Podcast transcript
Introduction
This live episode is brought to you by MerchantSpring, the leading analytics platform for Amazon vendors and their agencies. Determining profitability as a vendor can be challenging. But MerchantSpring's new vendor profitability module simplifies this process. It integrates cogs, rebates, chargebacks, and advertising costs to provide a clear view of profitability at both the vendor code and ASIN levels from both a sell-in and sell-out perspective. The early release program is now open to a limited number of participants. So head over to merchantspring.io or visit http://bit.ly/vendor_pl to register your interest. All right. Hi, everyone, and welcome to Marketplace Masters, the podcast dedicated to uncovering the strategies that drive success on Amazon and Amazon Vendor specifically.
Paul Sonneveld
Heloo, I'm your host, Paul Sonneveld, and today we're diving into optimizing your profitability and negotiation leverage within the Amazon Vendor channels. Now, to help me navigate this very interesting topic today, I am super excited to welcome my guest, Michelle Sickle. She is the Chief Operating Officer at Hinge Commerce, a full-service e-commerce consulting agency that provides the expertise in e-commerce consulting to help your brand grow profitably.
Michelle oversees the account management, advertising and operations teams, and is responsible for our overall client success. She brings more than 20 years of experience in retail with roles in buying, merchandising, product development, and vendor management. She comes with a wealth of experience in both retail and e-commerce, and before her time at Hinge e-commerce, she worked for Amazon, Land's End, Old Navy, and The Gap.
So Michelle is passionate about the retail industry and leads brands by having a dedication to the customer, reacting quickly to ever-changing trends while staying focused on driving sales and impacting the bottom line. That's a great intro. Thank you so much for being on the show with us today, Michelle. Talk to you. You were just on mute, so I just unmuted there.
Michelle Sickle
Oh, sorry about that.
Paul Sonneveld
Thanks for having me. Usually I'm the one. Usually I talk for about two minutes and people write to me in the chat saying, Paul, you're still on mute. But it's all good. We are doing a live show, everyone, as per usual. So get your questions in. The Amazon vendor profitability. I couldn't think of a more exciting topic, personally, as many of you know. So, feel free to fire up your questions. Best place for that is the LinkedIn comment section.
Okay. Well, Michelle, let's dive in. Before we talk about what you can do about profitability, you have to assess it first, right? Actually understanding if you're making profitability, profits or not. What are the key steps that you walk through with your Amazon vendor clients to really do that first assessment around profitability for vendors?
Michelle Sickle
For sure. So there's really five key areas vendors should focus on when trying to assess and improve their Amazon profitability. First is their vendor trade terms. Second is their overall marketing costs, so advertising and promotions. Third is their invoices and reconciliation of those invoices. Fourth is vendor chargebacks and having a complete understanding of what's going on there from an operations perspective. And then fifth, and it is not last in importance, is SKU rationalization. Each of these require a really deep dive analysis to determine the impacts to your individual business and then strategize solutions that are going to work for you.
Paul Sonneveld
Awesome. So I just wrote them down here. So we're talking trade terms, rebates, co-ops, marketing costs. Interesting. I noticed you mentioned both advertising and promotions. So we'll get into that. Invoice reconciliation, chargebacks, and SKU rationalization. Awesome. Right. So that's probably those are the five things we're going to focus on today, I suspect. So yeah, let's, where do you want to start? Should we start with auditing and rebates? Trade terms?
Michelle Sickle
Yeah, for sure. Let's start with trade terms.
Paul Sonneveld
How can vendors really ensure that they're not leaving money on the table when it comes to rebates and trade terms? You know, what are the areas that they commonly overlook? Where are the opportunities? Or let's, I'm skipping ahead of myself here. How do you sort of determine, right, how do you benchmark things? And then how do you get into the opportunity mindset there?
Michelle Sickle
For sure. First is benchmarking, as you just kind of alluded to. So benchmarks for Amazon and what your discount rate should be are different for each product group. So Home is going to have a different set of goals than toys is, for instance. But every Amazon vendor generally deals with what I call the core three trade terms, which is co-op, freight accrual, and damage allowance.
