The Dangers of Selling on Amazon
- Published on March 17, 2019
Michael DevlinSoftware Creator66 articles Follow
As you may have noticed I like to take articles from different sources around the web and share them with my network.
I feel this is important because it gives you the understanding that the topic isn’t just being written from my perspective and reinforces that the topic I am highlighting goes way beyond just me.
Before we arrive at the content from fellow PRO seller Max Godin co-founder and CMO of Crazy Lister, I have had my fare share of success and failures when selling on Amazon.
My love affair started with amazon way back in 2009 and in that time I have built multiple multi-million dollar stores and brands that deliver the following monthly and yearly sales results still to this day:
I share these results not to impress you but simply to impress upon you that we have seen our fair bit of success with Amazon, and, we’ve also seen our fare bit of failure and all is not as EASY as some gurus would have you believe.
Amazon has changed significantly since 2009 and has had to adapt to so many sellers, who, over the years have attempted to game the amazon platform and this has made it a very dangerous place for new sellers to put all their eggs when it comes to launching and growing an e-commerce business.
This is also not an attack on Amazon because it can be your best friend, but as you’ll find out further on this article it can also turn on you faster than you can spell Amazon.
This was one of the main reasons I decided to build my own drop-shipping platform LaunchPros so that I could test multiple niches at length before going all in on the Private Label front which, as a process, is completely the opposite to what the gurus will teach you.
Private labelling without an established audience and without testing your niche can see you land yourself thousands of pounds or dollars out of pocket and leave you with a bitter taste about selling online that quite simply doesn’t have to be.
One of the staples of LaunchPros is that it gives you a multi channel approach and enables you to drop-ship products from UK and US wholesalers and retailers enabling you to both profit and grow your list whilst acid testing Amazon’s niche and seller sensitivities.
Once you master what is needed to keep Amazon happy then you can build an extraordinary e-commerce business, but, enter this space without the correct guidance and testing and it could see you banned off the Amazon platform for life alongside a financial whack that could take you quite some time to recover from.
That’ll be enough from me, so let me hand you over to fellow PRO seller Max Godin co-founder and CMO of Crazy Lister and if you’d like to begin selling on Amazon and begin testing your desired niche by selling tried testing and proven products through the LaunchPros software – PM me.
Amazon to many is the online manifestation of the American dream – a free, all-encompassing marketplace where people can sell their goods and make quick and easy cash and go on to build an ever-growing eCommerce business. People say to themselves: ‘It’s so easy, all I have to do is ship my items into Amazon FBA and they will take care of the rest’.
Spoiler alert: just like in a Hollywood movie where things can start out looking hunky dory and very quickly take a wrong turn, so too Amazon needs to be approached with caution. The most important thing to understand is that although Amazon can be a terrific place to make money and move merchandise – they are not your friend! Like every good business, they are looking out for their own interests and when a merchant’s interest contradicts that of Amazon, the latter will not hesitate to crush the little guy (that, unfortunately, is most likely you).
The goal of this post is not to demonize Amazon per se but to warn good, honest, hardworking people of the dangers they must be aware of when selling on Amazon. I will relay to you, two real life Amazon horror stories and provide you with insights and precautions you can take in order to avoid being victimized by one of America’s largest corporations.
The Dangers Of Selling On Amazon
Ok, so by now many of you are either really spooked or thinking that I’m a crazy conspiracy theorist. Whichever category you fall into, allow me to present you with some of the very real dangers of selling on Amazon:
- Platform Ownership – The number one danger of selling on Amazon is making it your primary source of eCommerce income (I’ve written about the dangers of relying on one main source of income previously).The reason I say this is because if you do not own the platform on which you sell, you have very little control over your business and limited rights. I have heard many horror stories of people being kicked off of Amazon both justly and unjustly. At the end of the day it does not matter – if you are selling exclusively on Amazon you are essentially beholden to them and at their mercy.
