Here's what small retailers need to know about partnering with Amazon, according to e-commerce experts, small business owners, and Amazon itself

• Third-party sellers made more than $160 billion in sales on Amazon last year, and that number is growing twice as fast as Amazon's first-party retail business.
• Some sellers say partnering with Amazon has tripled their sales and enabled them to focus on their core products. On average, sellers using Fulfillment by Amazon see a 30-50% increase in sales over Fulfillment by Merchant.
• The tech giant is also a lender for select sellers. Small- and medium-sized businesses (SMBs) borrowed more than $1 billion through the Amazon Loans program last year alone.
• Other experts say the platform can be a double-edged sword that SMBs should approach with a careful strategy.
• After advertising fees, high commissions, and competitive prices, selling on Amazon can be an expensive proposition with tighter margins. Increased scale could offset those costs.
• Visit Business Insider's homepage for more stories.

Amazon accounts for half of US e-commerce, and third-party sellers made 58% of the sales in the marketplace last year, according to the company's annual report. Much of those sales are from small and medium-sized business partners, of which Amazon has more than a million nationwide.

Those numbers are growing - third-party sales in 1999 represented just 3% of Amazon's gross - and CEO Jeff Bezos is paying attention: "Third-party sellers are kicking our first-party butt. Badly," he said on the first page of his 2018 letter to shareholders.

More than 50,000 SMBs sold more than $500,000 in sales last year, and 20,000 of those merchants topped $1 million. In 2019 thus far, Amazon has rolled out a suite of new tools and services for SMBs, debuted a trio of SMB awards, and appointed its first Vice President of Small Business.

But with Amazon's great power comes great responsibility (and risk) for SMBs and their owners, who should consider the potential costs and benefits carefully before determining where Amazon fits in their overall strategy.

To help you navigate, we've rounded up reports, reviewed the data, talked with experts, and boiled it down into this handy guide. Here's what SMBs need to know when working with Amazon.

Business Insider is especially interested in the first-hand experiences of owners, managers, and employees of small business working with Amazon, so please get in touch to share your story at dreuter@businessinsider.com.

Basic Definitions

Let's start with some basic definitions. Amazon lists products from first party "Vendors," who are wholesale suppliers that provide inventory for Amazon to sell directly to customers, and from third party "Sellers," who maintain their own stores and channels on the platform.

The Vendor relationship is generally similar to any other large retailer, like Wal-Mart or Target, but Bloomberg and Digiday have reported the rules are changing in the future in ways that will push Vendors toward the Sellers program. This guide focuses on Sellers.

Amazon's marketplace is open to third-party sellers who set up an Individual or Professional account through the "Selling on Amazon" website. (In fact, anyone can open an account - even a small business reporter.) Individual accounts can list and sell products on a per-item basis, but SMBs need a Pro account to fully access the available tools and benefits.

The ideal level for an SMB's engagement with Amazon "depends on the business that you're in and what you're trying to accomplish," said Mike Farrell, Senior Director of Market & Customer Intelligence for Sidecar, a multi-channel e-commerce service.

"Retailers need to start making decisions about how they're going to integrate that Amazon piece of their business into their overall ecommerce business, and I think there's a lot of nuance there," he said.

Tools and services: Fulfillment by Amazon

The most powerful service is arguably the Fulfillment by Amazon program that rolled out back in 2006. It enables sellers to store and ship inventory through Amazon's extensive logistics network. The company says that sellers using Fulfillment by Amazon saw an average sales increase of 30 to 50%.

In addition to converting a higher number of sales, Amazon handles returns and other customer service issues, freeing up valuable time, space, and human resources for sellers. That has proved indispensable for Pittsburgh-based seller Sweet Water Decor, a hand-lettering design company featured on Amazon's Handmade channel.

"Fulfillment by Amazon is great because it takes off a lot of customer service on our side, and they house it at Amazon so we don't have to pay for that warehouse in Pittsburgh here," said owner Melissa Horvath, who personally designs each product she sells.

"Our sales actually grew three to four times just from being on FBA, so if we use fulfilled by merchant our sales are basically three or four times less," she said, emphasizing Amazon's ultra-low shipping rates and merchant support.

Tools and services: Search and sales data

Amazon also makes its extensive search and sales data available to its Seller partners, allowing sellers to see how customers are discovering and purchasing products on the platform. A 2016 study from BloomReach found that 9 out of 10 online shoppers compared prices on Amazon before making a purchase, and sellers can gain insights from the largest online marketplace to inform their product development and marketing strategies.

