Avoiding Amazon CRaP List

Amazon has eCommerce’s most advanced strategies and algorithms to ensure its profitability.  While every product available on Amazon gets ranked based on a number of shopper-related factors, the most important metric a seller must consider is profitability; both Amazon’s and its own. The slimmer the margin (or more negative, as the case may be) on any given item, the less interested Amazon is in selling it. Amazon’s process for measuring profitability is known as CRaP, or “Can’t Realize a Profit”.

In dealing with items that are approaching or on the CRaP list, Amazon does one of two things:

 

1) Redirect Customers to More Profitable Items

For items approaching the CRaP list, a program (known as Pegasus) places a widget at the top of the product’s detail page directing shoppers to other products more profitable for Amazon, with headings like “Lower priced items to consider” or “What do customers buy after viewing this item?”

Lower Priced ItemsComparable Items

2) Use Less Profitable Items as Loss Leaders

The most unprofitable items will eventually be discontinued, but for many products on the CRaP list Amazon has a few strategies for turning that loss into a gain:

EFP: Exclusively For Prime

Amazon’s algorithms automatically add individual items to, or remove items from, the EFP list based on weekly measurements of the item’s profitability. By making marginally unprofitable items exclusive to members of Amazon Prime, some of the loss is made up by membership fees, more frequent purchases, and larger single orders. Because only Prime members have access to these products, EFP items experience a 12% average decrease in sales. A similar (but voluntary) designation for items is Prime Pantry, which can be set up by the manufacturer to improve the profitability of low-price items.

Add-On Items

Low-profit items with a price point under $10 may be given Add-On status, meaning only customers with a shopping cart over $25 may purchase the item. This allows Amazon to make up for the loss by spreading out the shipping cost among more items.

Subscribe & Save

Amazon’s Subscribe & Save promotion offers a 5% discount on qualifying items when customers commit to purchasing the same product on a recurring basis. This allows Amazon to save in two ways: (1) by improving forecasting and lowering warehousing costs; and (2) by adding more items to the box, spreading shipping costs across more items. To help incentivize this behavior, Amazon offers a 15% discount to customers with 5 or more subscriptions.

How do I Keep My Products from CRaPing Out?

To keep your products off of the CRaP list, there are 3 important things you can do:

1) Maintain a High Average Sales Price (ASP)

Amazon used an algorithm to set prices, and here are a few tactics you can use to keep your ASP high:

  • Bundle items to increase the overall profitability while lowering the price per item.
  • Set a Minimum Advertised Price (MAP) so, when the Amazon price is lower than the MAP, it will prevent the price from being shown until the customer takes further action.  Note – this is quite difficult to obtain with Amazon and often results in multiple month stand-offs with the goliath retailer.
  • Double check your listings to ensure that they are mapped to the correct items by Amazon’s pricing algorithm.
  • Produce custom eCommerce packs that cannot be matched. This isn’t simply a different unit count; rather, a specialty pack with different flavors, items, etc. included.

2) Offset the Product Cost

Amazon’s profitability metrics are based on many factors so it’s possible for a product to remain profitable even if its cost is higher than its selling price. How? You can offset the product cost by increasing your budget in Buyer Merchandising, Amazon Marketing Services (AMS) and/or Amazon Media Group (AMG). Accruals and other co-op agreements obviously can also influence this.

3) Lower Outbound Shipping Costs

Outbound shipping is one of Amazon’s biggest expenses. Remember – every dollar saved is one less dollar you have to spend to get to profitability. Recommendations include:

  • Provide ready-to-ship packaging and participate in Amazon’s frustration-free packaging when it makes financial sense. This also lowers Amazon’s fulfillment center (FC) costs.
  • Work with your In-Stock Manager (ISM) to ensure that your products are received and stocked correctly in the FC.
  • Utilize Amazon’s mutually beneficial programs. Subscribe & Save lowers shipping fees by allowing Amazon to ship items ahead of time at a slower shipping speed. The Vendor Flex program, where a section of your warehouse space is operated as a miniature FC for your items, can reduce Amazon’s FC costs and increase the profitability of your items.
  • Optimize your FC locations to fit closer to where customers are ordering can reduce “zones” of shipping – again, Amazon’s largest P&L cost.

Avoiding the CRaP list is an all-around win for you, Amazon and the shopper: your product cost is high enough to make a profit, low enough for Amazon to make a profit, and the retail price is in line with what the shopper is willing to pay.

For additional insights into how to optimize your eCommerce strategy on Amazon and other leading sites, check out our weekly articles at www.oneclickretail.com/insights, and follow us on Twitter, LinkedIn, and Slideshare.