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The Amazon Marketplace Seller That Says It Has “the Colombian Cocaine of Algorithms”

28 February 2016

From Slate:

To show off the secret behind Pharma­packs, his $70 million retail business, Andrew Vagenas picked up an EOS lip balm and tossed it to his buddy Brad Tramunti. “Watch,” Vagenas said. “He’s like a special kid.” There is nothing about Tramunti that makes you think: lip-balm guy. He’s 33 years old and hefty, with a two-day scruff and a faded T-shirt wrapped around his torso. But he held the lip balm in his paw carefully, inspecting its lollipop-purple-swirl case like a savant.
“This is a new flavor,” he said. “Just came out. Blackberry nectar.” He took it to his desk and brought up its Amazon.com product page. He checked its weight—0.25 ounce. He pursed his lips and calculated the shipping cost in his head: “$1.89,” he muttered. He looked at its Amazon sales rank: 54,000. He brought up a page with suppliers’ prices. “We get this wholesale for $2.23,” he said, smiling. “That, plus shipping, plus our margin? We’ll be in the No. 1 spot.” That meant when a shopper clicked Add to Cart on Amazon, Pharmapacks would get the sale.

Vagenas grinned. Then he tossed Tramunti a box of Vitamin Friends Iron Diet Supplement. “He just gave me a crazy product right now,” Tramunti said. He pointed to his screen: The vitamins already had 201 Amazon reviews. “If we can get this for under 10 bucks, it’s a home run.” “We’re getting it for 11 bucks,” Vagenas said. “OK, it’s a double,” he shot back. “But we’re going to be No. 1 on this product—and it’s ranked 1,451 in all of personal care, No. 2 in vitamins. This is crazy! This is bonkers!” Whatever you want to call it, within hours, Pharmapacks would be the No. 1 seller on Amazon for both of those products—a ranking it would hold for weeks. “He’s my special boy,” beamed Vagenas.

. . . .

This is the Amazon Marketplace, where anybody can sell just about anything right alongside Amazon’s own wares. Unlike eBay, where each vendor maintains a separate listings page, Amazon tidily groups its Marketplace sellers by item, hiding away the inferior offers, to showcase the best deals up front. (In seller parlance, landing the No. 1 spot is called “getting the buy box.”) What looks so clean on your screen obscures the messy and massive jungle of the Marketplace: There are now more than 2 million sellers on Amazon. While the Seattle-based giant still sells the most popular items on the site itself, Marketplace sellers now ship nearly half of the products—about 2 billion items each year, all told—and those sales are growing twice as fast as Amazon’s, according to the consultancy ChannelAdvisor. The Marketplace started in 2000 selling used books. In 2016, it’s a retail phenomenon as significant as any in the past 50 years—together these sellers ring up what ChannelAdvisor estimates to be $132 billion in sales each year. That’s more than Walmart sold in 1997. Yet we know so little about who they are.

On 2015’s Inc. 500 list of America’s fastest-growing private companies, something stood out about the retailers. Nearly all of them, companies that were growing by 1,000 percent or more, had websites that looked a decade out of date. Like, a homepage. Maybe a few links to products. Why? That’s because, these days, such retailers don’t use their own sites much. They build their businesses on platforms—eBay, Walmart.com, Overstock, and especially Amazon.

. . . .

“Our top sellers are things nobody wants to buy at a store. But from there, people buy everything else.”

All the while, more than 100 workers, mostly women, stood at tables in the warehouse packing products into bubble-pack containers that looked like tiny space pods—Colgate toothpaste, Pantene shampoo. A man sat, an air gun in hand, inflating the containers nonstop. As soon as one crackled into shape, he grabbed the next, 15 times a minute. Psst-thwap. Psst-thwap.

Originally, Vagenas and Tramunti and another friend ran a pharmacy in the South Bronx. When they started selling health and beauty products online in 2011, they thought it could make a nifty side business. They rented a little warehouse on a leafy street six blocks from Vagenas’s childhood home in Whitestone, Queens, and started spending half the day there. Mastronardi soon joined them to help run the numbers. As they hammered out kinks, they discovered that selling on a platform like Amazon was totally different from running their drugstore or even a standalone website. It was also a much bigger opportunity.

You could fill a book with all the differences, of course, but the big one was: They could sell whatever they wanted, at whatever price, for whatever period of time. A Marketplace vendor doesn’t worry about stocking a full line of shampoos, or whether certain soaps are always on sale. If they want to sell lotion one week and hairspray the next, they can do that.

