Learning To Navigate Institutional Markets For Next Generation

Young people today are thinking about their futures earlier than ever before. Gone are the days of, “I’ll figure out my major before I graduate.” Instead, these are the days of lemonade stands that turn into business plans, seed money, and a resulting entrepreneurial journey.

In many respects, branding comes early on the journey of the very young, also known as Generation Alpha. According to an N.C. State article, Generation Alpha’s habits and outlooks reflect that of their Millennial parents. “As health-conscious caretakers, Millennial parents seek out a lot of information about the products they buy and expose their kids to,” says author Heather Dretsch. Like their parents, Alpha’s appear to seek high-quality, health-conscious, sustainable products with technology, diversity, and immediacy at the forefront.

The youth of today has been marketed through social media, television, apps, games, and other media outlets. But, according to Common Sense Media, advertisers are keenly aware of the long-term effects of getting their brand in front of youth as early as possible. “Advertisers know that kids greatly influence their parents’ buying decisions, to the tune of $500 billion per year,” cites Common Sense on advertising for kids.

However, in some industries, such as beauty products, advertisers tend to position their marketing from already established models that cater to adults more than young people. As a result, mature messaging is portrayed to a younger audience attempting to develop their identity and explore their emotional space in the world.

Samantha Cutler, the founder of Petite ‘n Pretty, harnessed 17 years of experience in product development in the professional make-up industry with such brands as Smashbox, MAC Cosmetics, and others to launch an age-appropriate product line for younger girls just learning to explore their personal development and sense of self.

Cutler recognized that if beauty products were already being marketed to a younger age bracket, she might as well offer a healthy, age-appropriate product that educates through inspiration, empowerment, equity, and inclusion.

While working at name brands, many friends and acquaintances would ask her if she could recommend products, and she realized how many products did not align with younger kids.

“I never had an answer, the products weren’t age-appropriate. Many of the products had suggestive naming conventions, or the colors were extremely pigmented, something many parents would not feel comfortable giving their daughter or son,” says Cutler.

Product integrity is essential to Cutler, and some marketed merchandise did not represent clean beauty. In addition, some were produced overseas without proper testing that would appeal to parents wanting the safest products for their children.

As a mother herself, she knew there was a need. “I felt like there was this whitespace of opportunity in beauty, educating about beauty, and I always wanted to start a brand. But the beauty marketplace is saturated with 300 times the number of brands launching yearly than when I first started working. So I wanted to ensure there was a purpose behind what I did.”

Niche Market

Cutler concentrates mainly on the niche market from ages 7 to 12. While cutesy in nature, the company’s naming is steeped in feedback from the associations of younger kids and application principles. “I raddled off names to my three-year-old daughter and when the word ‘pretty’ came up, she instantly knew what it meant. There was a familiarity, and ‘pretty’ is a feeling that comes from within, a good feeling. Petite represents everything we produce. Everything is slightly smaller and gives a first user the best initial experience.”

At the core, Cutler is trying to bring confidence and comfort to kids by starting what she calls ‘the beauty journey’ and building within the offerings. “What I like to say is if your daughter or son is going to ride a bike for the first time, you’re not going to give them a mountain bike,” she says. “Everyone begins the journey at a different age, and we are here to support them and be their friend, knowing there are no mistakes along the way.”

Education Zoom Camps

During the pandemic, Cutler found the use of Zoom camps a tremendous educational and informative tool. “The camps were a great revenue driver for us and brand building experience. These kids were so bored and stuck at home, and ultimately it was an opportunity for us to create a fun brand-building experience with dynamic, engaging, creative activities.

Influencers

Cutler’s ability to team up with influencers such as Piper Rockelle, with almost 10 million subscribers on YouTube, is part of the process of bringing people from other worlds together. Cutler has noticed that some influencers’ numbers skyrocket after the collaborative process. “There’s a fascinating dynamic with influencers, actresses, and dancers, and we bring them together for photo shoots. As a result, different audiences come together, and everyone begins to follow and learn from one another socially.”