- Niche Encroachment – One tactic Amazon uses, is something I like to call ‘Niche encroachment’ which basically means that if you don’t own the rights of a brand or have a product patented then there is a good chance Amazon will steal your niche from under you. People who used to sell cables or SD cards on Amazon will know exactly what I am talking about. Amazon has a program called ‘Amazon Basics’ (which grew to over 60 Amazon manufactured brands in just 6 years) in which they use merchants as guinea pigs to see if a product is profitable. Once they see that it is, they start selling their own private-label version of that product at under market prices and with preferential rankings in their A9 search engine algorithm, essentially obliterating the competition.
- The Evolving Algorithm – A9, Amazon’s search engine algorithm is constantly evolving and changing. This means that your sales may be through the roof now due to great SEO which allows you to rank your products number one in Amazon search results or just by chance. Very often, a customer will search for a specific product such as ‘hair gel’ and not for a specific merchant, whatever comes up in the top results is what they will buy. If Amazon’s algorithm suddenly changes not in your favor then you are literally down the river without a paddle.
- Private labels are dead – Private labeling on Amazon meaning finding a great manufacturer and then putting on your own label used to be much easier and the timeframes where it would continue to be profitable were longer. Today it is much harder to find an untapped niche on Amazon and if you do, it won’t be a few short weeks before you are inundated with competition which will force you to move on to the next product. Private labels on Amazon are basically dead in my opinion and are definitely not viable as a long-term business plan.
- Fake Reviews – Once upon a time sellers would private label items from China, give away some products for free in order to generate positive reviews or just buy reviews from people on third party websites such as Fiverr. Those days are pretty much over as Amazon knows that people buy from them among other reasons because of their peer-based reviews. Amazon is cracking down on these ‘fake reviews’ which is yet another stumbling block being placed in a seller’s way. Amazon has special technology which can detect fake reviews and scams: “We have machine-learned processes to detect inauthentic customer insights including the manipulation of helpful votes and will ban vendors, sellers and reviewers who are found to be out of compliance with our policies”, wrote Amazon in an emailed statement to The New York post in a May 2017 article.
- Inventory & Sales Rankings – Running low on inventory can happen on any platform and even on your own website – this is not a phenomenon which is unique to Amazon. But what is unique is that running low on stock can be detrimental to your sale’s ratings on Amazon and can stifle your business. If you run out of stock and can’t ship within Amazon’s service level window you can be banned – that is some major risk! (check out my article about inventory sync to avoid this situation).
- Margins – Let’s talk a little bit about Amazon seller fees which average about 15% of a product’s retail price. Now let us assume that an average merchant has a profit margin of 25% on his products – that means Amazon is cutting into roughly 60% of his or her profit margins. Now in and of itself, this is pretty terrible but from a risk perspective, this is a high stakes scenario. What happens if manufacturing costs go up by 5 %? Or shipping costs increase by 5%? Or maybe Donald Trump decides to levy a tax on all goods from China. If the tides shift the wrong way, your profit margins are shot and you may as well throw your business plan out the window (learn more about calculating your profit margins correctly)
Amazon Horror Story # 1
Without further ado let’s move onto some real-life Amazon horror stories.
This story is one which exposes the dangers of Amazon’s FBA program and points to the fact that Amazon is in cahoots with Hollywood production and distribution companies. The seller in question had:
- Over 50,000 DVDs at Amazon fulfillment centers
- One complaint about a supposedly counterfeit DVD was filed by a DVD company
The worst part of this story is that:
- Amazon closed down this seller’s account and demanded that they pay thousands of dollars to get their merchandise back or to be destroyed
- The fake merchandise did not even belong to them!
But don’t worry. This story only gets worse – read on if you would like to be horrified by the hell that Amazon is capable of putting you through.
The merchant in question was a victim of one of Amazon’s famed ‘counterfeit warnings’ on a DVD which the merchant claims were 1000% authentic. It may not surprise you to discover that Amazon will go to great lengths to appease large DVD manufacturers and distributors who are concerned about eCommerce sales dipping into their profits. Very often these charges are trumped-up, bogus charges which are fabricated to help these companies’ bottom lines while simultaneously throwing the little guy under the bus.