There are additional types of agreements that you can engage with Amazon on. So for instance, a lot of people see discretionary vendor-funded discounts. These are typically for promotions like best deals or deals of the day, as well as subscribe and save and B2B discounts. There's also straight payments, which are used for programs that Amazon vendor managers often sell to vendors, like Amazon Vendor Services, also known as AVS, or Vendor Commercial Program, also known as VCP. So both of those are a little bit different than your kind of core three and should be treated differently.
The key to these at the very beginning before you try to optimize against them is understanding that you've got to review them very carefully before accepting. And if they're already accepted, you still should go through and review them very carefully. And the reason why is mistakes happen. People are human. And we have personally seen for some of our clients, agreements being set up with overlapping vendor codes or product groups that essentially will cause a double dip on the discounts vendors are providing to Amazon.
And in all truthfulness, once these agreements are set up, they're often auto-renewed year after year. Because if Amazon doesn't have a profit concern for your product group, if they're okay with all their profits and home, they're just gonna let all their agreements roll over and that double dip will just keep happening for multi-years until you can enter it into an AVN again. So read the details, find details carefully.
Paul Sonneveld
Yeah, avoid the double dip, right? Just a couple of clarifying questions for me on that. The basic one, you mentioned the word freight accrual. Am I thinking freight allowance here? Same thing?
Michelle Sickle
Same thing. Yeah.
Paul Sonneveld
Yeah. You mentioned sort of benchmarking, right? But I think there's sort of the million dollar question here is, so let's say I am in toys, right? How do I know what some reasonable benchmarks are? Can I just ask Amazon or is there another way for me to go about this?
Michelle Sickle
Amazon's not going to tell you the truth, right?
Paul Sonneveld
I thought that might be the case. I was hoping there might be another answer too.
Michelle Sickle
What their goal is. So when I worked at Amazon, you know, I worked in apparel and we had a goal to achieve X percent for co-op, X percent for freight and X percent for damage. And that was completely different than what electronics or toys had or sporting goods or whatever. And so if a vendor came to me and said, well, what's the benchmark? I just tell him what the goal that I had to hit was, if I'm being really honest.
So asking your vendor manager is only going to, if they tell you, they're only going to tell you what their goal is, or potentially even higher, so they can negotiate. And then you can go, obviously, you can try to Google it and see if there's some outside resources. But typically, talking to people that, you know, like me, where my business manages multiple accounts across multiple product groups, we can kind of see the forest through the trees on what are those real benchmarks and averages between toys and electronics, et cetera.
Paul Sonneveld
Yeah, I understand. I understand. I was going to ask you a slight follow-up question around vendor codes, right? So many vendors will run different vendor codes with different trade terms associated with that. I mean, in the context of what we're talking about, is there anything there that is worth kind of mentioning or prevent us to look at, particularly if they have quite different logistics setups there? Is there any difference in the audit or what I want to do and how I want to think about it?
Michelle Sickle
Yeah, so there's different reasons for different vendor codes. So for instance, you could have a pallet order vendor code that's used specifically for pallet ordering and thus would get a different freight allowance or freight accrual than your kind of standard PO vendor code. You also could have a direct fulfillment vendor code in which all of those orders you're fulfilling yourself and sending directly to the consumer. And those you don't even have a freight agreement on. So there's different reasons for different vendor codes.
Typically, it's in the vendor's best interest. And again, it's a typically, there's always exceptions to every rule that you want to negotiate all of your vendor terms with one vendor manager and have your vendor terms applied to quite frankly, whatever the most advantageous product group is. So if you have, I'm making this up, products that sit in apparel and toys, for instance. If you are dealing with two different vendor managers, you want to be advantageous and try to negotiate the best deal if you can with one and try to get everything under one vendor manager and one product group. Sometimes you can't, but if you can, work that angle.
