Discover more from WiFi Money
Spangler Candy's Dilemma
Last night I was reading an article on Spanglers Candy and how they’re having some problems with Amazon arbitragers. Having been in their position previously, I thought this would be a good post to write so you all can see both sides of the fence of this.
If any of my readers are growing their brand or work for a large brand, let this be a warning to your future self as your grow.
First, if you don’t want to read the above article or don’t know what this corner of ecommerce is, arbitragers buy product at a discount to retail price and resell on a different marketplace.
In this case, these arbitragers were selling a product on Amazon then immediately purchasing the product at Sam’s Club and having it shipped to the customer. This can also be done from Costco, when brands run deals, using cashback, or on seasonal items.
The only limit here is the creativity of the entrepreneurial individual.
WiFi Money is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
Incentives For Arbitragers
Before I go any further, let me state that I don’t think there’s anything morally wrong with this. You’re likely not going to get rich off of it but if you live in a country where the US dollar goes a lot further or you’re only looking for a few thousand a month, this opportunity is ripe for picking.
Hell. If you live in a country like the Philippines, I actually encourage it. The average hourly salary is like $3 US an hour. There’s almost no potential downside and a lot of upside for you. You are incentivized to do this by the market and by Amazon.
Broadly speaking, all you have to do is figure out the price of 3 things.
The price you can sell the product at on Amazon, Ebay, or another website.
The platform/storage fees and shipping
The price you can find it at Sams Club, Costco, or when a brand runs a big promotion.
Subtract these out and if the number is positive, you’re in business.
There are 3 basic models of how you’d do this.
Like in the Spangler Candy case at Sams Club, you order after the item is placed and have Sams Club ship the order.
You store the product yourself or a 3rd party warehouse and ship when necessary.
You send the product to Amazon and have them fulfill the orders.
The last two are going to be most often used when you’re buying directly from the brand with discounts or with seasonal items at Walmart/other retailers.
Why Brands Care
First, they lose money. That’s their fault though. There’s a trend in retailers/brands where they think “We have to be everywhere!” to increase sales.
It’s a great short term strategy to increase sales. What generally ends up happening is they end up with problems like this and they dilute the quality of their brand. Look no further than Under Armour selling low quality items at Kohls and other retailers.
They no longer become premium and they shift demand to lower priced items. I’m still waiting for Gucci to end up on Walmart’s isles because “We’ll get more eyeballs”.
Never happening because some brands get this concept. Some brands don’t and they incentivize their wholesale department completely wrong. The wholesale guy doesn’t care that the brand is losing money because he’s bonused off of that Sams Club contract.
The second reason why brands care is because there is significant risk to the brand.
A bad experience with receiving a product looks bad on the brand. Most customers don’t realize that Seller12548 is not associated with the brand. They don’t understand how Amazon works. The brand deals with the customer service calls and damaged brand reputation caused by the arbitrager.
There’s legitimate risk to customers and lawsuits. This is mostly in the consumable space like candy, food, and supplements. Amazon treats the products like the Healthmaster Inferno in the movie Idiocracy. If/when these items get mixed up, who knows which seller the tainted item came from. What I do know is who’s getting sued. Hint: It’s the big brand with millions to be able to pay out in a lawsuit.
While I don’t think there’s anything morally wrong with this, I was on the other side of the table and it was my job to fight back.
It’s just bizness kid. We’re all paid to do certain things in life.
A brand needs to eliminate the incentives that cause things like this to happen. Remember, this is the cost of being short sighted, greedy, or not understanding today’s market. This is not the fault of the arbitrager. They are incentivized to do this.
The goal here is to make it where the arbitrage opportunity is impossible to do.
If your wholesale department doesn’t have parameters and they’re incentivized wholly by pushing product out the door, you’re going to get screwed. Either set tight parameters or figure out a different incentive structure.
Wholesale departments are essentially sales departments. If you incentivize them big upfront for getting the contract and punish them when something like this happens, they’ll still make bad deals and just quit when arbitragers show up and go somewhere else to repeat the cycle.
Your best bet here is to figure out the floor of the arbitrager’s opportunity and have a minimum price that your wholesale team can pitch to retailers.
What’s the minimum price?
I won’t go through all of the math here because it’s different for every platform, product, and way people are selling. Look at the costs to the arbitrager and subtract that from your retail price.
For sellers on Amazon, it’s generally going to be between 17%-30%. The 17% is the floor for Amazon commissions and it may increase depending on shipping and distribution of the product.
If you’ve never dealt with Sams Club, they’re a nightmare to negotiate with in terms of pricing. They have a minimum % below retail that they require you to allow them to sell at to do business with them. They are the source for so many of these 3rd party sellers for brands.
A better way to do this is to give Sams club a better deal (higher margin %) for them raising the price above the arbitrager’s incentive price. If you cannot negotiate this, walk away from the deal.
It is not worth the few extra million gained from that channel if you’re losing millions fighting 3rd party sellers. You’re being lied to if you think that all of the sales from Sams Club is incremental. There’s a sales shift from one channel to other channels when a brand starts selling in multiple retailers.
Another way to do this, which is even harder to negotiate, is to not allow your brand to be sold on the retailers’ website. This forces the arbitragers to store and ship the product which increases the cost to the arbitrager. An increased cost to the arbitrager decreases the incentive dollar for dollar.