Competition

Many brands try to go after the younger consumer. Still, Cutler recognizes that many brands are not directly integrating them into marketing or bringing them together for learning workshops or photo opportunities. “They know there’s an audience and a consumer that sits on TikTok all day, or Instagram, but they are not necessarily hiring a 12-year-old for a photoshoot. They’re trying to get the audience to engage with their brand but not directly.” It’s a direct relationship that appears to set Cutler’s efforts apart from others.

Big Picture

With 30% to 40% growth rates last year, Petite ‘n Pretty is looking to scale at a 30% rate this upcoming year. Online sales on Amazon and others have been a success and Cutler is moving back into Ulta.com stores this coming year. The projection is to build the branding in stores in the U.S. with international efforts on the horizon.

Cutler’s approach is a more hands-on collaborative effort. An iterative educational process that learns about the younger generation while at the same time generating consumer behavior habits that are authentic to their consumer needs. Cutler recognizes that the younger generation isn’t necessarily and habitually brand loyal, but more driven by a loyalty found in authentic experiences that speaks to them and caters to the world they are forming.

Samantha Cutler found her entrepreneurial groove with her motherly instincts intact. Her thriving business illustrates the scale companies can grow if brands and proprietors maintain a sense of self along the way and educate themselves on the needs and understanding of the younger generation.

Even though cosmetics tend to be viewed as ‘outer’ oriented, Cutler is building a company of substance that stays true to the consumer base with the sensibility of market trends, sustainability, and safety.

I am an education and health care industry strategist having covered thought leadership and entrepreneurship for Forbes, Entrepreneur Magazine, Scholastic and Huff Post.

Source: Learning To Navigate Institutional Markets For Next Generation

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Learning To Navigate Institutional Markets For Next Generation Forbes

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The Year In Franchising: Reflecting On 2021, And Anticipating 2022

Over the past two years, the world has changed in ways it never has before, and the franchise industry is no exception. It has taken a while, but following the challenges of the Covid-19 pandemic, 2022 is positioned to be a massive year for franchise development and sales growth. First, as we wrap up 2021, let’s take a look back at how the franchise industry has adapted to the ups and downs of the past year.

2021: A Light at the End of the Tunnel

Following the unprecedented challenges of 2020, this year saw a steady return of in-person events and the rollout of Covid-19 vaccines. Several people and industries started to see a much-anticipated comeback and recovery in the beginning of 2021.

There were certainly still some challenges for franchisors especially on the retail and restaurant side. This included geographic limitations, where certain areas were still heavily locked down and others weren’t, forcing some restaurants to operate without full indoor dining and some retail stores to operate with restricted capacity.

As the year progressed, more people became comfortable with traveling and spent more money at businesses. It also made it more challenging for businesses in certain industries to satisfy this pent-up demand successfully due to complicated in-person requirements. Additionally, business owners have had to adapt their operations to combat the ongoing labor shortage, resulting staffing issues, supply chain interruptions and product shipment delays.

Much has changed for the foreseeable future, there’s no doubt. That said, in 2021 franchise brands have continued to rise above the challenges and seen growth in their systems overall.

2022: An Opportunity for Franchising to Emerge Stronger Than Ever

2022 will likely be a tremendous year for the franchise industry as a whole with a majority of individual brands set to prosper both in terms of system wide sales and franchise development. Many franchisors have been reporting increased sales in 2021, and there is no reason to believe that trend is going to change in 2022. Additionally, the International Franchise Association predicts franchise development is also on the rise with 26,000 franchised locations expected to be added in 2021 and franchise employment projected to grow by more than 10% to nearly 8.3 million workers.

The sector that is positioned better than any other is home services. With more people spending increased time at home and saving money on travel, the demand for home services and home improvement has skyrocketed since the start of the pandemic. As a result, more and more savvy entrepreneurs are recognizing the uniquely lucrative opportunity to enter the home services space.

Some of the other trends that will likely continue in the franchise industry include prospects investing in concepts sight-unseen. Candidates are more comfortable now meeting online than ever before, and development teams have learned how to adapt and appeal to a prospect’s comfort level.

