a world where your online marketplace store is listing millions of unique products and is generating thousands of daily orders. A world where you don’t need to stock any of the products you sell, don’t need to manage warehouses and logistics, and don’t need to pre-purchase your products to ship to FBA facilities. Envision providing 24×7 world-class support and processing orders without the hassle and financial investment involved in expanding staff and the associated overhead.
Such a world is the dream of nearly every marketplace seller today. We here at MPLogix call it the dropshipping dream – achieving massive, sustainable growth with the lowest possible risks and cash investment. Allowing others to handle the complexities of inventory, order, shipping, and staff management while you get to focus on what is most important – your bottom line.
Sellers Annual Sales
Unfortunately, like most dreams, things aren’t as simple as they seem. In fact, it is extremely difficult to translate this vision into reality. As you can see, only a sliver of sellers are able to exceed $10M in annual sales, and all heavily rely on FBA to do so. If you find yourself asking, “Why?!” the answer lies in the fact that the inherent drawbacks to the dropship model are detrimental to your success as an online seller! Inconsistent data accuracy on the distributors’ feeds, lack of physical control over inventory, and no direct control over shipping speed or accuracy are among these pitfalls.
And if these obstacles weren’t challenging enough, needing to acquire deep new expertise while adapting to the ever-changing business model dictated by the marketplaces has its own set of risks. To make matters even more difficult, scaling operations at the required speed presents plenty of challenges in and of itself.
Because of the mammoth set of requirements and the level of risk involved in drop-shipping, many companies decide instead to turn to the slightly less risky strategy of using FBA in order to grow their business. This can have minor to moderate effects on improving growth, but carries its own laundry list of risks and requires product sales forecasting and deeply specific product knowledge in order to make correct product placement decisions that do not result in losses once FBA costs are taken into account.
So if scalability presents such a risk and cash investment, what is the incentive to scale product offerings? Let us look at two main points: the competition you face on the marketplace (in this example Amazon) and the marketplace product tiers and how they correlate to the need to scale. In addition to Amazon being a direct competitor, there are over 5M sellers who make up the rest of your competition on the marketplace. Marketplace competitors are divided into three distinct groups: Amazon itself [AMZ], Fulfilled by Amazon sellers [FBA] and Fulfilled by Merchant sellers [FBM].
The 488M+ products currently on Amazon fall into one of three tiers, here cleverly known as Tier 1, Tier 2 and Tier 3. Tier 1 products represent the absolute best selling items across the most popular categories, where the only sellers available are Amazon and perhaps a small handpicked group of FBA sellers. Tier 2 encompasses FBA friendly products; where FBA sellers along with Amazon.com are the dominant sellers, but FBM sellers may also be present. Lastly, Tier 3 products cover all the offerings that are not part of the other 2 tiers, where FBM sellers represent the majority of offers for a product. These are what we label “FBA-unfriendly” products.
|Marketplace||Total Products||Change (12 months)|
|Amazon.com||488 million||+235 million|
|Amazon.co.uk||261 million||+108 million|
|Amazon.de||237 million||+96 million|
|Amazon.fr||209 million||+90 million|
|Amazon.co.jp||168 million||+60 milion|
|Amazon.it||165 million||+77 million|
|Amazon.es||160 million||+76 million|
|Amazon.ca||133 million||+77 million|
|Amazon.in||42 million||+18 million|
|Amazon.com.mx||36 million||+33 million|
|Amazon.com.br||18 million||+15 million|
|Amazon.cn||13 million||+4 million|
|Amazon.com.au||4 million||+1 million|
Number of Products on Amazon Marketplaces
Most FBA-unfriendly products consist of items that sell in insufficient individual volume, are too large and/or heavy to efficiently store and send in bulk, or are otherwise unsuitable for FBA allocation. Tier 3 products account for over 300M items and over $36B in FBM revenues in 2015. Logically, it follows that the more Tier 3 items you can list, the larger you can grow your sales revenue. And since there are over 300M Tier 3 products, and this number is growing by thousands per day, your growth is only limited by your ability to scale. Since Tier 3 products do not generally compete directly with Amazon or preferentially-treated FBA offerings (such as Prime Shipping) you have a lot less competition on a per item basis. And with Amazon buy-box eligibility and buy-box rotation practices you can be assured of almost always getting your time in the buy-box spotlight.
Third-Party vs. First-Party Merchants on Amazon [Q3 2015]
E-Commerce revenues in the US alone reached $300b in 2015, a 14% year over year growth. Amazon is the largest “e-retailer” capturing 37%. Third party online marketplace sellers generated over 53% of the entire merchandise revenue in 2015.
“Today Amazon sells over 480 million products in the USA. Amazon’s product selection has expanded by 235 million in the past 16 months. That an extraordinary average of 485 thousand new products per day.” – Paul Grey, E-Commerce [December 2015]
Amazon's catalogue is grouped into dozens of departments. There are over 30 million items in the combined Clothing, Shoes & Jewelry department, 24 million in Sports & Outdoors, and 60 million in Home & Kitchen. There are 6.7 million Office Products items, 96 million in Electronics, 1.7 million in the Beauty department, 1.2 million Baby products, and 900 thousand Grocery items. Third party sellers provide an average of 83% of total Amazon’s product offerings! (source RW Baird)