Sometimes the source of 3rd party sellers is your own ecommerce store. Or your stores if you’re a retailer. I’ve even been at fault of this myself. You’re trying to make end of quarter numbers or liquidate product and you end up feeding the beast.
Just like in the previous paragraphs, you need to figure out the break even price for arbitragers and set this as a minimum in your promotions.
To be clear. The only way to stop this problem is to make it unprofitable for people. This can only be done by taking the incentive away by not selling below their break even price.
The Slow Fight
The slow fight is what every law firm is going to advise you to do. It’s going to bleed you to death if you don’t solve the root problem of incentives. Here’s the tactics.
Hire a law firm like Vorys and continue to pay them an asinine amount of money while you continuously go after sellers.
Enroll in Amazon’s brand registry and spend the time managing and proving that out.
Enroll in Amazon’s transparency program and continue to pay an extra 5 cents per product. Then wait weeks to get a seller delisted only to find 5 more that show up.
Utilize a repricer tool and find out that you’ll never be at full price again because you’re in a constant repricing battle with the 3rd party sellers.
All of the above will drag out for years and it won’t solve the problem. It will be a continuous battle of whack a mole while your company’s time and resources are drained. You won’t focus on growth, marketing, customer service, or anything. The focus will be fighting a never ending battle.
The funny part is Amazon is actually incentivized to allow this to continue. Having the lowest price incentivizes customers to come back. It also forces brands that don’t want to sell their products on Amazon to join their platform to fight unauthorized sellers.
WiFi Money is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
Full Scale Attack
This isn’t the best option but it’s better than the slow fight. Again, fixing the root cause of incentives is the only way to stop this. The full scale attack is simple and the only option for a lot of brands that don’t actually sell a physical product. Trademarks and digital products often have to take this route.
You do all of the above in the slow fight above but you also find a way to sue the sellers. There’s some obscure law that they’re breaking. There always is. Figure this out with your attorneys. Then you track the sellers down.
If the sellers are giving Amazon the inventory (FBA), then you need to work to get an injunction for Amazon to hand over their names to you.
If they’re sending the inventory (merchant fulfilled), it’s easy to track it back to their address and find out who it is.
If they’re shipping it from your website or Sam’s Club’s website and they’re trying to cover their tracks, a good analyst or dev can track this down. You just need to order from them and have this item shipped to your house. Now you can bump your address up to your sales database to see what user/account purchased the item. Now that you have the account, you can back track to the sessions that they’ve visited the website.
Among other things, modern ecommerce websites track IP address, MAC address, device ID, and credit card data with the name and billing address attached to the order. I even once managed to find someone based solely off of their email address where it was used on another site.
Opsec is very difficult to truly not get caught and most people don’t have the technical skills.
Now you are starting to gather names. What do you do now?
You punish them. Then make it public. Very public.
You only need to win one lawsuit, make one person pay an outrageous fine, send one person to jail for a night before you start publishing it on Seller Central’s blog and other drop shipping sites. Publish it everywhere and continuously send a warning to would be sellers that they should think twice.
This should be done in a way that pretends to be a would be seller asking if you should sell these products since X company has a history of going after them. It’s a psyop.
A lot of the drop shipping community is connected so if you have a reputation of potentially putting people in jail, less people will try to pull this off with your company.
By “you”…I mean that someone unrelated to the company does it. This last detail could get legally sticky if you ever get caught. There are companies and people that will do this for you. Many brand management, PR, and agency companies likely have this capability with an overseas VA.
Your best bet if you find yourself in this position is to eliminate the incentives. It’s the only thing that will work long term and not waste a significant amount of resources chasing ghosts.
If you’re on the other side of the table doing this… Know one thing.
It’s highly unlikely that you’re going to get caught and suffer any real repercussions.
Reselling is actually legal
Almost no companies go full nuclear
When they do come after sellers, they generally stop if you stop selling when they send you a cease and desist order.
If you’re subscribed to this newsletter, you need to keep in mind why we’re here.
Your boss and company, no matter how nice, doesn’t care about your future. Nobody outside of a few family members and select friends care about your growth and your future.
You are the only one that can save yourself and make your life what you want it.
Single player. Just you.
This Substack is here to help you build a business and build the life that you want. I’ve laid out the basics to understand, analyze, & grow most any online business.
Free articles on WiFi Money are supported by:
►SiteGround - SiteGround is one of the easiest hosting providers to get setup on quickly. For a full guide in getting setup with your first website in less than an hour, read how to start your own website.
►Shopify - The #1 and only ecommerce website builder that you should be using. If you’re selling a physical product online, look no further. They handle 90% of the hard stuff. Start building on Saturday morning and be selling by the afternoon.
►Surfer SEO - Save hours by using Surfer SEO to prepare content optimized to your domain, niche, and audience. Use the #1 AI writing tool on the market that the best affiliate marketers are using.
►SEMRush - The one tool I cannot live without. This tool has almost everything you need. Keyword research, spy on your competitors, local SEO, site audits, social media management, paid advertising tracking, PR monitoring and much much more.
Disclaimer: Nothing written here should be construed as legal for financial advice of any kind. These are opinions and observations, written by an anonymous cartoon Opossum, built up over years working in e-commerce & affiliate marketing.