“Growth, to a certain extent, means nothing if it's not profitable in the long run, if it's not sustainable. So, I think it's very crucial for any brand [that is] currently selling or is going to sell on Amazon in the future to really ask themselves the question, ‘Okay, how do [we] reach profitability?’”— Martin Heubel, Founder of Consulterce
Amazon has become an integral part of most brands’ ecommerce strategies, but intertwining your business so closely with the world’s largest online retailer often comes at the expense of profitability.
Amazon is masterful at driving growth — but driving profits on the platform is an entirely different beast for brands. Martin Heubel, founder of the ecommerce consultancy Consulterce, has spent years helping brands figure out how to unlock Amazon to maximize ecommerce profit margins.
Heubel, a former fast-moving consumer goods (FMCG) category manager at Amazon, joined a recent episode of the “Unpacking the Digital Shelf” podcast, “Driving Profitability on Amazon,” to share his four-step framework for how brands can solve this challenge and balance both growth and profitability on the channel.
Why It’s So Hard To Boost Ecommerce Profit Margins on Amazon
Heubel spent five years at Amazon, working as a senior category manager in FMCG.
He worked with Nestlé, Mondelēz International, Inc., Mars, Inc., and other leading brands to improve their ecommerce operations, drive high performance, and generate revenue.
During his time partnering and negotiating with brands, Heubel discovered two main challenges that typically prevent brands from optimizing profits on Amazon, starting with misconceptions about how the platform operates.
“I think the biggest challenge in the place for brands is that they still treat Amazon like any other retailer and not like a marketplace. But if you think about it, they are not actively developing the category for you as a brand. [Amazon] basically do[es] not invest heavy resources into working and partnering with brands to actually develop your business,” Heubel says.
Amazon Follows Prices
Heubel says the second challenge is that Amazon is a price follower.
“Amazon is not a retailer, but a marketplace. They will always orient their pricing based on what's out there in the market and take a look through the customer's lens,” he says.
Digitally native brands have the upper hand because they can quickly adapt to Amazon’s dynamic pricing strategy.
This approach is challenging for most brands because they’re more accustomed to a traditional retail environment, but Heubel says brands can grow and be profitable on Amazon despite these challenges.
Brands just need to realize that achieving scale isn’t the only path to growth.
“Change towards profitability on Amazon really begins within your own organization,” Heubel says.
Heubel’s 4-Part Profitability Framework
Heubel offers a four-pronged approach for maximizing profitability on Amazon.
1. Revisit Your Assortment Strategy
Heubel says brands must clearly define their assortment strategy on Amazon and decide whether they’ll list all their products or only a specific selection.
Many brands often adopt a spray-and-pray approach on Amazon. They thrust all their items on the platform at once and don’t selectively manage their portfolio.
Heubel says this leads to a vicious cycle where a brand becomes highly dependent on the growth Amazon drives — and loses any negotiating leverage it has during vendor negotiations.
“Following this Amazon narrative of listing all of your selection without thinking twice about it will bring you into a situation where you grow in the first couple of years very rapidly. Then, successively, Amazon will come and say, ‘Look, you've grown so much over the past years. Now, we would like to also have better compensation and higher trade terms in exchange for that,’” Heubel says.
He adds that this often leaves brands with only bad options: They must either pay more or delist more of their inventory. Before they get to this point, brands should embrace a selective assortment approach, Heubel says.
With this approach, brands can opt to list products that aren’t sold at discounters, which will provide stable profitability by attracting new customers or driving repeat sales.
“I think you need to find the right mix. You also need to become aware of what the function of each product is to then decide if you onboard it, ‘Does it level our growth? Does it level our profitability? Or does it also attract more and more customers towards our portfolio that we list on Amazon?’” — Martin Heubel, Founder of Consulterce
2. Focus on Margin Performance
It’s also crucial for brands to understand their margin performance before they even list a product on Amazon.
Heubel says brands must use all the data at their disposal to better understand their margins across accounts, especially their Amazon profit and loss (P&L) statement.