Technology, of course, has also brought on several changes to the industry. Whether it was Zoom meetings, curbside pickup or QR codes, these new digital tools have helped businesses get by and drastically changed the landscape of the industry. These will all continue to be a huge trend in 2022 as brands adapt to challenges including the evolving workforce and supply chain issues.

Overall, it has been a long and difficult time, but the franchise industry has made it through to the other side. Now, as more and more people look to take control of their destiny through entrepreneurship and customers return to their pre-pandemic habits, it is an incredibly exciting time to be a part of the franchise industry.

I am Steve Beagelman, Founder and CEO of SMB Franchise Advisors. In 1991 I co-founded Black Tie Express, a multi-restaurant delivery service.

Source: The Year In Franchising: Reflecting On 2021, And Anticipating 2022

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Strong Job Market Keeping Economy Safe For Now, Goldman Says

In a morning note to clients, Goldman acknowledged a barrage of recently weak economic data—on consumer spending, manufacturing and international trade—has pushed some forecasts for second-quarter gross domestic product growth into negative territory, but called the projections “too pessimistic”.

After the U.S. economy unexpectedly shrank in the first quarter, a decline in the second quarter would constitute a technical recession, or two consecutive quarters of negative GDP growth, but the economists note they still believe the odds of a recession over the next year are only about 30%, and 50% over the next two years.

The team says it’s “doubtful” the National Bureau of Economic Research—whose declarations of recession are accepted by the government but don’t strictly follow the two-quarter rule—will say the economy is already in a recession given how strong the labor market remains, citing Friday data showing the U.S. gained a better-than-expected 372,000 jobs last month.

It would be “historically unusual” for the labor market to appear so strong during a recession, the Goldman team led by Jan Hatzius writes, noting that jobs have grown at an annualized pace of 3.7% over the last six months—roughly double the typical pace at the start of past recessions.

Despite remaining bullish, the team concedes labor market data typically lags other economic indicators and cautions that revisions to recent data could ultimately reveal that job growth may have been less robust, as was the case at the onset of the Great Recession.

In a separate note on Monday, Hatzius said the strong jobs report helped quell fears of an imminent recession, but also contained red flags: He notes the Census Bureau’s survey of 60,000 households has shown “essentially no job gains” for the past three months—casting doubt on the overall jobs figure, which is based on a survey of companies.

The U.S. economy posted its worst showing since the Covid-induced recession in the first quarter, shrinking 1.6% despite expectations originally calling for 1% growth. The worse-than-expected decline makes a second straight quarterly decline in GDP “much more likely,” Pantheon Macro chief economist Ian Shepherdson said earlier this month, forecasting that GDP fell 0.5% in the second quarter. However, like Goldman, he believes the NBER “very probably will not” declare a recession unless the job market meaningfully slows down.

Rather than purely going off technical recessions, the NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” After losing more than 20 million jobs at the height of pandemic uncertainty in the spring of 2020, the labor market has quickly and forcefully led the economic recovery. However, prolonged inflation and rising interest rates, which tend to hurt company earnings, have sparked concerns about the broader economy and started taking their toll on the job market.

Recently booming technology and real estate companies have announced waves of layoffs this summer, and corporate giants including Amazon and Walmart have both signaled a slowdown in their hiring needs, with Walmart executives pointing to “overstaffing” as a drag on disappointing profits last quarter. “There is no doubt that a labor market slowdown is underway,” Hatzius said Monday, pointing to the layoffs and hiring freezes, in addition to a drop in job openings, rising jobless claims and data showing employment in the manufacturing and service industries has contracted.

The Bureau of Economic Analysis unveils its first estimate of second-quarter GDP growth—or decline—on July 28. It will then update the figure in August before releasing a final estimate in September.

Follow me on Twitter or LinkedIn. Send me a secure tip.

I’m a senior reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill

Critics:

Even amid the Great Resignation, job demand skyrocketing, and shifting power dynamics between employers and employees that have led companies to enhance compensation packages and other perks, fears over job security still exist among a majority of workers. “Workers have experienced a tremendous amount of upheaval,” ADP Chief Economist Nela Richardson said during a recent CNBC Evolve Livestream. “The changes are both seismic and persistent.”