The openness of that information is a double-edged sword, since sellers cannot control who sees how their products are performing on the platform, as they would using their own systems.

Tools and services: Sponsored product listings

Sponsored product listings are an advertising option that place individual products at the top of a relevant search result, ahead of the organic results for specific key words.

E-commerce expert James Thomson, who was a senior manager and later business head of Amazon Services 2007 to 2013, knows them well. He was responsible for recruiting third-party sellers to the platform and responding to issues that arose in their business. He's now partner at Buy Box Experts, a consulting firm that specializes in marketplace management for Amazon sellers.

"If you're a brand-new product with no reviews and no sales, nobody will find and buy your product," Thomson said. "You need to spend on ads to keep adding rocket fuel to generate interest in your product."

"This is absolutely not 'if you build it, they will come,'" he added. "You need eyeballs, and that's not really something most retailers know how to do."

Product listing advertisements convert 3.5 times better on Amazon than on Google, according to research by Merkle, due largely to the nature of each platform's user base. Google searchers are more typically for general information, whereas Amazon users are more often looking to buy a product. Unfortunately, this makes those few featured spots that much more valuable and can kick off an expensive arms-race between sellers to control the top spot.

"It's almost becoming a requirement that they opt in to sponsored ads," said Farrell, "not just to try to help grow the revenue on the platform, but also to protect the organic revenue that they've naturally gotten since they started running the marketplace. "

Amazon's ad revenues topped $10.1 billion last year - more than double the year before. Farrell expects Amazon's U.S. ad business to grow more than 50%, and Sidecar recently rolled out an expanded set of AI-powered tools for Amazon sellers.

"We're at a turning point right now where it's becoming more of a necessity to run sponsored ads on Amazon versus a nice to have," Farrell said.

READ MORE: [PRIME] 'It feels as though lots of brands are getting hijacked:' Some marketers say Amazon is too crowded with ads, and they're trying new ways to break through

Tools and services: Brand Registry

The globalization of e-commerce on Amazon and beyond has led to a significant growth in the problem of counterfeit and unauthorized products in the marketplace that won't be solved any time soon. In response, Amazon revamped its Brand Registry tool in late 2017, which it says will enable intellectual property owners to flag imitators and slow down the encroachment of fake listings on the platform.

"We have a zero-tolerance policy when it comes to counterfeit and abuse on Amazon," Denissen, the Amazon VP, said. "Both on behalf of our buying customers, but also on behalf of the sellers who conduct their business on Amazon."

It is unclear whether the Brand Registry tools will be enough to stay ahead of motivated black- or gray-market sellers, and the company admits that given the free transfer of goods there's little it can do to prevent legal competition in the form of near-imitation products and brands.

A further complication arises when those tools are turned against legitimate sellers, according to Chris McCabe, a former investigator at Amazon and the founder of a consultancy that helps Amazon sellers whose accounts have been suspended.

"It's hard to sort the good apples from the bad," McCabe said about the growing armies of black-hat operators who target successful products and flood the system with false complaints, leading to huge headaches for sellers.

Brand Registry is still fairly new and is open to any IP rights-holder. Amazon says the program is "rapidly evolving" and could serve as a complement to other regulatory registries like the US Patent and Trademark Office.

"Unfortunately, the criminal energy is out there, and it's really just staying ahead of that game," Amazon's Denissen said.

Branding Challenges and Opportunities

For some sellers , the brand development tools are just not there yet. Upmarket swimwear brand Andie has specifically decided to avoid listing products on the platform, opting instead to sell exclusively on its own website.

"Amazon is a great place to buy products, but it's not a home for brands," said Andie founder and CEO Melanie Travis in an email. "Business owners looking to build strong brands probably won't get the best experience out of Amazon. But if it's just a product-play, there's probably no better place to sell."

Emerging tools and services: Loans and Storefronts

Also of interest to SMBs are a pair of programs that Amazon offers on an invitation-only basis, but are likely to expand in coming years. Starting in 2011 Amazon began notifying select sellers of their eligibility for loans ranging from $1,000 up to $750,000 to finance inventory or just about any other business expenses including product development. SMBs borrowed more than $1 billion through the program last year alone.

And last year, Amazon selected 20,000 SMBs from across the US to pilot its Storefronts initiative, a web portal with videos and stories that feature individual businesses and brands. Combined with a new Small Business of the Year Award program, Amazon is investing heavily in building the brand narratives of its SMB partners and establishing itself as the place for small business e-commerce.

"We wouldn't be where we are today without having our items on Prime," Horvath said of Sweet Water Decor. "It has really helped us grow our business and we have a ton of people now in our candle team."