Paul Sonneveld
Yeah. Makes sense. Makes sense. Cool. All right, let's, let's move on to the next item in the list invoice discrepancies. It's feels like, kind of a gold mine, but actually, a real heavy lift as well. I mean, I'm looking at some of our vendor accounts and like the amount of information coming out of that, the amount of, I mean, electronic paperwork is a little overwhelming. So talk to me a little bit about the issues, what you're seeing there, where the opportunities are.
Michelle Sickle
Yeah, for sure. If I'm being honest, the biggest challenge with invoices and Amazon is shortages. So essentially what that is, is Amazon pays you for less units than what you actually ship them. So they pay you for 80 units, you sent in the 100 they originally asked for. This happens more often than vendors realize. And it requires, like you just alluded to, Paul, a pretty heavy lift to get to what is the truth and how much money are you owed back. And what that means is as a vendor, your finance team and your warehouse team have to be in sync to make effective disputes.
So you basically should be doing, your finance person should be running a monthly reconciliation on all the invoices and then working with your warehouse person to get the proper shipping documentations, proof of deliveries, BOLs, to basically make those disputes on the discrepancies to prove that you shipped in the 100 units that you supposedly shipped in.
Paul Sonneveld
So is it mainly shortages then? Or because I was just going back to your double dipping, right? Which somehow the phrase double dipping is probably the one thing I'll take away from this webinar. If I'm looking at my invoice, right, I'm seeing the deductions. Will Amazon literally, so let's say we're talking marketing co-op, will I see two lines on the invoice or will I just see one number that is doubled up? It's so much more complicated than that. Yeah, I suspect it was going to be.
Michelle Sickle
So, there's the invoices that are what I would call your, you shipped in 100 units, Amazon paid you 80 invoices. Those invoices are purely like, kind of like the the pure play of POs. The co-op deduction invoices are different. in Vendor Central, they're on a different section. So those have to be reconciled separately. In addition, with invoice reconciliation, we're talking about POs and units, there can be cost discrepancies. It's rarer that you'll see that because typically Amazon's pulling directly from what's in the catalogue and they're getting it right. But it does happen.
But generally, the thing you should be scrubbing for is units first, and make that your priority and then cost item cost or wholesale price second. And then from a double dip on the co on a co-op or a freight agreement or whatever it may be, you're going to have to look at your co-op and your co-op discount invoices essentially, and then determine at a skew level, who got the double dip. It's an incredibly painful process. We literally just went through this with for a client.
Paul Sonneveld
It sounds, sounds painful, but perhaps worth doing. Right.
Michelle Sickle
So, absolutely. There's a lot of money to be found. Let's put it that way.
Paul Sonneveld
It's, that's right. I know we're all going to be super quiet, you know, the first two weeks before Christmas, after Thanksgiving. So for those of you that twiddling your thumbs and not looking forward to break, there's something to do, right? I'm saying that tongue in cheek, by the way, I'm sure we all deserve a break. Great.
Just basic question. If I'm a smaller vendor and I don't have my own kind of integration kind of set up in terms of ERP and all that, you know, I probably have some amount of that. But where do I get hold of all this invoices? Like, how do I get all of this stuff, put it in one place so I can start going through it?
Michelle Sickle
You can get all of it through Vendor Central and going directly into that platform and pulling down your invoices essentially into Excel, into Excel documents, and then doing your reconciliation there. A little bit more painful that way. Ideally, you have some sort of EDI connection and you're utilizing your own ERPs and things like that, but it is entirely possible to do it manually.
Paul Sonneveld
Cool. Not recommended, but possible. It's all there. All right. Let's move on to SKU portfolios and products, SKU rationalization. I mean, Why is it even important? And how can vendors really leverage this concept to really improve their margins as well as the negotiation leverage and positions?
Michelle Sickle
So this is the thing I think I've been most passionate about my entire career. SKU rationalization is the most important thing that a vendor can do, and it's often the most overlooked thing as well. The reason it's so important is if you do it right, you actually identify the items that are profitable versus not, which allows you an incredible amount of flexibility to run your business. This does require a heavy lift, though. It requires complete financial analysis down to the contribution profit level. So not gross margin, but contribution profit. Bottom, bottom line.
