Should I sell on Amazon?

Should we sell on Amazon? I get this question a lot from e?commerce CEOs and boards. At first glance, it seems like a no-brainer. ~60% of online product searches start on Amazon. And with 90M visitors per day and 200M Prime members worldwide, the potential customer base is clearly enormous. So how could it not work?

The three major issues with Amazon as a sales channel are costs, competition and cannibalization.

Costs

Below is an illustrative side-by-side P&L comparison for an e-commerce company.?

On the left is the company's P&L for its main DTC channel. This company uses the standard e-commerce stack to run its business: Shopify for its e-commerce platform, a 3PL to warehouse its products, UPS or FedEx to ship its product. It has to pay for all this, plus the cost of customer service. Its contribution profit is 20%.

On the right is the company's P&L for Amazon. The contribution margin is a lot lower at 7%.?

Let's walk through the key differences.

Returns:

Return rates on Amazon are much higher. Prime customers can take advantage of free returns, extended return windows, and generally lax return policies. Studies have shown the net effect is a 5-15% point increase in return rates.

Shipping to Amazon Fulfillment Centers:

If you sell on Amazon you have to pay the cost to ship your product to multiple fulfillment centers. For most companies that already have one or more 3PLs, this is an incremental cost.

Referral Fees:

This is the fee you pay to access Amazon’s enormous user base and it takes a huge bite out of contribution margin. I assumed 15% but this fee can run as high as 25%.

FBA Fees:

This includes storage, pick, pack, shipping and customer services costs. It’s actually not a bad deal and speaks to Amazon’s enormous scale and high efficiency.

Worth noting, there are a couple costs that won’t change much if at all.

Discounts:

I'm assuming no difference here. A company that sells on Amazon is competing against its own DTC business and typically wants to offer the same net price to its customers across channels.

Product costs:

Product costs include the cost to produce the product plus the cost of inbound freight, customs and duties. This doesn’t change whether you sell on Shopify or Amazon.

Competition

It’s often underestimated just how difficult it is to gain a foothold on Amazon given the sheer volume of competition and the way you must compete on the platform.?

Competition on Amazon is fierce, and nearly every category is saturated with sellers. For example, the beauty category includes over 10,000 listings for basic items like moisturizers and face serums. In many categories, you see hundreds of identical-looking products sold by different brands, many of which are private-label sellers leveraging the same manufacturers. This intense competition can make it difficult to stand out. Likewise, having a strong brand in the traditional sense is far less important on Amazon. Studies show that customers on Amazon focus more on product ratings, reviews, and price than brand. If you’re a well known brand with a loyal following cultivated over many years, it may not benefit you much to sell on Amazon. This is why brands like Nike decided to stop selling directly on the platform.

Another key challenge is the way Amazon sorts its search results. Search results are heavily based on customer ratings, reviews, and the number of purchases. High-quality listings with large volumes of positive reviews tend to dominate the top results, creating a snowball effect where top-performing sellers continue to grow while new entrants struggle to gain visibility. For new sellers, the lack of initial reviews and purchase history makes it nearly impossible to rank organically. To boost their position in search results, new entrants often rely on Amazon Sponsored Ads, which appear at the top of search results. The cost of running these ads varies by category, but cost-per-click (CPC) rates for competitive categories like beauty or electronics can range from $1.50 to $5.00 per click. Sellers may need to spend tens of thousands of dollars in advertising just to gain traction, and these ads typically have a low return on ad spend (ROAS) when first starting out due to limited organic visibility and lower conversion rates.

Cannibalization

Cannibalization occurs when sales through one channel — such as Amazon— replace sales that would have occurred on another channel.

When customers who previously purchased through your DTC channel shift to Amazon, it erodes your contribution margin. There's no way around it. Additionally, selling on Amazon reduces your ability to control customer data and engagement, which are critical for driving repeat purchases and long-term customer lifetime value.

Companies with strong DTC sales and loyal customers that overlap with Amazon’s prime members are most prone to cannibalization. Companies selling undifferentiated or commoditized products are also vulnerable since customers prioritize price and convenience on Amazon, making it harder to justify premium pricing.

Conclusion

Before you decide to launch on Amazon, proceed with caution and be sure to consider your costs, competition and cannabilization. Be clear about what you’re trying to accomplish and why. If your main goal is to maximize margins, you will likely be disappointed with Amazon. If you are trying to find new customers, ask yourself, at what cost?

At Karlon Group, we help companies dive deep into their P&L and evaluate key strategic decisions through the lens of finance. Whether you’re evaluating a new sales channel, entering a new geography, or assessing the return on your marketing spend, Karlon Group can help you make your most important and complex strategic decisions.

About the Author

Karsten Loose is co-founder and Managing Partner at Karlon Group, a fractional finance and accounting firm that helps companies build, scale, and optimize their finance and accounting functions. Karlon Group works with companies across SaaS, consumer, manufacturing and technology, offering a full suite of finance and accounting support tailored to each client’s changing needs.