Amazon, the 800-pound gorilla of online retailers, negotiates with vendors every day.
Vendors can face Amazon from a position of strength…if they prepare properly. It’s important to keep in mind that Amazon sees itself as not in the business of selling things, rather the business of helping people buy things. The company focuses squarely on the customer’s desire for the most choices at the best prices. The keys to Amazon’s profitability are in the deals it strikes with vendors.
In negotiation with vendors, Amazon vendor managers measure contractual terms called “contra-CoGS,” which are balanced against the Cost of Goods Sold (CoGS) and form the heart of Amazon’s incredibly successful business model. Vendor managers want profitable goods, the widest assortment possible, reliable availability, and the most favorable contract terms. Those terms are negotiated with vendors, who can and should be well-prepared for the process.
In negotiations, Amazon will use terms like “co-op” fees, return fees and allowances:
- Co-op fees: When Amazon uses terms like “contra-CoGS,” “funding,” or “vendor spend,” these terms are synonymous with co-op fees through which Amazon can recoup their operating costs. These will likely be central to the negotiating strategy, the largest “ask,” and usually the most disputed. And they can be alien to those with primarily brick-and-mortar experiences. This is true because a vendor’s ROI from these is not always obvious. However, co-op fees are a cost of doing business with Amazon. Also, like most things in life…they are negotiable
- Return fees are optional and some brands may be better suited not using Amazon for returns. For example, it might make sense for a vendor to opt out of this fee if it has a refurbish and resell program that makes return fees less of an issue.
- Allowances can be a great financial win for a vendor. An example of an allowance is freight consideration. Often, a better deal can be struck if the seller has a solid fulfillment network capable of shipping to Amazon fulfillment centers at a lower cost than the freight allowance Amazon offers. Allowances are optional and, for larger brands, it might be better to handle freight and returns internally.
Let’s make a deal with Amazon
The “nuts and bolts” of negotiating with Amazon will vary based on the size of vendor and if they offer a unique selection, but there are things that every vendor should know.
Large national or global businesses are handled by their vendor manager. Think of a brand like iRobot. A joint business plan is created, the deal relies on robust and detailed data, negotiations are live, with extensive back-and-forth communication and they tend to be ongoing, rather than “set and forget” annual agreements.
Smaller organizations get different treatment, mainly because of lower sales volume and less selection. Amazon has significantly more leverage with vendors of this size and automates as much of the deal as possible. Deals tend to be brief and offer less room for negotiation, with Amazon setting the terms. Most often, the vendor manager in charge of the process from the Amazon side is involved in many such deals– with limited knowledge of the individual vendor’s businesses.
What to expect in negotiations with Amazon
Regardless of the size of the vendor, understanding Amazon’s pressures and priorities will give a clearer picture of the negotiations “playing field.” From that point forward, good negotiation techniques apply, such as knowing your key business metrics, not expecting a “partnership” with Amazon, being prepared for turnover in vendor managers during negotiations, not rushing into an agreement, and knowing which terms to avoid (like margin guarantees) that may be a problem in the future.
Forewarned is forearmed
Comprehensive preparation for negotiations with a vendor manager from Amazon will pay multiple dividends for a company of any size. Each step in the process and each piece of information offers opportunities to learn what’s most important to both sides and drive the deal in a more favorable direction. Knowing what your business means to Amazon and what to expect in the process, along with asking the right questions, is a recipe for success.
Jamaal Hackett-Cook is senior e-commerce strategist at Ideoclick