And when you do that, you are really able to pull on all the levers within your portfolio to maximize profitability. It doesn't just become an argument with a vendor manager over item cost or AVN terms. You're able to pull any lever within the kind of the calculation because you have that visibility to contribution profit level.
Once you've done the analysis and you know that at an ASIN level, there's essentially four categories of profitability. The first one is ASINs that are profitable for both you and Amazon. Win-win. The second is ASINs that are profitable for you. Still win. Third one is ASINs that are profitable for Amazon only. And then the fourth one is ASINs that aren't profitable for anybody. So obviously not a win.
When we think about each of those four groups, the first group, the win-win group, where they're profitable for both you and Amazon. These ASINs, when you're doing rationalization, should obviously be kept in your assortment. But more importantly, they should be invested in using promotions and advertising so they grow in sales. Because generally, in most vendors' cases, their most profitable ASINs are not their highest unit drivers.
So if you invest in those ASINs through either some promotion, get some halo going, or through some advertising, you can try to boost them to a mid-tier if they're a low-tier or a higher tier if they're already in a mid-tier. And that benefits both you and Amazon. If you have the second group, the ASINs that are profitable for you, these also should be kept in your assortment. But remember, they're not profitable for Amazon, so Amazon's not too thrilled about them. You can actually use these as leverage. But I'm going to talk about that in a second when I talk about the next group, which is ASINs that are profitable for Amazon, but not profitable for you.
So these are the ones you're trying to get through those item cost increases. And you're constantly asking your vendor manager or God help you going through support cases to try to get those cost increases through. If you have a relationship with a vendor manager, you can actually approach these two groups simultaneously, in which you negotiate potentially, you know, a cost decrease to Amazon on something that you're making a ton of profitability on. And Amazon gets a win, so you can get a win on something that's not profitable for you on Amazon, but is a top driver.
The things that are not profitable for you, but profitable for Amazon and are not top drivers, those you should consider eliminating from your assortment in all honesty. Because if you're losing money on every unit that you sell, why are you doing that? Is the question you should be asking yourself. And then finally, the fourth group, unprofitable for both you and Amazon. Truth is, Amazon probably crapped them out a long time ago, and so it's not really something you need to take action on. But that being said, I'd remove them from your assortment and permanently discontinue them.
Paul Sonneveld
Yeah, that's great. I love this framework. As some of our listeners know, I used to be an ex-consultant. So for me, this is like, I'm looking at the two by two and I'm looking at the products plotted and all of that, which is great. So, and I guess, you know, more broadly speaking, if you're doing this exercise, you're really looking, I guess, at net PPM on one side to take the Amazon perspective. And you probably want to benchmark that against some sort of category average, because Amazon probably has different expectations by category on that.
And then you're plotting your, now you mentioned two terms, you said gross margin and sort of full contribution margin. I wanted to just follow up on that. Like, where do you see the difference? I mean, these terms get bandied around a lot. And I think I could give you one version of what I think it means. But I'd love to hear your kind of explanation. What are the differences? What's in the contribution margin that is not in the gross margin? As you do this analysis?
Michelle Sickle
Yeah, what's in the contribution margin that's not in the gross margin is typically when people do the math on it, it is your SG&A. So it's the costs that are driving for you to run your Amazon business. That's what's generally left out and most people overlook. Sometimes depending on how every person that runs their own Amazon business throws in things the way they want. But the way the math calculation should work is the wholesale price you sold it to Amazon, less any trade terms equals your gross margin.
And then your marketing costs are below the line of gross margin, but most people throw them in above the line just so they can kind of get a little bit of a more holistic perspective. But getting to CP level means you have to incorporate If you're a full-time employee of a brand at P&G, you have to incorporate your salary and everybody else's salary that works on getting units into Amazon. That's why you have to work with your finance partners to get to a CP level and understand exactly what it costs to run the Amazon business.
