THE BLOG

Why Amazon Is Bad for (Small) Business

06/12/2013 09:13 am ET | Updated Aug 12, 2013

When you think of Amazon, do you think of small businesses? Do you think of them as a champion of mom and pop?

I don't.

When I think of Amazon, I think of a behemoth masquerading as a platform that helps small and medium-sized businesses (SMBs) compete against big-box retailers. The fact is, it actually hurts these smaller players far more than it helps.

That's why it is crazy to me that so many SMBs choose to sell their products only through Amazon. Sure, it's easy to get up and running -- you don't have to create your own site or do as much day-to-day management. But with today's tools, it's easier than ever for even one-person operations to have their own successful e-commerce sites.

Entrepreneurs who use Amazon and Amazon alone to sell their products are taking a myopic view of their own businesses. If they'd take a step back and look at it from a larger perspective, they'd see the strategy that helps them at the start is going to harm them a little way down the road.

How exactly is this harm being done?

Your brand doesn't get the credit

I see Amazon as a "frenemy" to the small business. As an SMB with a great product, you're given the opportunity to sell on one of the world's largest marketplaces. Who wouldn't want that? But once your products are available, you're lost in a sea of thousands of other sellers. After all, when the average consumer buys a widget on Amazon, they don't tell their friends, "I got this from John's Widgets."

They say, "I got it on Amazon."

Problem number one with selling on Amazon is that you lose control over your brand the instant you set up your store on their platform. Whether you are a business greenhorn or a seasoned veteran, this is a big problem. Branding is half the battle. It doesn't matter what awesome customer service you provide during the course of the transaction or the friendly note you wrote on their shipping slip; the consumer is just going to think of the product as being one of Amazon's.

Without a brand to support, a consumer is likely to just seek out items based on price rather than loyalty. A business can only grow if its customer base grows, and part of that base has to be returning, loyal customers that spread word of their excellent shopping experience. On Amazon, there is no unique shopping experience -- it's homogenous. The only brand that benefits from your hard work, fantastic product and excellent customer service is Amazon.

You give as much as you get

Clearly, Amazon isn't offering this for the heck of it. There's a price (and fees) at play here. On top of taking away from a small business's brand and image, Amazon takes a portion of sales and charges extra fees for handling logistics. Nobody expects Amazon to offer a free platform, but in recent weeks and months they've increased fees to the point that smaller sellers are barely breaking even.

The most recent hike came on February 18 of this year. Citing a rise in the cost of transportation, a statement from Amazon said that the fee for a one-pound standardized package, which account for a "significant portion" of the packages in the fulfillment program, would increase by "only" $0.09. That $0.09 may not sound like a lot, but it's a substantial jump per product on top of other fees, including shipping rates.

For one of our customers selling a niche product, this is a big problem. In December, Amazon's average fee for her product (which sells for $7.99) was $3.60. In March, that rose to $3.90, forcing her to give nearly 50% of each sale to Amazon in fees. This business also has to deal with an added "pick-and-pack" shipping fee. That means if a customer buys several units of her product rather than just one, Amazon charges yet another fee for each additional unit purchased.

The biggest problem with Amazon's fee structure is that it makes a lot of products unprofitable for small merchants. This can cause some SMBs to sink or jump ship.

It's David vs Goliath (and guess who's winning?)

All eyes are on Washington right now as the Marketplace Fairness Act (MFA) legislation navigates the hurdles of becoming a law (or getting shot down). In a nutshell, if passed into law, the MFA would let states compel online retailers to collect sales tax no matter where they are located. Right now, online sellers are only required to charge tax in states where they have a physical presence.

It's an attempt to level the playing field between brick-and-mortar stores and online retailers. But it's a well-meaning misstep. While the legislation would only apply to businesses making more than $1 million in out-of-state revenue, it would be crippling to small business owners, most of whom lack the resources to file tax returns in 45 additional states every month. These "millionaire" businesses actually operate at margins of only 10-20%, so their real income and ability to cover these incremental operating costs are comparatively low.

Amazon is spending big bucks to support the proposed legislation. It's a smart move for them, but a potential catastrophe for small businesses. Basically, the company wants the best of both worlds -- they grew so large so quickly in part because they didn't have to pay sales tax on purchases made in states where they didn't have a physical presence. But now, as they build more warehouses (taxable presences) across the nation to ship orders faster, they want everyone else to pay taxes, too -- and forcing all e-tailers to spend time and money to comply would crush Amazon's smaller competitors. Of course those administrative costs wouldn't even be a blip on the Bezos radar.

The Fix

I believe it's important to strike a balance. Yes, Amazon is good for reaching a broader audience, but it can't be the exclusive model you use to market and sell your product, especially when it's clear they aren't operating in your favor. Taking control and launching your own e-commerce website is the best way to stay afloat. That way you can manage all aspects of your store and your brand (and even integrate and manage your Amazon, eBay and other selling channels) on one single platform. You don't have to pull the cord completely on Amazon, but throwing all your eggs in one basket is dangerous for an organization with already thin margins.

Take a stand. Control your brand. Make a profit selling your product. Pay your dues, but nothing more.