"The sky's the limit now," she added.

Costs, Benefits, and Risks

All of Amazon's benefits come with a predictable downside: it's expensive. Sales commissions tend to run around 15%. Competition on the platform is also fierce, driving down margins.

Individual mileage may vary on the cost-for-value of Amazon's commission relative to its benefits, but the marketplace's competition is not for the faint-hearted. To one side there is an ever-growing number of other third-party vendors with their own supply agreements and business costs, and on the other there is Amazon itself.

Well-performing products have always become targets for competitive attack, but never at the speed and scale now possible. A seller could easily see its winning idea become adapted and sold by the marketplace's very host as a private label offering - Amazon raised eyebrows when it introduced a wool sneaker that looks a lot like Allbirds' offering. In fact, a search for "Allbirds Shoes" on Amazon returns a lot of similar products, with no Allbirds branded options.

READ MORE: Amazon is selling a $35 wool sneaker that looks suspiciously similar to Allbirds, the $95 shoe of choice for Silicon Valley power players

Seasoned e-commerce sellers will also have to adjust to Amazon's close-to-the-vest handling of customer information. Denissen, the Amazon VP, says that's partly by design: "We really make sure our customers' privacy wishes and desires are maintained and met," he said. "Whatever is required to complete the transaction, the seller is part of, and if for any reason the customer wants to engage beyond that with a brand, we do offer tools and possibilities for that."

Amazon customers reward the company with a high degree of loyalty - Prime members spend an average of $1,400 per year - but that loyalty doesn't necessarily extend to third-party sellers, according to Farrell at Sidecar. He also adds that the platform's exclusive focus on the transaction leaves little room for added-value interactions and experience that could reinforce a brand's identity.

Key Strategy: Win the Buy Box

Everything on Amazon comes down to the Buy Box, the little yellow button that connects customers with purchases via Amazon's proprietary algorithm. Staying ahead of the game there can be a significant ordeal for sellers, where the smallest difference in price or delivery speed can make all the difference in winning the sale for items with matching SKUs.

"A big part of running a successful campaign or business on Amazon is winning the buy box - and there's a lot of things that go into winning the buy box," Farrell said. "Pricing, shipping, reviews. All of those things need to be managed very effectively in order to get that prime position on Amazon and have success."

Sellers using FBA are automatically qualified for inclusion in the Buy Box, and Amazon says it is strengthening its tools to help sellers optimize their listings and fulfillment strategy to win the sale. The Seller Central dashboard shows how a business is performing on the most important factors.

"The best way to maintain eligibility and be able to win the Buy Box is to ensure that their account metrics are all green and that they have competitive prices," Denissen said.

Still, the battle over the Buy Box is certainly more pitched for retailers who sell other companies' brands, than for makers or distributors of highly differentiated products, but the risk is always there.

"To win on Amazon you need to have differentiated products, lower costs, or some unusual ability to promote your products better than anybody else," said James Thomson of Buy Box Experts.

"That third one is not gonna happen, so that leaves differentiated product and lower prices, and lower prices are hard," Thomson said.

Where Amazon was once a place that brick-and-mortar retailers could list excess inventory, there is now an entire sub-industry of online-only sellers with razor thin margins and patchy adherence to brands' quality control or minimum advertised price agreements.

And as Birkenstock was surprised to learn it tried to ban its retailers from selling its footwear on Amazon, a company's decision to not list its products on the platform doesn't necessarily mean someone else out there isn't making the sale using its name. The ease of creating a profile means that a company could wake up one morning to see sales of its once-exclusive products diverted to another seller's account.

Amazon is taking steps such as the Brand Registry to address this threat, but Amazon isn't the only side that is evolving - sales poachers are adapting too.

Key takeaway: Inform yourself on the many factors, and figure out how Amazon fits your business

The sellers and consultants we spoke with agreed that for all of Amazon's potential, SMBs would be wise to avoid over-reliance on the platform.

"It's kind of a double-edged sword and I think it really depends on what kind of business you are, what kind of scale you're getting and whether or not you're having a hard time driving the type of growth that you're looking for," said Mike Farrell, the senior director at Sidecar, the online retail service. "Amazon can serve as a really large distribution network for people that are manufacturers of products and trying to get them out the door."

With Amazon's resources and ubiquity, the right answer to the Amazon question will vary from business to business. Whether your business is all-in or all-out, the answers have one thing in common: having no strategy is no longer an option.

NOW WATCH: How Area 51 became the center of alien conspiracy theories