Early on, the guys decided that it would be easiest to offer whatever their suppliers had in stock. They built each online listing, and had a developer code a script that scraped the suppliers’ databases to enter each product’s information. When a customer ordered something, they in turn would order it from the supplier, pick it up, and then pack and ship it. That’s still the model, more or less, though nowadays they order in bulk using sales projections and need three trucks and a van to pick everything up. Inventory often stays in their warehouse only for a few hours before going right back out the door. The business is less like traditional merchandising than it is like a commodities trader from a bygone era, buying and selling well-known goods and turning a profit on each transaction.

. . . .

In the platform business, they learned, price is everything. Set a price too high, and Amazon buries it. Setting it too low is worse, earning the buy box and leading to thousands of orders flooding in—and a loss of money on every sale.

Vagenas, a problem solver at heart, loved turning Tramunti’s tricks into rules. He and the team had a developer code the tactics into algorithms, and baked them right into their proprietary software. Now the listings had optimal prices. Sales took off. They called the software the Master Brain.

. . . .

Other marketplace sellers have algorithms. There are now companies that design pricing software for platform vendors: ChannelAdvisor, WisePricer. But that’s all chump stuff when you have a Master Brain. “We can make listings in seconds,” Tramunti boasted. “Everybody else has to do all this hoopala hoppala.”

The conundrum fascinated Tramunti. He’d struggled with dyslexia in school, and like many with it, he’d developed an ability to memorize huge chunks of facts and figures to compensate—as he puts it, “we find workarounds.” He began studying all their products, memorizing competitors’ prices, watching as new items climbed the rankings. He toyed with different pricing strategies, figuring out formulas for how much they could charge for certain products and still get the sale. They started getting the buy box—and making money—more often.

Life as a Marketplace seller isn’t all algorithms and cash. Vendors also need high customer-service ratings to get the buy box. Keeping them that way is a grind, especially when you sell almost 25,000 different products and ship 570,000 orders a month.

Link to the rest at Slate

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10 Comments to “The Amazon Marketplace Seller That Says It Has “the Colombian Cocaine of Algorithms””

  1. Another way that Amazon democratizes and frees PEOPLE to compete with CORPORATIONS.

    And yet the left-leaning New York Times and idiots like Douglas Preston bow to the corporations that attempt to squeeze the customer, while bemoaning the rise of an institution like Amazon that attempts to set people free. And rather than take profits, Amazon pours everything back into its services.

    Amazon is part charity, part utility, part toolbox. And they aren’t afraid to compete with themselves (KDP competes with A-Pub and 3rd party competes with retail). The Kindle disrupted their founding sales model. It’s amazing to watch this company innovate and disrupt. Power to the people.

  2. Pharmapacks is the only Marketplace seller I actively avoid. They WAY over package their shipments.

    The “bubble-pack containers that looked like tiny space pods” are then wrapped in another plastic bag. They also put paper into the pod to keep the product from moving around and include a paper packing slip.

    I wrote to them about my concerns and they replied that the “pods” are recyclable, they have the code on them.

    They are not recyclable where I live….I bet they are not recyclable where many people live. They are land fill fodder.

    Thus, when I see Pharmapacks as the seller, I go to another Amazon listing.

  3. “In the platform business, they learned, price is everything. Set a price too high, and Amazon buries it.”

    Or it’s just seems that way, because you know the qig5 would be writing full page NYTs ads to the DoJ if their overpriced ebooks were ‘buried’. Heck, they cry loud enough as it is about Amazon sticking their agency priced ebooks side-by-side to cheaper indie/self-pub ebooks (and right next to their sometimes cheaper hard covered books …

  4. There are now more than 2 million sellers on Amazon. …Marketplace sellers now ship nearly half of the products—about 2 billion items each year, all told—and those sales are growing twice as fast as Amazon’s…

    I love this! Capitalism doesn’t work when you have only 6 or 7 sellers. They too easily form cartels. :: cough, big 5, cough :: Once you have several hundred sellers, then then there is strong evolutionary pressure toward efficiency and thus better use of resources (time, people, energy, materials) and the lowest possible prices for consumers.

    Amazon has has made it possible for millions of sellers to compete. This is fantastic for everybody: the sellers (access to distribution and consumers), the consumers, and Amazon.

    • Interesting point about capitalism – it needs competition to work, yet left to their own devices, competitors always aim to become monopolists [because that maximises profit]. Ergo, as an economic system, capitalism actually needs constraints and oversight to stop it from becoming an odd sort of totalitarian ‘state’.

    • @ J.M N-G

      Yes. This. Amazon has enabled millions of small M&P businesses to survive and thrive. In that sense, it’s the ultimate Anti-WalMart.

      And so much for the BS leftist posturing of the Manhattan Elites and fellow travelers; they reveal their true selves by their actions.

  5. 570,000 sales per month at an average profit* of 20 cents per item equals $114,000. Decent money.

    —Just saying.

    * gotta pay rent, employees, eat returns, etc.

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