Paul Sonneveld
Thank you. That's really helpful. I thought I'd clarify that. All right, great. Let's, let's move on. I want to just jump to sort of some of the more sort of nitty gritty things here. And I want to have a chat about chargebacks. I think they were on your list too. Chargebacks is one of those, I call them like, it's a bit like the hidden speeding fine. So that I definitely feel like chargebacks feels like too friendly. They do feel like fines to meet sometimes I'm probably biased but they certainly can be quite hidden and unexpected. What advice do you have for vendors to make sure they really stay on top of this and avoid anything that's just unnecessary, wasted? Because it comes out of your margin, right? It's wasted margin.
Michelle Sickle
For sure. So full stop, they are fines. And anyone who says they're not is incorrect because this is really a way for Amazon to penalize vendors for not following Amazon rules, essentially. And so the chargebacks are on the operational side of the house in regards to, did you follow Amazon's rules for prepping your products for Amazon and shipping them into Amazon, by and large?
Some chargebacks can be challenged, but many cannot. If you have 24 hours to confirm POs, Amazon's got a stopwatch on you. And if you miss it by five minutes, they know you missed it by five minutes. There's no challenging that chargeback. But a lot of chargebacks can, especially in the prep side of the house, be challenged with proof. And the key here with vendor chargebacks is ultimately, they seem small at first because when they start to happen, it is, oh, I got dinged here. It was only a couple of dollars or a couple hundred dollars. But they start to add up.
And the reason they start to add up is, if I'm being really honest, If Amazon realizes that you should be bubble wrapping a certain product subcategory and you never bubble wrap anything, they're going to tag you for everything within that product category for bubble wrap because you now are a profit center for them because they're like, oh, this vendor doesn't bubble wrap, so I'm just going to ding them on everything until they tell me and prove to me that they're bubble wrapping. So this can quickly add up and get out of control if not monitored.
So first key, similar to invoices, is monitor them monthly. And then submit disputes with proof photographs, in the case of Bubble wrap of your product in the box, in a bubble wrap, all nice and contained, to basically prove that you're doing the right thing and following Amazon rules. Same thing for SIOC. You know, Amazon is right now, because of all the changes on SIOC, they are doing a lot of vendors left, right and center on that chargeback. And with a little bit of due diligence, you can dispute those that don't fall within the program's parameters.
Paul Sonneveld
It reminds me, one of my colleagues is saying like, you know, many shavings make a pile. And he usually uses that in a positive sense, you know, we'll do all these little things, it all helps. But it feels like this applies in the reverse, in the negative sense, you know, because you're right. For a lot of these charts, it's only a couple of dollars here or there. But if that is applied across every single unit, every single product that you ship into the fulfillment center, all of a sudden you are the one that's cross-subsidizing Amazon's fulfillment operations, right?
Michelle Sickle
For sure.
Paul Sonneveld
So watch out there. Great. I want to go back to so we sort of talked about some sort of, you know, really kind of day to day operational stuff. I want to sort of go back and talk about negotiations. Right. And look, the context here is we have done a number of kind of in-depth webinars on how you prepare for AVN and all of that. But I'd love to just get your take, given this is a very sort of practical, practically focused session. What are some of the practical ways that you have, you have applied in the last months or year in which Amazon vendors can create and use that negotiation leverage to, with a view of really securing better terms with Amazon? You know, what's in your secret, like, here are the hinge tips that you talk to your colleagues about?
Michelle Sickle
Yeah, for sure. This is definitely Hinge tips, but this is stuff I learned directly at Amazon if I'm being really transparent. This is how your vendor manager is going to approach it. So it's always good to come to the table with what they're going to come to the table with, right? So the first thing is, be prepared. Come prepared, do your research. They have.
So understanding the total dollar impact of the trade term discounts. So what exactly total dollar value have you given Amazon in discounts in comparison to total POs? Know that for the impact to your business, but also the impact to Amazon's business. How much did that deliver and PPM for them? Be able to speak to that dollar value, it actually is critical with the VM because it starts the conversation off and it says, you've done your homework and you have a clear understanding of the inputs that drive Amazon's business. So that's pro tip number one.
