Bruce Merrifield: Amazon’s war on CRaP
Amazon’s analytics can identity SKUs on which they “Can’t Realize a Profit” (CRaP). Even with their improving, world’s best fulfillment and last-mile delivery costs, they can’t cover costs on items lower than $15 per pick/order.
AMZ’s fixes to date?
1. Bully vendors to bundle items or to do third-party shipping for AMZ’s orders.
2. Increase prices on small-dollar-pick items.
3. Make items “add-on” status.
4. Or, “Pantry Items” (a shipment goes when enough goods reach a total)
Distributors get killed on small-dollar picks too. Distributors that invest in a cost-to-serve model at the line-item level typically discover that:
1. Up to 70% of all line-item picks are losers.
2. 65% of warehouse orders are losers.
Thank goodness there are a few highly-profitable SKUs (and direct-ship orders) to pay for losing items and losing customers; with still a residual that is the company’s overall operating profit!
When will AMZ’s private-label clones target your profit-cow SKUs?
Amazon analytics also identifies popular items that have the most margin-dollars in the pick/order. Their private-label clones (or “Amazon Exclusive” resellers’) can sell for 50% less with great reviews and still be profitable. How? AMZ and its clone-friends are exploiting traditional channels’ high-cost service structure that is funded by cross-subsidy pricing of full-lines of products.
Cross-subsidized full-line pricing? Assume a product line has ten colors all priced “fairly” at the same per unit. But, 2 SKUs are 80% of the sales and a few don’t sell at all. The killer clones will only come in the 1 or 2 best colors. You can raise prices on the non-sellers to cover their true, total supply-chain cost, but they don’t sell at the lower subsidized price.
High-Cost Structure? In most channels, there are sales reps for both factories and distributors. They were originally needed to push new products through channels and create final demand. Fast forward: what if 80%+ of all sales today are for commodities to repeat buyers? And, clone-availability news is digitally instant from AMZ? Rep overhead costs and channel-push-through costs are not built into the clone pricing at Amazon.
What to do?
Get the right analytics to: fix CRaP SKUs (and customers!) Be prepared to be more competitive on items that may be cloned. And, start rethinking overall business and selling models. Next-gen digital buyers want e-selling assistance only as needed.