Richardson cited a recent ADP survey that found that only 20% of workers felt that their job was secure. That is just one byproduct of a new working landscape that is poised for further adjustment due to the looming threat of a recession and slower growth for companies, both tied to the fight against inflation.

Even as the economy has added over two million jobs this year, near 40-year high inflation is limiting the amount of money workers bring home and jeopardizing a full recovery for the economy from the Covid-19 crisis. “The real thing to focus on today is inflation,” Richardson said. “What inflation does is it erodes the value of that paycheck. … People are getting more take-home pay; it’s just not going as far as it used to.”

“Even though their wages have gone up and they’re growing faster, when all is said and done the average worker in the fourth quartile [of income earners] is only making about 2 bucks, a little less than 2 bucks [more] than they did in 2019 per hour,” Richardson said. “Despite all the talk of wage growth, it hasn’t been stellar when you think about inflation. Real wages are declining, and that’s true at every income level.”

U.S companies were expecting to pay an average 3.4% raise to workers in 2022, according to a January survey, outpacing the raises in both 2020 and 2021. While inflation was one reason given as to why, 74% of companies cited the tight labor market. Microsoft recently said it would be raising compensation. “This increased investment in our worldwide compensation reflects the ongoing commitment we have to providing a highly competitive experience for our employees,” a company spokesperson told CNBC.

To keep workers happy in an inflationary environment, organizations must also focus on boosting worker flexibility and security, Richardson said. ADP’s survey shows workers want flexibility over their time and more autonomy in their work. In spite of inflation, “our data shows that workers are willing to take pay cuts to get that kind of flexibility,” Richardson said.

This places even more importance on how companies are approaching bringing back workers to offices. Two-thirds of the U.S. workforce would consider changing jobs if they were required to return to the office full-time, according to ADP’s People at Work survey. This flexibility is also nuanced. “Having some flexibility about when you work is so much more important to the U.S. worker than flexibility about where you work,” Richardson said.

It could also aid a rebound for female workers. More than 1.4 million net jobs were lost among women since the pandemic began. Before the pandemic, women made up 46% of workers, but took on 53% of the losses, according to Richardson. To rebound from these losses, “flexibility could be the answer,” said Richardson. “It could be a way to accommodate the very real fact that women have a larger share of the family responsibilities.”

Richardson highlighted that the current labor shortage also encompasses skill sets. “We need to start training the workforce of tomorrow for the jobs that are needed, not today, but the jobs that will be needed tomorrow,” she said. Boosting skill sets will lead to increases in job security among workers. Despite the possibility of a recession, organizations must make changes and evolve now to deal with the problems they are facing today.

“Whenever the Fed is hiking, recession is always that shadow in the closet that may come out. There is always a probability of recession; that doesn’t necessarily mean that it should be a front-burner concern for companies who, recession or not, have to make hiring decisions,” she said.

By: Zachary DiRenzo

Source: No, We’re Not In A Recession Yet: Strong Job Market Keeping Economy Safe For Now, Goldman Says

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 This Surprising Investing Strategy Crushes The Stock Market Without Examining a Single Financial Metric

I am not a professional stock picker, but over the past decade my portfolio has beaten the stock market by a factor of three to one.

Unlike Peter Lynch, who advocated investing in the makers of products you love and who, in my estimation, stands out as one of the greatest of all stock pickers, I did not examine a single financial metric to build my portfolio. Instead, I simply ranked competitors in each industry based on customer love and then bet on the winner.

My portfolio has performed so well because the market undervalues the economic power of customer love. When customers feel loved, they come back for more and refer their friends. This is the economic flywheel that drives sustainable prosperity, and companies built on it generate surprising levels of profitable growth.

To measure customer love, I used the Net Promoter Score (NPS) that I created 20 years ago. It captures how likely a customer is to recommend a product or service to a friend or colleague. I relied on the market to incorporate all financial insights into the current stock price.

