The Amazon marketplace has gained a reputation for being incredibly competitive and even cutthroat for sellers. The company posted a mere 0.4% profit margin in Q2 2015, and that’s after a .25% loss in Q1 2015. Price cutting was once believed to be the only way to survive on the Amazon marketplace. Jeff Bezos even said, “your margin is my opportunity.”
Competition is great. We all know that it’s incredibly beneficial for consumers and leads to innovation from retailers. But when competition is based almost solely on price, the consumer benefits, but the retailer is left with minimal margins. Amazon’s low prices can actually act as a barrier to entry for smaller retailers who fear that they cannot compete on such low price points.
The constant price cutting practice is called price warfare. There are plenty of ways that retailers can keep price wars from ever occurring. The best way to prevent them from taking place might be in the hands of product manufacturers, and Amazon has the potential to really make an impact.
Amazon does not enforce MAP policies, but doing so would be incredibly beneficial for the marketplace and its sellers. By establishing a price floor, price wars would become rarities, and retailers would actually have to compete on something beyond price. Sounds competitive, right? That’s exactly what you want as a retailer and a consumer.
But how would it benefit Amazon? Well for one, this would remove another barrier to entry for those who were previously afraid to join. Amazon could capture market share from sellers who can’t afford to completely slash their prices. But there’s more to it than simply winning new sellers.
Amazon’s price perception is incredibly low. When consumers want to get an item online at a good price, they look to Amazon. Many believe that Amazon always has the lowest prices, but empirical evidence shows that that’s not always true. Amazon is in a good position to raise prices because of its loyal customer base and additional perks through its Prime program. If prices rise, they still won’t lose their Prime members because of the program’s offerings. Nowhere else on the internet does a membership have the same offerings as a Prime membership, like free 2-day shipping and video streaming services.
So what does Amazon have to lose? As of right now, a large chunk of its market share is at risk, mainly because of direct competition from Jet.com. Jet has only been around since July, but is actually gaining quite a bit of popularity among sellers and buyers alike. Recent reports reveal that Jet is currently ChannelAdvisor’s number 4 marketplace by GMV in the world. It’s already bigger for ChannelAdvisor than established retailers such as Sears, Best Buy, and Rakuten. Not only that, but shoppers are sticking to Jet. It boasts a 23% repeat buyer rate, compared to Amazon’s own 11% rate. Jet’s low price promises can create the same barriers to entry as Amazon, and a price floor could act as a differentiator for retailers.
The only problem if Amazon chooses to enforce MAP? It’s going to take a lot of work. Amazon should suspend repeat MAP offenders, but that would take a lot of price monitoring. Luckily, there’s a separate solution. Amazon sellers can take matters into their own hands, and invest in their own MAP monitoring software. They can have the power to prevent price wars and slashed margins from even occurring.
Amazon is behind the curve on MAP protection. Their current solution to MAP violations is a hidden price on the product’s listing. But they can take it a step further and choose to enforce MAP instead. If Amazon decides to actively enforce MAP on its sellers, then consumers, retailers, and Amazon itself will benefit in the long run.