Now usually when you hear one of these stories on the internet you figure that it is 85% made up on a good day and 110% made up on a bad day. This story is 100% true and happened to an individual by the name, Peter Valley who:
- Owned an eCommerce business called ‘Inflatable Madness’ for 10 years
- This merchant sold new and used movies, CDs and video games on Amazon and eBay
- He was the 25th seller on eBay in terms of size and one of the top 15 media sellers on Amazon
- At his peak, he was moving 5,000 products a day, had 38 employees and a workspace measuring 24,00 square feet in North Carolina
This business fell on hard times as:
- Downloading and streaming media gained popularity
- Seller fees were on the rise
- The American economy, in general, was in a state of disrepair
- And their suppliers learned the retail business from them and ultimately pushed them out of the picture
Needless to say, Peter’s business collapsed but not willing to give up he started a new business whereby he purchased DVDs and CDs from regular people over the internet. Individuals would send in their products and anything that was not badly scratched or counterfeit he sent into the Amazon FBA or Fulfilment By Amazon program. This was fantastic for him as he did not need to:
- Deal with individual shipping and handling
- Find storage solutions
- Deal with customer service
For quite some time his business was booming and Peter sold a whopping 169,000 units and had a 97% seller rating.
Everything seems great up until here but brace yourselves for the roller coaster drop. One dismal Monday morning in October of 2012, Valley woke up to an email which informed him that Amazon was permanently closing his account due to a suspicion that he had sold a counterfeit DVD on Amazon. You read that last bit correctly – he was being permanently banned from Amazon due to a suspicion!
As any seller in their right mind would do, Peter decided to take action regarding his Amazon account suspension and appeal Amazon’s decision using the following arguments:
- Can Amazon please provide conclusive proof that this DVD was indeed mine and can I see the DVD in question
- I have examined each and every one of the 169,000 DVDs I have sold on Amazon and have never ever had a complaint of a counterfeit over the past year and a half
- I have a 97% seller feedback rating which should serve as a strong indication of my trustworthiness as a seller
Sounds pretty convincing to me but apparently not so convincing to Amazon. 48 hours later Peter got a response from Amazon saying that his appeal was denied. Period. End of story.
But that is not all folks.
Pause for suspense.
At this point in time, Peter is helpless and hopeless over his second business crashing to the ground overnight and on top of that has 55,000 items in Amazon FBA warehouses across the country! When you are shut down by Amazon, you are given two options:
- Allow Amazon to destroy all of your merchandise at 15 cents a unit
- Amazon will return your products at a fee of 50 cents a unit plus shipping
You do not need to be a math genius to figure out that this comes out to large amounts of money:
- Option number one would run Peter $8,250
- And option number two would cost $27,500 plus shipping
Peter obviously is reluctant to pay these fees and is borderline bankrupt by this point and so he is in a bit of what we would call a ‘pickle’
Valley, of course, writes to Amazon explaining the absurdity of the situation only to receive a cold email after email denying his request to waive the above fees.
As if things were not bad enough and they could not get worse (don’t worry, they do), a few weeks down the line Peter gets a phone call from a fellow DVD merchant who was also recently kicked off of Amazon for the same trumped-up charges and asks him how he plans on handling the lawsuit being filed against him.
Peter was clearly shocked and had no idea what lawsuit his friend was referencing. Apparently, these merchants were being sued by a large DVD manufacturer and distributor but Valley did not get the memo until mid- December which is almost two months after this phone call.
Sure enough, Peter Valley was being sued for supposedly selling a counterfeit DVD on Amazon and could not afford a proper legal defense lawyer whose fees started at $25,000. Peter pleads with them to drop the case, using all the logical arguments I mentioned above to no avail. The case proceeds to court as Valley helplessly watches corporate America feeding on an innocent individual like a wolf preying on a helpless rabbit in the wild.
