This post has been a long time coming. I have been collecting my thoughts and putting together a list that every FBA seller should live by. These are essential truths that hold true based upon economic models and human behavior. The quicker you come to terms with these items, the sooner you can capitalize on growing your income!
1. The laws of Supply and Demand will always drive the marketplace – No matter if you understand how it works or why it works, you need to come to terms with the fact that the core principals of supply and demand (and economics in general) drive the Amazon marketplace. As FBA sellers, we are fixing the inefficiencies of the market by finding excess supply and selling it in a marketplace where the demand is high. When a hot toy runs out of stock online, that doesn’t mean it runs out of stock in a rural community. By speculating and playing the market, we are able to capitalize on these inefficiencies and profit along the way. Overall, everyone is better off and we bring the market back to equilibrium (or as close as we can get).
2. Information will never be perfect – With rule number 1 holding true, you might think that Amazon (or any online retailer) could simply figure out which products are popular and order more (which would increase the supply and cover the shortage). This is great in theory, but the Law of Imperfect Information also holds true. Human nature causes information to be imperfect. It also takes time for information to make its way to the right decision maker for them to correct their choice. These two facts account for the Law of Imperfect Information which states: One cannot predict the future: They can only make the best decision with the information at hand. Since perfect information is only available after a choice is made, this allows FBA sellers to react in quick and nimble manner to profit during the time when imperfect information exists. One must also realize that there is only a certain amount of time that the information inefficiencies will exist and they should expect that a company will try to fix any mistakes.
3. Opportunity Costs Drive Decisions – You have probably wondered why people want to buy something from you for 3 times the amount you paid. The answer is simple: Opportunity Costs. People place different values on all aspects of their lives from work, play, relaxation, etc. The matrix that arises creates a curve (just like the one pictured below) that constrains a person to certain boundaries. For example: Someone living in California might have a different value for sunscreen than someone living in Alaska. Someone living in New York might be willing to pay more for delivery service so they don’t have to carry bags home on the subway. Someone may have an emotional tie to an item and might be willing to spend a lot on an item to get it. Some people value getting items in 2 days without having to go to the store. All of these values work together to create the downward sloping demand curve that most of us are familiar with from economic class. The key takeaway from this rule is that just because we place a value on an item doesn’t mean that other have that same value on an item.
4. Amazon is a Marketplace with Multiple Stakeholders – I hear it all the time – “Amazon is making it harder and harder on sellers.” We have to come to terms with the fact that Amazon is a company with multiple stakeholders (and FBA sellers are just a small portion of them). When Amazon makes a choice to implement a new restriction on sellers, we need to look at it through the eyes of a customer. If you were a customer and received a damaged or expired product, who would you blame? Amazon. You (now think of the you before you started selling on Amazon) have no idea that there are multiple people across the world who are buying and selling items online. You simply blame Amazon for the bad experience. Amazon might lose a customer (which gets into the whole lifetime value of a customer argument) and they will lose money over the lifetime of the company. Just remember this rule when you get mad at Amazon for restricting new sellers or requiring more out of their sellers.
5. The Barriers to Entry are Small to Sell on Amazon – A common question that is asked in all of my groups is: “Why are you teaching other how to make money doing this? Won’t they take money from you?” Here is the honest truth: There are very few barriers to entry that prevent people from selling on Amazon. All you need is some money, a bank account, and merchandise and you can get started. The biggest barrier is the economies of scale. This is where I make the majority of my money. I am able to take advantage of my economies of scale and leverage them to generate more income. I am able to place bigger orders and sell more products. The groups that are run by myself and the other admins are only helping tear down one of the five major barriers to entry (learning curve). The other barriers will still be there and it will reduce the competition over the long run.
I hope this post opens your eyes to the economics principals that drive Amazon and all other online marketplaces. I also hope I didn’t bore you too much with economics from your high school days.