My buy-and-hold investing portfolio started with the 11 public NPS leaders profiled in my 2010 book, “The Ultimate Question 2.0“: Amazon AMZN, +0.68%, Meta Platforms (formerly Facebook) FB, -0.33%, Apple AAPL, -0.65%, Costco Wholesale COST, -0.91%, Google parent Alphabet GOOG, -1.41% GOOGL, -1.88%, Southwest Airlines LUV, +0.33%, American Express AXP, -1.83%, JetBlue Airways JBLU, +2.20%, Verizon Communications VZ, +0.80%, T-Mobile US TMUS, -0.64%, NortonLifeLock NLOK, +0.78% and Metro PCS Communications (which merged with T-Mobile in 2013).

In hindsight some of those stocks look like no-brainers, but back when the book was written they were anything but. Amazon had a market cap below eBay’s. T-Mobile was considered by many to be the weakest player in mobile telephony.

In the years since, however, this group’s extraordinary customer focus has paid off. From Jan. 1, 2011 to Dec. 31, 2020 these stocks outperformed Vanguard’s Total Stock Market Index exchange-traded fund VTI, -0.46% by a factor of 2.8 to 1. (This performance is market-cap weighted and rebalanced quarterly akin to VTI’s rebalancing).

Since then, Bain & Co., where I have worked since 1977, has applied NPS to a long list of industries, and created NPS Prism, a data benchmarking service that ranks competitor NPS on an apples-to-apples basis. As we X-ray more industries, we continue to uncover new NPS leaders, among them Texas Roadhouse TXRH, +1.63%, Discover Financial DFS, -1.39%, Tesla TSLA, +0.61%, Chewy CHWY, +2.55% and FirstService FSV, +0.79%.

I serve on the board of directors at FirstService, a real-estate services company whose social media handle #FirstServeOthers provides a hint about its corporate philosophy. Over the 25 years since the IPO, its annual total shareholder return has been just under 22%, a better record than all but seven of the 2,800 firms with revenues of at least $100 million at the time of their NASDAQ listing.

For a long time, like many great customer-focused organizations, it remained below investors’ radar screens. One reason: GAAP accounting is woefully lacking at measuring customer centricity. It doesn’t even require organizations to report the number of customers they serve, let alone how many are returning, increasing purchases, or referring friends and family.

Investing Insights with Global Context

Understand how today’s global business practices, market dynamics, economic policies and more impact you with real-time news and analysis from MarketWatch.

This makes it hard to find comparable data. I first discovered online pet supply retailer Chewy when its self-reported NPS appeared in its IPO documents. Chewy does a tremendous job tapping into the special emotional tie between owner and pet, with things like the hand-painted pet portraits the company mails as surprise thank-yous to customers, who, delighted, then post them, along with glowing testimonials, across social media.

By our calculations Chewy’s NPS beats Amazon’s by 24 points in its category — an extraordinary performance. Chewy’s own numbers are slightly different from ours, however, and the inconsistency of self-reported numbers is one reason we developed a new metric called earned growth rate.

It measures the revenue growth generated by returning customers and their referrals by combining net revenue retention (NRR), the back-for-more battle-tested statistic used in the software-as-a-service (SaaS) industry among others, with earned new customers (ENC), measuring how much new customer spending is earned through referrals rather than bought through promotional channels.

NPS exemplar First Republic Bank FRC, -2.56% has in the past earned 82% of its deposit growth, with 50% coming from existing customers and another 32% from referrals. Warby Parker WRBY, +4.28%, the direct-to-consumer pioneer in prescription eyeglasses, earns almost 90% of its new customers through referrals.

You can use this calculator to estimate your company’s earned growth rate. In addition to these metrics, it’s also possible to spot NPS leaders by their common features.

  1. They apply the Golden Rule – love thy neighbor as thyself. This often means eschewing bad profits. Discover Card, for example, never sells receivables to collection agencies.
  2. They empower their front-line employees to serve customers in creative ways. Companies like Chewy that give employees the freedom to serve customers with empathy and creativity engender trust in and loyalty to their companies.
  3. They integrate in-store and online customer feedback. Technology-rich companies like Warby Parker augment direct feedback with digital signals from customers and front-line employees to guide decision-making—crucial in helping companies respond to holiday shopping trends this season.
  4. They make customers their primary purpose. By going the extra mile to provide a customer with an experience that’s not just good, but remarkable, companies can play a part in enriching their lives beyond the product they offer.