After that, different agreements require different approaches to negotiation. So for instance, freight terms, they can be negotiated, quite frankly, by leaning in with Amazon by participating in some of their programs. So if you can participate in pallet ordering, you can see a reduced freight allowance or freight accrual on those pallet orders. Or you can remove freight entirely if you can do direct fulfillment. That's an easy way to get a win-win, assuming that the economies of scale are good enough on your side for you to fulfill to the end consumer.
For damage allowance, ask your vendor manager for ASIN level data on what are the root causes of the high damages and high return items. And then you can make a determination here's the items I'm going to remove, because it has a high return item across the board, and there's nothing we can do about it or damage. And this is, there's not, we're not going to have an immediate solve. And so because I'm removing this item, what can my allowance now be percentage discount now be because this item isn't driving the cost up anymore for you Amazon. Or if you can make a change, and it's cost effective for you, like if the damage is causing is being caused by packaging, and you can improve your packaging, for a small amount of money, do that. And then again, negotiate the terms with Amazon.
The final one is co-op. So co-op is what everybody pretty much knows is a slush fund, if I'm just being honest. It's something that Amazon can't really justify with data the way they can for freight terms and damage allowances. And so let's say as a vendor, you can't do direct fulfillment and you can't do pallet ordering because your warehouse isn't set up for that. And so you can't negotiate on freight, but you need to get a discount savings. A place to push is co-op and absolutely negotiate in total discount percentages. So if all three of those agreements add up to, I'm making this up, an 18% discount to Amazon, and you needed to be at 16, you push on the co-op. So, and then maybe Amazon's getting a win on freight terms, but net, net, you all, nothing really changes, if that makes sense.
Paul Sonneveld
It does, it does. I've never, that point around co-op is not often talked about actually, but it's usually also the largest element of all your rebates. And you're right, it's just like a generally agreed discount, right? We're just going to, just because that's the way we work, right?
Michelle Sickle
As a former Amazon vendor manager, I could tell you the spiel I told vendors of what it is. But the reality is, it's hard to justify.
Paul Sonneveld
Yeah, yeah, no, completely. Great. Look, I'm looking at the clock here. I know you have a hard stop. So I want to be conscious of your time. So Fortunately, we are going to have to wrap up. So Michelle, I do want to just really thank you for coming on the show today. Your expertise has really helped clarify some of the complexities on how do you think about profitability?
I love the frameworks you shared with us, like those five things. And then I call it the two by two Amazon profitability versus your profitability and grouping them in those four quadrants. I think that's absolutely fantastic. Now, For those that are listening to these like live today or on demand after, and they want to get a hold of you, then maybe they've got some challenges they want to discuss with you further. What is the best way to get in touch with you?
Michelle Sickle
Well, there's two ways. You can go directly to hingecommerce.com and click contact us and fill out a little form and someone on our team will get back to you. Or you can email my team directly at contact@hingecommerce.com. I look forward to hearing from all of you and I appreciate your time today.
Paul Sonneveld
Thank you so much, Michelle. I look forward to all the best for the remainder of Q4 and let's talk again in 2025.
Michelle Sickle
That sounds great.
Paul Sonneveld
Take care. All right, everyone. That is it for today's episode of Marketplace Masters. Thank you so much for tuning in today. Now, if you are looking for more insights, please ensure to check out our extensive library of video-on-demand topics. I think we've got over a hundred plus Amazon vendor videos and episodes that we've put out now. So make sure to check that out at merchantspring.io. Look for the resources section on our website.
Of course, as you saw in sort of our sponsorship announcement at the start of this video, if you're a vendor, you're looking for analytics, whether it's sell-through analytics, purchase order analytics, or profitability, and you think we might be able to help, don't hesitate to get in touch. We'd love to show you how MerchantSpring can add some value to your business.
And last but not least, I'm thinking really hard about topics for 2025 vendor topics. If you have a burning topic that you'd love for me to explore, to tackle and find the right guest speaker, drop me a note and I will do my best to find the expert and bring that topic to you. Until next time, take care.