Keeping that graphic metaphor in mind, the case passes the point of no return from a legal standpoint, opposing counsel sends Peter the conclusive evidence they have against him – a brand new, sealed DVD series of The Mentalist. Peter suddenly has an epiphany – there is an overwhelmingly high chance that these DVDs do not belong to him! But how does he reach this conclusion ?!
It turns out that when signing up for Amazon’s FBA program, Peter ticked the box next to the option called ‘commingling’ which basically means you can send your item into Amazon’s warehouse but that doesn’t necessarily mean your customer will get that specific item. If for example you are located on the East Coast and someone on the West Coast orders the item you sent into FBA, it does not pay for Amazon to ship it across the country. So instead they will ship your customer an identical item which was sent to them from a seller on the west coast.
This my friends is a recipe for disaster!
Peter Valley called up the attorney and explained the situation and was told that in the state of California they did not have to legally prove that the item was his rather that the item was bought from his Amazon user ID. Subsequently, Peter got a call from Amazon who called to tell him that there were no other merchants selling The Mentalist in the commingling program.
Red lights went off in Peter’s head which lead him to the conclusion that Amazon and the DVD distributor were in bed together.
Valley wisely told the Amazon representative that there may not have been other merchants selling the item but that Amazon did sell that item. Peter did not make headway with that argument as one could expect despite his logical line of thought.
Sadly, this story does not have a Hollywood ending – Peter Valley was:
- Permanently banned from Amazon
- Lost his court case
- Was liable for both the Amazon destruction fees as well as the damages deemed by the court
- And very likely had to file for bankruptcy
What can we learn from Peter’s story?
Though it is always intriguing to hear other people’s bad news (that’s why 90% of things you hear on the actual news are negative) as it makes us feel better about ourselves and our own situation, it is important to learn from other people’s misfortune. So what are some of the key takeaways from this horror story?
- First off, try to avoid merchandise categories where copyright infringement can be a big issue such as:
- Selling brands without authorization
I realize this covers a lot of ground and I am not saying to abstain completely but do tread carefully.
- Be aware of the risks of using FBA and do a risk-gain analysis. Additionally, you should be taking actions to mitigate your risk factors. For example, don’t send in 55,000 items at a time. When discussing investments, there is a time old adage which says only invest as much as you are willing to lose. The same goes for FBA – only send in as much product as you are willing to and/or able to default on.
- After this story, I would not recommend signing up for ‘commingling’ either. The risks are far too great and you may wind up being held accountable for someone else’s misconduct.
- Always strive to be multi-channel. Aim to sell your merchandise on a few platforms so that if one closes your account (in this case Amazon) you will not be left holding the bag and will have other outlets on which you can continue to move your merchandise.
Amazon Horror Story # 2
This next horror story is about a merchant who started a dropshipping business on Amazon. They were extremely enthusiastic as sales started rolling in – in a matter of hours they had made $600 in sales, which as a small, new seller was a lot for them (it took me weeks to achieve $600 in sales).
Subsequently, they received an email from Amazon informing them that their account was being suspended due to a link they had found to a previously blocked account. The usual tale of frustration ensued. Like many other large corporations such as reaching eBay customer service, it is very difficult to get an actual customer service representative on the line when it comes to Amazon. They typically send you a link to their FAQ section but in this particular case, there was no entry about dealing with being linked to a previously blocked account. After failing to get proper help on the phone or on Amazon’s website, the seller decided to email Amazon at [email protected] Amazon refused to give details regarding the previous account in question and informed the seller that their suspension was final and that further inquiries into the matter would not be replied to.
Left with $600 in orders and not knowing if there would be a 990-day hold on their funds, the merchant reluctantly chose to not process the orders and had to email each customer individually and explain the circumstances.
The seller said the following sentence which really stood out to me:
“I went from being really excited to feeling like I was just mugged.”
That is some powerful language right there but in all honesty, I can totally understand her. Amazon essentially snatched $600 out of her pocket.
