Cost negotiations with Amazon drive even the most experienced negotiators to despair. That’s because their buyers (so-called Vendor Managers) are likely to ignore any cost increase requests, and the process to put them through in Vendor Central will quickly let account management teams run against a wall of algorithms, protecting the Amazon profit and loss account.
Yet, raw material prices are through the roof and supply chain costs have become tough to manage.
So how should suppliers go about cost increases with Amazon?
Well, if you want to get your new costs accepted by your Amazon Vendor Manager, you have to stop justifying them with input factors like raw material prices and focus on measurable outputs instead. These outputs are the progression of your Average Selling Price and the margin of your vendor account, also known as Net PPM.
Here’s why:
Amazon is an automated marketplace. They set their prices by following the offers of their key competitors and order based on the resulting customer demand. As such, they also hold lower inventory levels compared to other retailers, because end-customer demand tends to fluctuate heavily depending on the set price of a product.
As a result, your VM will fear being among the first affected by cost fluctuations and won’t accept their suppliers’ price increases unless they are already reflected in the broader market segment.
In other words, talking about increases in raw material or shipping costs won’t address your Vendor Manager’s commercial concerns.
What has proven to work well instead, is the following:
Adopt a data-driven approach that is focused on your Average Selling Price (ASP) and the Net Pure Profit Margin (Net PPM) of your account. This way, you can highlight your account’s past margin and investment progression to justify your cost increases.
If you can prove to Amazon that the cost increase has already translated into the wider market, your Vendor Manager will have less arguments to reject your cost increase requests. Bear in mind, however, that this presumes you also adapt your Recommended Retail Price (RRP/MSRP) along with your price increase.
Otherwise, you set a ceiling to the maximum margin Amazon can earn, while pressuring them from the bottom with your new costs.
Good luck in your endeavours with Amazon, and feel free to contact me with your questions!
Author details:
Martin Heubel is Founder and Director of Consulterce, a strategy consultancy for B2C Household & CPG brands.
As a former Senior Manager at Amazon, he has led several FMCG categories and helped
companies like Nestlé, PepsiCo and Mars to successfully sell online. After five years at Amazon, Martin transitioned into his role as an independent consultant.
His consultancy firm Consulterce works with clients across Europe and provides tailored advice for brands seeking to elevate their Amazon margins to profitable levels.