I have spent most of my 44-year career focused on understanding the role that loyalty plays in building great organizations and helping leaders inspire their teams to embrace a mission of purposeful service enriching the lives of customers and colleagues. That is the right way—and the best way—to win in business and the stock market.

Fred Reichheld is the creator of the Net Promoter system of management and the author of “Winning on Purpose: The Unbeatable Strategy of Loving Customers” (together with Darci Darnell and Maureen Burns), among other books.

Source: Opinion: This surprising investing strategy crushes the stock market without examining a single financial metric – MarketWatch

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Amazon Funds Its Empire By Squeezing Its Marketplace Sellers

Amazon has always presented its Marketplace, where outside businesses sell products through Amazon’s platform, as one of its biggest success stories: mutually beneficial to Amazon, sellers, and customers alike. But a new report says those benefits are increasingly lopsided — in Amazon’s favor.

The report, which comes from the nonprofit Institute for Local Self-Reliance (ILSR), asserts that Amazon takes a larger and larger cut of sellers’ earnings through the various fees it levies on them. These fees have become so lucrative for Amazon that they now represent the company’s most profitable segment as well as its fastest-growing revenue stream, according to ILSR. And because sellers are paying Amazon high fees, customers may face inflated prices, even when they shop beyond Amazon’s borders.

“Amazon is the only winner here,” Stacy Mitchell, ILSR co-director and author of the report, told Recode. “It’s exploiting its monopoly power over these small businesses to pocket a huge and growing cut of their revenue.”

You might consider this to be a good business strategy on Amazon’s part, as it’s certainly paid off for the company. And some sellers on Amazon’s platform say they’re happy with the arrangement — at least, for now. But a growing number of others argue that Amazon’s dominance over the e-commerce market and its power over its sellers has given rise to anti-competitive practices that hurt Amazon’s competitors, competition in general, and consumers.

“Amazon’s dominance is bad for businesses, jobs, and America’s competitiveness,” Rep. David Cicilline, chair of the House Judiciary Antitrust Subcommittee, told Recode. “This important study makes clear that Amazon is crushing sellers through abusive policies that make it nearly impossible for everyday businesses to get ahead.”

These are some of the same issues identified by regulators and lawmakers who have accused Amazon of abusing its market dominance. They say it’s further evidence that action must be taken to curb Amazon’s power — and some of them are already working on legislation.

“It is important to understand how tech platforms can exploit their power to hurt small businesses and raise prices for consumers,” Sen. Amy Klobuchar, chair of the Senate Judiciary Antitrust Subcommittee, told Recode. “This report highlights how Amazon’s tactics can lead to that result and why Congress must act to set clear rules of the road for the digital giants that dominate our online economy.”

Amazon disputes the report’s findings, calling it “intentionally misleading” for lumping its mandatory fees and optional services together as “seller fees.” Amazon maintains that all of its fees — mandatory and optional — are competitive with what similar services charge, and that many sellers are successful without taking advantage of those optional services. But Mitchell says many sellers feel compelled to pay those ostensibly optional fees if they want their businesses to stay afloat.

Marketplace: The gift that keeps on giving (to Amazon)

Marketplace is a huge part of Amazon’s business. In his 2020 letter to shareholders, Jeff Bezos said it accounted for nearly 60 percent of Amazon’s retail sales, which come from nearly 2 million sellers. So when you buy a product on Amazon, chances are it was sold by an independent business using Amazon’s platform. Amazon isn’t providing that platform for free.

“The trade-off that any seller is dealing with is you get access to a huge audience, you get access to scale, the ability to scale your sales, but it comes at a cost to margin,” Andrew Lipsman, principal analyst at eMarketer, told Recode.

