Have you ever seen your products priced on Amazon or other digital marketplaces below your desired selling amount or below MAP (Minimum Advertised Price)? This can really be frustrating, and even worse hurt your brand equity, sales, and profits.
Watching the price of your product decrease on Amazon is one of the first signs that you are on or flirting with the profitability death spiral.
The Profitability Death Spiral
Here is an image of The Profitability Death Spiral.
As we show this image to brand CEOs, VPs of Sales, and their ecommerce teams managing Amazon, they all agree about one thing—stay clear of the death spiral. And if you get on it, it takes a lot of hard work to get out of it.
Step by Step Process of The Profitability Death Spiral
- Amazon revenue takes off
- 3P (Third-party) sellers flock to the Amazon
- Competition amongst the sellers drives down pricing
- Lost buy box ensues
- Brick & mortar match online prices
- Retail profits erode
- Amazon profits erode
- All channels are less profitable
Deeper Dive on How the Profitability Death Spiral Happens
Let’s dive a little deeper into why the profitability death happens. And if you’re already feeling the stress from being on the death spiral, don’t go into the depths of despair. There’s a way out.
Step 1: Amazon Revenue Takes Off
The first step is likely a big celebration as you watch your Amazon sales grow faster and faster each year. Your distribution sales go up and your Amazon sales go up. Everything is good right? Yes—unless you don’t have control of how your distribution may be impacting your brand on Amazon. This rapid growth might be setting you up for the second step in the death spiral.
Step 2: Third-Party Sellers Flock to the Amazon
The second step of the death spiral is when third-party sellers buy your product at discounted prices and start to sell your product on Amazon. As we talk to brands, they tell us story after story about how a third-party seller is wrecking their product listing, reviews, and price on Amazon.
Step 3: Competition Amongst the Sellers Drives Down Pricing
As more sellers show up on your Amazon listings, it creates competition as the sellers battle for the Amazon buy box by lowering your price. If this trend doesn’t get under control quickly you could find your product at a stage where you can’t realize a profit on Amazon.
Step 4: Lost Buy Box Ensues
You finally lose the buy box and a third-party seller starts selling your product below the price. This can start a tailspin to the bottom. And this can happen on 1P or even 3P selling strategies on Amazon.
Step 5: Brick & Mortar Match Online Prices
As you lose control of your pricing on Amazon, it starts to impact your brick and mortar sales and profits. You start to see lower prices online then prices in your brick and mortar (retail) channels. You start to get retail complaints and may even risk shelf space.
Step 6: Retail Profits Erode
You start to see your retail profits erode as your retailers require price matching guarantees, buybacks, and other concessions. With Amazon being out of control, you start to start to erode your retail profits. This is super painful for brands!
Step 7: Amazon Profits Erode
Of course as this death spiral is happening, you also see that your Amazon profits have now also eroded. Because Amazon is coming back to you and asking for prices that really aren’t profitable any more. You are getting closer and closer to having your product CRaP (can’t realize a profit on Amazon) out.
Step 8: All Channels are Less Profitable
Before you know it, you are at the bottom of the death spiral and all channels are less profitable than when you first started. What to do next?
Don’t Despair, Take Action to Get Out of the Death Spiral
If you find your brand on one of the steps of The Profitability Death Spiral, don’t despair. You can take action now.
At Pattern, we help brands get in control and out of the death spiral. Just click below to schedule a free consultation and get back in control. You got this and together we got this!