Bruce Merrifield: The war on CRaP
When will Amazon’s private-label clones target your profit-cow SKUs?
Amazon’s analytics can identity SKUs on which it “Can’t Realize a Profit” (CRaP). Even with its improving, world’s best fulfillment and last-mile delivery costs, Amazon can’t cover costs on items lower than $15 per pick/order.
Amazon’s fixes to date?
- Bully vendors to bundle items or to do third-party shipping for Amazon’s orders.
- Increase prices on small-dollar-pick items.
- Make items “add-on” status.
- 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:
- Up to 70% of all line-item picks are losers.
- 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!
Amazon targeting your profit-cow SKUs?
When will Amazon’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. Its private-label clones (or “Amazon Exclusive” resellers) can sell for 50% less with great reviews and still be profitable. How? Amazon 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 10 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 one or two 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%-plus of all sales today are for commodities to repeat buyers? And, clone-availability news is digitally instant from Amazon? 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.