The cost to sellers is increasing every year, according to ILSR’s analysis, making business unsustainable for some sellers while Amazon’s profits grow.

The new ILSR report found that Amazon’s seller fees accounted for an average of 19 percent of sellers’ earnings in 2014. That’s almost doubled to 34 percent in 2021. And while seller fees accounted for 14 percent of Amazon’s entire revenue in 2014, that figure is up to 25 percent in 2021. Amazon will pull in $121 billion from seller fees alone, ILSR estimates.

That revenue translates to a lot of profit — more than even Amazon Web Services (AWS), Amazon’s cloud computing platform typically believed to be the company’s most profitable arm. AWS netted $13.5 billion in 2020, according to Amazon’s financial data. ILSR estimates seller fees netted $24 billion. (Amazon says these figures are inaccurate but did not provide its own; the company’s public earnings statements also don’t combine seller fees in this way.)

“Everyone thinks AWS generates all of Amazon’s profits,” Mitchell said. “But in fact, Marketplace is this massive tollbooth that gushes profits.”

Seller fees primarily come from three things: sales, fulfillment, and ads. Every item sold is subject to a referral fee, which is Amazon’s commission. Over the years, that’s stayed pretty consistent at 15 percent (it may be lower or higher, depending on the product category). According to ILSR, those referral fees made up the majority of seller fees as recently as 2017.

Since then, however, the majority of fees come from Fulfillment by Amazon (FBA), Amazon’s service that stores, packs, and ships sellers’ items to customers. Ad revenue is steadily gaining ground as more sellers pay for more ads to get prominent placement on Amazon’s site, including on product pages and search results.

Sellers who use FBA pay Amazon a fee based on the size and type of item they sell. Sellers also have to pay to ship items to and from Amazon’s fulfillment centers and to store them there. For some sellers, this might be a cheaper or easier option than doing it all themselves. Amazon says FBA’s pricing is competitive with similar fulfillment services if not cheaper, and sellers aren’t required to use it.

But help with logistics isn’t the only appeal of FBA for many sellers. Enrolling in the FBA program is the only way that most sellers can qualify for Prime. (Some sellers may qualify for Seller Fulfilled Prime, but it’s not accepting new enrollees at this time.) Getting that Prime badge is huge for a seller. Amazon shoppers — especially those 200 million Prime members — are far more likely to buy products that qualify for Amazon Prime. But that’s not only because they want to take advantage of the free shipping. It’s also because customers may not even see non-Prime offerings in the first place, thanks to the mechanics of the so-called Buy Box.

When multiple sellers offer the same item, Amazon’s algorithm picks one of them to be the default purchase on the product’s page. This is called “winning the Buy Box,” and when the customer clicks to add an item to their cart or to buy now, the seller who won the Buy Box is the one who gets the sale.

Prime items are far more likely to win the Buy Box than non-Prime items, and customers rarely click on that small “other sellers” link or the small “new and used” box where all the other listings are housed. This gives sellers a major incentive to pay for FBA, even if it costs more than taking care of the shipping themselves.

These FBA fees have been great for Amazon, which has dramatically expanded the logistics network that powers FBA as well as the number of sellers participating in the program. Five years ago, about half of Amazon’s top 10,000 sellers worldwide used FBA. By 2019, it was 85 percent. Amazon even offers a version of FBA for products ordered from other e-commerce services, including Shopify. Dave Clark, the CEO of Amazon’s consumer business, believes his company will be the largest delivery service in the United States by early 2022.

FBA aside, there are other ways sellers are paying Amazon more and more in the hope of generating sales. Amazon has been making a big push into digital advertising recently, and seller ads are part of its strategy. Critics have accused Amazon of increasing the number of sponsored slots in search results to increase ad inventory, and of charging more for the ads in them. (Amazon says the number of ads varies, and pricing is determined by an auction.)

Because of this, some sellers feel like they’re paying more and getting less. Amazon itself says these ads increase product visibility, which can translate into more sales. But that also means less visibility for the products in organic search results that earned their placement through strong sales and positive reviews. Sellers are already competing for this space with Amazon’s own products, and that competition might not be fair, as Amazon reportedly ranks its own products above others that had higher ratings. (Amazon has disputed these reports and says its ranking models don’t take into account whether the product is made by Amazon or offered by a third-party seller.)

