hi everyone this is Andrea Leigh, VicePresident of strategy and insights at Ideoclik and I’m coming at you todayto talk about margin guarantees.
This is the question of the week – we have beengetting a lot of questions from clients about margin guarantees Amazon has putsome of them out in proposals to some of our clients and I wanted to share withyou how we’re thinking about them and how you might think about them too.
Sofirst of all what is a margin guarantee? It’s providing Amazon with a guaranteedamount of funding to hit a target PPM so if they, for example, say they need to hita 50 net PPM or PPM on your products and they have to price match – that makes themfall short of that, you would owe them the difference.
So it’s kind of like atrue up co-op agreement and it protects them against any price matching theyneed to do for your products.
So first a few questions to ask yourself whenyou’re considering one of these agreements – you knowassessing your level of risk will include understanding how clean yourchannel is, so are your products really widely distributed and heavily pricematched or are they typically less price matched and maybe you have atrusted list of resellers and retailers that are pretty selective that you workwith.
What is the pricing stability of your products – that’s gonna help youfigure out what your risk factor is for these.
Obviously Amazon’s probablyputting it forward as a potential negotiated term because they think theyhave a lot of risk.
And then what’s the structure of the agreement is it a trueup at the end of the quarter, you know, do you owe them money is it off invoice.
Just kind of understanding a little bit around the details will help you figureout what the costs are gonna be and then also how likely it is they’llbe able to renegotiate this term with you in future quarters and years.
So why would you sign up for one of these? Sounds crazy right – Amazon has putthese forward to some of our clients in exchange, potentially in exchange foraccepting cost increases, so if you’re trying to push some costincreases through to Amazon that aren’t heavily documented or entirely tariffdriven, you’re typically going to belooking at you know an opportunity for them to bring forward a margin guaranteeso it’ll get them off reasons you know that Amazon wants to do these – they guarantee their margins so you might do it if you need to getAmazon off your back for CRaP funding for the rest of the year – to get yourcost increases through like I said another reason might be so you cancontinue uninterrupted participation in Amazon advertising and still show up atthe top of search results.
Probably everyone’s seen the articles this weekabout how Amazon’s considering profit as the key factor in deciding the order inwhich to return products and search, and search is everything, and then the otherreason you might do it or it might make sense is if you have someprojects in the works that will help stabilize pricing and so it’s kind of ashort-term problem – so your exposure could be known or calculated and it isacceptable to you.
But that being said, there’s a ton of risks and and I thinkthe risks in general outweigh the benefits.
First of all it’s just avariable exposure so you don’t know what it’s going to cost you until it startscosting it and you – and you could owe.
It’s basically like writing Amazon a blankcheck – they can price match to whatever degree they like and you will alwaysfund the difference.
I think another risk is that they’ll renegotiate it next yearand now you have another term kind of on the table up for negotiation with Amazon and then but I think the biggest risk is because you can stillmarket the products and they’ll still show up high in search and be inautomation and personalization you could potentially be driving adisproportionate number of sales to products that are economically lowermargin for you, because you’re paying a margin guarantee, so it’s kind of thesame reason that we don’t think CRap allowances are a great idea becauseyou’re essentially gonna grow the part of your business that’s alower margin for you or potentially negative margin for you.
Sothe bottom line: I generally think these are a pretty bad idea if you can avoidthem that’s great.
If Amazon’s putting a lot of pressure on you for CRaP funding, I think kind of the the better paths are to think about howyou can potentially Un-CRaP your items so what are some of the ways you canbundle them or get those price points up you know looking at some imap policies, restricting the list of sellers that you sell to, or if none of thoseoptions are available to you potentially CRaP-ing out your own products and justdeciding that you’re not going to sell them on Amazon anymore because they’reyou know too much of a risk from negotiations perspective.
So there youhave it margin guarantees feel free to reach out to us at Ideoclick if you have any questions www.