However, Heubel says most brands don’t proactively do this until they face intense margin pressure.
“A lot of executives are obviously looking for solutions and addressing the portfolio [assortment issue]. But how you drive the right margin mix with the levers that you get from Amazon directly — such as Amazon Advertising or price promotions — is something that needs to be evaluated in detail,” Heubel says. “It's not only about the margin of Amazon; you also need to balance the profit margins that you have on the brand side.”
3. Improve Management of Cross-Channel Promotions
Once brands understand their profit margin performance and define their portfolio on Amazon, their next step is to actively manage their product mixes and promotions.
With this approach, a brand can target their marketing and ad spend toward products that drive creative account margins not just on Amazon, but also on other retail channels.
Heubel says brands often run into issues when their offline retail teams offer heavy bulk discounts to wholesalers and distributors who are also third-party sellers on Amazon — effectively eroding their own ecommerce profit margins.
One approach you can adopt to solve this problem is to more effectively coordinate price promotions across all your retail channels and “harmonize the times when you actually are funding price promotions, which will also help you get a grip on when Amazon is matching these price promotions,” Heubel says.
“It really comes down to finding the levers to say, ‘Okay, what is the route that is the least painful that can help you to still grow, but amend either your portfolio or your investment strategy into price promotion or into a targeted spend,’ as compared to solely saying, ‘Look, we'll have to disinvest from Amazon altogether,’” Heubel adds.
4. Incentivize and Align Your Team
In such a fragmented ecommerce landscape, it can be difficult to get key stakeholders and offline retail, ecommerce, and sales teams all on the same page and aligned to the same metrics.
Heubel says winning on the digital shelf requires a cross-functional effort. Ecommerce leaders and digital leaders must educate senior decision-makers within their organizations about the fact that ecommerce doesn’t operate in a vacuum, and that it’s vital to develop a more holistic retail strategy.
Reviewing internal data to better understand their profit margin on Amazon compared to other retail channels can help ecommerce leaders make the case to senior leadership that it’s time to reassess their brand’s Amazon strategy.
“Really look into the status quo. Where does Amazon stand in terms of a margin position compared to your other retail channels? Then, also project that for the next three, five, and 10 years based on the internal data that you probably get from your financial stakeholders,” Heubel says.
Doing this due diligence can also lay the groundwork for incentivizing internal teams and retail partners.
Internally, using data to better understand margin performance on different accounts will make it clear to the organization why it’s necessary to make a few changes to how it incentivizes retailers.
For internal teams, the ultimate incentive is that making these shifts likely will drive greater growth and profitability — while enabling the brand to reduce some of its dependence on Amazon.
However, Heubel admits that making these changes externally will be tricky because wholesalers, distributors, and other retailers won’t want to compromise their bottom line.
Heubel says giving certain retailers exclusives to parts of the brand’s portfolio is one way to incentivize these partners and improve margins across accounts.
“Developing a more streamlined marketing and promotions plan can help you to also offset the negative impact you have from a front margin perspective at Amazon without jeopardizing too much the type of incentives you hand out to these retailers,” he says. “But you will need to obviously educate them towards redistributing [promotions and ad spend] across the year. And again, it also comes down to the differentiation of your portfolio.”
Balancing Long-Term Growth and Profitability
Amazon may be the world’s largest online marketplace, but brands can’t solely chase growth. They also have to pay close attention to profitability.
In order to have a holistic and effective ecommerce strategy, you need to look at your current product mix and margin performance on Amazon and decide whether it makes sense to continue investing at the same levels.
This may lead to some tough vendor negotiations with Amazon when the time comes, but diversifying your strategy ultimately will help you do the best thing for your brand.
“Growth, to a certain extent, means nothing if it's not profitable in the long run, if it's not sustainable,” Heubel says. “So, I think it's very crucial for any brand [that is] currently selling or is going to sell on Amazon in the future to really ask themselves the question, ‘Okay, how do [we] reach profitability?’”
Listen to the complete podcast episode to hear more of Heubel’s insights on how brands can balance both growth and profitability on Amazon.