The holiday season is big business for e-commerce. Year-over-year metrics show massive gains for online sellers, particularly during the pandemic-fueled 2020, with sales growing a whopping 45 percent compared to 2019.
At the heart of this surge was Amazon, whose worldwide sales grew more than 50 percent, with upwards of eight million items delivered.
But this year will be very different across every platform. Brands should focus on profitability over sales volume, because even though Amazon will again see record sales, the game has changed more so than any previous year.
Let’s examine why…
Amazon Struggling To Fulfill
The rapid ascent of e-commerce has consequences — even for powerhouse fulfillment businesses like Amazon.
Like many U.S. businesses, Amazon is struggling to hire — and despite a $35 billion investment in its fulfillment capabilities, Amazon can’t build warehouses fast enough. All major marketplaces remain heavily dependent on a network of delivery partners, many of whom have logistical and financial challenges to meeting the lofty goal of shorter delivery times.
It should come as no surprise then that Amazon put limits on warehouse space, reducing the number of popular items that third-party sellers who use Fulfillment by Amazon (FBA) can ship to its fulfillment centers.
For example, one merchant reported that they could only send in 230 units of a fast-selling novelty board game to an Amazon warehouse, whereas they’d sent thousands in the past. Others noted the increasing length of time for Amazon to check in newly shipped merchandise.
This is a massive headache for sellers who could miss out on potential sales volume during the busiest time of year. But going out of stock has other consequences. Amazon views low inventory as a sign of unreliability and penalizes the seller with a lower ranking in search listings — a potential kiss of death for many brands, even if the limitation stems from Amazon itself.
Low inventory plus a low ranking equals lower sales, revenue shortfalls, and the potential loss of the merchant’s Amazon Best Sellers Rank, which is based on units sold.
Costs Continue To Rise
Another reason why focusing on the number of units sold is particularly problematic this holiday season is that sellers are faced with a substantial rising cost of doing business.
In the past year, supply chain issues have led to a 500 percent increase in the price of shipping “Made in China” goods to the U.S. These expenses are passed on to merchants who rely heavily on Chinese manufacturers for low-cost, high-margin inventory.
But that’s not all. The cost of marketing those goods has also skyrocketed. As established brands pour more of their marketing budgets into Amazon, Google Ads, and social media ads, the auction-based pricing of these products has risen exponentially, driving up customer acquisition costs for already challenged brands.
How Brands and Sellers Can Prepare for a Unique Holiday Season
Although online shopping will still be a major channel this holiday season, third-party sellers who benefitted from pandemic-driven e-commerce highs need to be realistic about how much slower, and less profitable, this holiday season might be compared to 2020.
In this environment, is it a good strategy to discount products?
Any other year, perhaps. But 2021 is unique. Third-party sellers have a tide of market forces and post-pandemic disruption working against them. Even if playing the discount game results in double the sales, rising costs could easily drive margins into negative territory.
That’s why, this holiday season profitability trumps sales. To prepare, top brands must reconfigure their typical holiday sales strategy to focus on four key areas:
1. Have a Fulfillment Backup Plan
Brands must find ways to circumnavigate Amazon’s warehouse limits and fulfillment challenges. One way to do this is to diversify their fulfillment options.
For example, having a backup plan like listing high demand, seasonal products under Amazon’s Fulfilled by Merchant (FBM) option will ensure that sellers can continue to ship goods directly to the buyer from their own warehouses. This holds true on other marketplaces as well.
2. Combat Rising Ad Costs by Finding a Winning Niche
With ad costs rising, merchants need to get creative to earn a place at the top of Amazon’s search listings. They can do this by finding a tiny corner of Amazon, Walmart, and other marketplaces where they can dominate by aggressively targeting high-volume, niche search terms.
For instance, a seller of synthetic-free baby toys can stand out from the crowd by using terms like “toxic-free baby toys,” “plastic-free toys,” and “eco-friendly toys for babies.” As conversions and sales grow, Amazon’s algorithm will increase the product’s rank organically and the seller will be in a better position to compete for more common terms like “toys for babies.”
While standing out is important, recognizing where your placements are underperforming is equally important. To find a winning niche, experimentation with diverse search listings is key, but quickly pivoting to change search terms where something isn’t working is crucial to manage the rising costs of ads.
3. Be Realistic About Supply Chain Issues
In the current climate, merchants can no longer afford to depend on a sole supplier for 100 percent of their goods.
To offset supply shortages and mitigate rising costs, sellers should consider sourcing goods from U.S. or Mexico suppliers. This may take time and may not be achievable before the holiday season, but it’s wise to develop a supplier diversification strategy, especially since many supply chain issues will continue into next year.
4. Slow Demand To Increase Profitability
The best strategy for brands that are impacted by supply chain issues and increased shipping costs is to slow down demand and increase profitability.
Sellers should avoid the discount game and forgo costly ad buying. Brands must also be cautious not to overstock merchandise that won’t sell easily after the holidays and avoid running out of inventory of the items buyers want — a sure fire way to damage brand reputation.
Summary
The key to a successful 2021 holiday season for brands is to focus on doubling their profits, rather than sales.
Companies must recognize the potential outside factors that could plague their brand this holiday season and take control of factors they can affect: staying in stock, dominating niche search categories, and preparing for supply chain issues and slowing demand. By doing so, brands can not only survive the 2021 holiday season, but emerge stronger and more resilient on the other side.
Ethan McAfee is founder and CEO at Amify.
