking to make the most of an online marketplace, there are also some important compliance-related considerations that they shouldn’t ignore. For example, Amazon’s chargebacks and shortages can be tricky to navigate for new sellers using the marketplace, and non-compliance can incur significant penalties.
‘Chargebacks’ are fees that Amazon Marketplace imposes on sellers for issues related to Amazon Shipment Notification (ASN) accuracy, labelling or barcoding and delivery timeliness. ‘Shortages’ are essentially the difference between what Amazon Marketplace has ordered and what the business delivers.
Shortages typically have two root causes; shipping compliance, which could result in products being lost, miscounted or damaged, and mismatches or inaccuracies between the master data held by each party.
For example, human error when managing master data could trigger a shortage where the data between the seller and Amazon Vendor Central is different. This could occur when Amazon places an order for a multipack of a single unit version product which the supplier dataset then incorrectly assigns as ‘eaches’, or a single unit of the product, creating a mismatch between expected and received product and triggering a shortage.
These penalties arise because Amazon Marketplace is responsible for the service level, unlike eBay, for example, which facilitates a direct transaction between the vendor and customer. With an average two to three percent chargeback rate, non-compliant businesses using Amazon Marketplace could quickly see costs spiral out of control.
For example, for every £100,000 worth of revenue generated via the platform, approximately £5,000 could be lost to chargebacks and shortages – a figure that could quickly render the business unviable. However, it’s not just money that could be lost, as missed orders could see the business flagged as an unreliable vendor.
With so much at risk, how can businesses navigate these challenges and avoid these common pitfalls, thereby optimising profits? The priority for any business must be to understand the exact vendor requirements of each online platform and utilise specific training materials effectively. By investing time upfront, businesses could save money and optimise earnings just by staying compliant.
In the case of Amazon Marketplace, there are many ways a business can mitigate risk – from ensuring that all labels fulfil the platform’s specific requirements to printing ASNs on top of boxes, which can help to increase visibility and improve stock control.
Clean master data is also key, and businesses should automate processes where necessary to reduce the risk of human error, such as implementing Electronic Data Interchange (EDI) for invoicing. Such measures can help to ensure that core functions, such as invoicing, then meet the platform’s compliance criteria.
Businesses at the start of their online sales journey have plenty to contend with, but by putting in place a well-considered strategic plan and seeking professional advice about how to mitigate risk, they can generate strong revenues.
Entrepreneurs need to understand their target market and the level of competition they can expect to find. They will then be best placed to choose the optimal launchpad for their product. By starting small, any success can be used as a proof of concept and provide direction for future investment.
It goes without saying that if a business wants to perform well online, it will need a compelling and user-friendly website on the host platform, with high resolution images and keyword optimisation to boost sales. To drive revenues, they could try other strategies such as selling low margin products in volume ‘bundles’ to optimise margins by lowering the total cost of fulfilment.
Proactively managing customer feedback can also help to protect their ranking in search results too.
Instead of rushing to join an online marketplace, entrepreneurs and businesses keen to scale should first carry out in depth research and due diligence. In some instances, selling direct to market via their own e-commerce site could prove more commercially beneficial.
If they choose to sign up to an online marketplace, businesses should be aware of the potential challenges ahead. Becoming an online vendor could be the first step to global success, but the business will need to focus on mitigating risks and avoiding potential hidden costs too.
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