Learning From Misfortune
Admittedly, this is not as terrible a story as Peter Valley’s but it is pretty traumatic for a new business person especially if they are working class. $600 dollars does not grow on trees and can be a week’s and sometimes two week’s pay. Either way this post which I saw on Reddit had some interesting comments and I thought we could mine some insights by examining this thread:
- “I have a theory that Amazon will ban all seller accounts one day to put all of their competition out of business. Or at best force all third party sellers to use FBA. All part of their global retail domination plan”.
Now this is a bit extreme but does tie into the point I made earlier about Amazon using sellers as guinea pigs and then snatching niches from under their nose. I don’t know if I would go to such an extreme as this guy but I would definitely be suspicious of Amazon’s intentions and where their allegiances lie.
- “I used to work in Amazon Seller Support. I talked with sellers in similar situations to yours probably five times a week. I can’t remember a single time when the account was being blocked incorrectly. Every time there was an associated account which had violated Amazon’s terms of service and had been blocked appropriately.I can’t remember a single time when the account was being blocked incorrectly”
Fair enough. Sometimes folks do violate Amazon’s policies and you do have to be aware of everything you do and remember that you are playing in someone else’s stadium and that you do not have home court advantage.
- “Obviously from Amazon’s perspective it’s blocked correctly. But would it be possible for example that one seller account with [email protected] from NYC pulled a scam and then another guy with the same name and location makes also gets blocked?”
This is a pretty valid point and super relevant to boot. It is very possible that you are being punished for someone else’s crimes. There are a lot of scam artists out there and you have to be very careful with your personal account information, email, passwords etc ..
- “The only thing I could think of is I had a personal account years ago selling some used books my family had. I don’t recall it being blocked and if they could just tell me that was why I would be more than happy to come up with a plan of action to try and resolve the issue. Should something I did years ago negatively affect a business I am a partner in years later without and recourse to resolve the issue? The total stonewalling of the sellers is unacceptable and I will make the proper complaints and hopefully one day it will be addressed.”
As you probably already figured out this is the merchant from the above case reacting to the thread of comments on her post where she divulges that she did have a previous account on Amazon. She apparently totally forgot about it but Amazon clearly states that you are not allowed to have more than one seller account.
As we have seen up until now, Amazon can do terrible, unjust things to sellers but in this case, I think the merchant was in the wrong. At the end of the day, you need to be responsible, you need to be aware of your actions and know that everything you do, especially on Amazon has consequences.
- “Never put all your eggs in one basket. As an Amazon seller, you are just an order taker since the customers are Amazons. Sadly, as such, that almost makes you an employee without the benefits. You have no recourse as if these pronouncements are coming from on high. Amazon claims to be all about customer service, but that does not extend to sellers…Just move on, you’ll have set backs, this is part of the experience.”
This is similar to the sentiments I mentioned earlier. I would advise you to use Amazon as a platform, as a way to build your own brand and your own customer base. I would also recommend you use at least 20% of your resources towards building your own brand and selling platform (ie website for example) and to not put all your eggs in Amazon’s basket.
Amazon Horror Story # 2
Although this post dealt with a lot of negative aspects of Amazon as a marketplace I do want to finish off on a positive note. Yes, you must be extremely careful when selling on Amazon and yes don’t bet all your money on one horse. But with that said you should definitely still keep selling on Amazon and utilizing it as a revenue stream for as long as you can. Amazon is an eCommerce mammoth with hordes of customers and tons of demand for a variety of products. Just remember that you are selling on someone else’s turf and as such you have to abide by their rules even if you don’t like them. Keep in mind that Amazon is a private business and if they suspend your account they are usually not doing anything illegal albeit sometimes unfair and annoying. Just like anything in life, do your research beforehand, know what you are getting yourself into and do your best to protect yourself and your business. Remember, Amazon is not evil but there is always the potential of becoming the next ‘Amazon horror story’ – be vigilant, try to internalize the insights from this post and most importantly stay calm and keep on selling.
Please feel free to share your comments as well as your own personal Amazon horror stories below.