Either way, many sellers increasingly feel pressure to buy ads just to get the same search placement (and sales) they once got for free. In a statement to Recode, Amazon maintained that FBA and ads are not mandatory and that sellers may find them beneficial.

“Sellers are not required to use our logistics or advertising services, and only use them if they provide incremental value to their businesses,” an Amazon spokesperson said.

How sellers’ problems affect your wallet

If you’re not a seller that relies on Amazon to survive, you might not see how any of this affects you. If you’re an Amazon customer, you might even think that this system is ensuring that you can buy products at the best price. But you might be wrong.

“Whether you shop on Amazon or not, you are paying higher prices because of its monopoly power,” Mitchell said.

When sellers have to raise their prices to account for Amazon’s increased fees, they often pass those costs along to the customer. And, thanks to Amazon’s fair pricing policy, sellers have to offer the same price on other platforms that they do on Amazon — even if their costs to sell on those platforms are less. If they don’t, Amazon may suspend or demote their listings. Sellers don’t want to take that risk, which could be potentially devastating to their business.

This policy could mean that, as sellers adjust their prices to account for Amazon’s fees, prices end up being higher elsewhere, too. It also makes it harder for other e-commerce platforms to compete with Amazon and challenge its market dominance, since they aren’t able to offer lower prices that would attract more customers. The lack of options means sellers are basically stuck with Amazon if they want to reach its exponentially larger and loyal consumer base.

Sellers have helped Amazon grow to own 40 percent and 50 percent (depending which report you cite) of the e-commerce market in the United States, and in some product categories, its share is far higher. Its closest platform competitor, Walmart, has just 7 percent. Amazon is often the first place online shoppers look for products — even before search engines — especially if those shoppers are Prime members. A large, established company can pull itself out of Amazon, as Nike did in 2019, and still do fine. Most businesses don’t have that luxury.

“Small businesses don’t have other options when it comes to the digital economy,” Rep. Ken Buck, the ranking member of the House Judiciary Antitrust Subcommittee, told Recode. “Amazon continues to use their monopoly power to crush competition.”

One solution is for lawmakers and regulators to step in. Some are trying: The European Commission announced last year that it is investigating whether Amazon gave preferential treatment to itself and sellers that used FBA when determining who gets the Buy Box. The fair pricing policy and its potential to inflate prices across the internet is the basis of the District of Columbia’s lawsuit against Amazon, as well as a class action lawsuit filed by Amazon customers last year.

Several members of Congress — Buck, Cicilline, and Klobuchar among them — have introduced bills that would forbid some of Amazon’s practices they believe to be anti-competitive. These bills came out of a 16-month-long House antitrust subcommittee investigation into Big Tech companies, including Amazon. The committee accused Amazon of luring in customers and sellers with artificially low prices and Prime memberships that the company loses money on, only to raise rates as soon as Amazon’s market dominance was assured.

The proposed legislation would forbid Amazon from giving its own products prominent placement, unless it earned that place organically, and from requiring sellers to pay for ads or services like FBA in order to get preferred placement. One bill would forbid Amazon from competing in a marketplace it also owns, and could force Amazon to split off into a first-party sales company and a company that operates a platform for third-party sellers.

Amazon has responded to all of this by denying that such measures are necessary or that it’s doing anything wrong. The company has become one of the biggest lobbying spenders in the country, and it’s been emailing select sellers to warn them that pending antitrust legislation could make it difficult or impossible for them to sell their products on Amazon.

After years of studying Amazon’s business practices, Mitchell, of ILSR, thinks the best solution is arguably the most drastic.

“Policymakers could regulate Amazon’s fees — basically accept it as a regulated shopping monopoly, like a utility,” she said. “But I think a much better, more market-oriented approach is to break it up by splitting Amazon’s major divisions into stand-alone companies.”

Source: Amazon funds its empire by squeezing its marketplace sellers

 

More contents:

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