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Third Party Sellers Need To Rethink The Amazon FBA Program

Hi gang,

Long time no talk. How are you? You’re looking good! How are the kids? How is your business doing? Did the doctor take care of that rash? Good. Good. Is your business growing? You hanging in there?

How am I, you ask?

Wow, is that a good question that does not have an easy answer. I think that before I answer that, I’d like to tell you a story.  Do you have a few minutes? This is a pretty important story if you are a business owner and sell online. Ok, grab your coffee and pull up a chair.

Here goes.

For those of you who don’t know me, here’s a little back story.  For 10 years I owned a company called Inflatable Madness, and even though we received 4 calls a week from people either asking for blow-up dolls or bouncy houses, what we actually did was sell used and new movies, music cd’s, video games, and books on eBay and Amazon and other websites.  For a time, my business was very successful and we became the 25th largest seller in the world on eBay and in the Top 15 of all media sellers on Amazon. At our peak we were selling 5,000 items a day and I had 38 employees operating out of a 24,000 sq ft facility in Matthews, NC. Let’s just say that I’m probably 1 of about 100 people in the world who have a Ph.D in eBay and Amazon.

Around 4 years ago, everything collapsed very quickly.  Resale prices for used media were plummeting as digital viewing and downloads kicked into high gear, eBay was steadily raising their seller fees, then the economy collapsed and our banks started calling in their loans, and finally our suppliers notified us that we had taught them how to sell used media so well that they were keeping their product that they usually sold us for themselves to sell.

So my business collapsed. It was the most traumatizing event of my life and I am still trying to get over it.

But, like you, I am an entrepreneur and the show must go on.  I started another company that bought private collections of dvd’s, cd’s, and video games from people via several buyback websites.  It was a great model – the customers sent us their product, we would receive the product in and pay the customer for everything that wasn’t scratched to hell or counterfeit, and then we would send all of the product to Amazon.com’s Fulfillment by Amazon (FBA) program. So when an Amazon customer bought an item from our user id on Amazon, Amazon would fulfill the order for us and handle customer service.  This way, I didn’t need a warehouse or a shipping staff or a CS team.  I could just focus on product acquisition.

For a long time I was very positive on FBA. I even blogged about it:

Also, we were doing very well with it.  I ran a minimal crew and with minimal effort and we were generating numbers like this on Amazon:

Time period 5/1/2011 – 10/31/2012

169, 013 units sold

I should also point out that we maintained an almost spotless seller record on Amazon – 97% or better feedback and rated Excellent by them, which is very tough to achieve.

Still awake?  Here comes the good part.

So, I woke up on a Monday in late October of 2012 with an email from Amazon that informed me that Amazon was permanently closing my account because “they suspected we had sold a counterfeit item.”  The action was permanent. The end.  Have a nice life.

Wha???

Amazon allows you to appeal the decision via email one time, and so I did.  I pointed out all the logical arguments:  a) hey Amazon, what item are you talking about? Can we see it so I can agree or disagree?  b) in the last 17 months we have sold 169,013 items and have NEVER had a complaint for counterfeit, which is because we literally examine each and every item we receive before we send it back out for sale and since we have been inspecting dvd’s for over 10 years, we are experts at detecting counterfeit.  c) did I mention we are rated Excellent by Amazon with a 97% feedback rating?

Within 48 hours, Amazon wrote back to say that my appeal has been denied.  The end.  Have a nice life.  I wrote all of my Amazon contacts.  No response.

So, just like that, my second  business had been wiped out.

Hold the phone – there’s a lot more. Go get some more coffee

Well, I can’t really have a nice life just yet.  Know why?  Because I have 55,000 items stored at Amazon’s FBA warehouses, and now they are all just sitting there incurring storage fees.  Amazon will happily either return my items to me or destroy them for me.  For .50 a unit + shipping or for .15 a unit, respectively.

We’re entrepreneurs – let’s do math!

55,000 x .50 = $27,500 + shipping to return my items

55,000 x .15 = $8,250 to destroy all of my items

Amount of money I have after the spectacular failure of Inflatable Madness a few years earlier =  $0.00.

I try to explain my dilemma to Amazon via their email case system, and it goes something like this (cue the Benny Hill music):

Me: Amazon has permanently closed my account. I have a large volume of items in the FBA program. I cannot afford either the .15 disposal or the .50 return fee. I would like to have my items returned to me. How can Amazon help me accomplish this?

Amazon: Greetings,

I apologize for the current situation you are facing.

Unfortunately, there is no other way other than place a removal order or disposal order which will be charged of the amount you have already mentioned in your email.

We will not be able to exempt the removal or disposal fees in this case.

Please write back to us with your confirmation so we can go ahead with further processes for placing a removal or disposal order for your existing items in our fulfillment center

We look forward to hearing from you soon,

Me: I’m not sure you understood my original email. Amazon has turned off my account and cut off all of my income. I cannot afford either the .15 disposal fee or the .50 return fee. I feel that Amazon should waive the return fee and give me back my inventory.

Amazon: Greetings,

I deeply apologize and I completely understand your situation.

Please know that we will not be able to waive out the removal or the disposal fees as Sellers are not exempted of this fee. Therefore I kindly request you to create a removal order for the units present in the Fulfillment Center.

Sooo,  there’s that.

Here’s where we start to go down the rabbit hole.

A few weeks later, I receive a phone call from another seller of dvd’s and music.  Not just another seller – really they are the second largest 3rd party FBA seller of media on Amazon. They are huge. 10 times my size or more. He tells me that they have been kicked off of Amazon as well for “potentially selling a counterfeit item”.  They had to spend hundreds of thousands of dollars to get their product back out of Amazon’s FBA program and their overall business has taken a serious hit.

He then very casually asks me how I was handling the lawsuit against me.

Exsqueeze me? Baking powder?

I tell him I have no clue what he’s talking about, and he points me to a legal website that states that I have been sued by a major DVD manufacturer/distributor for selling counterfeit.

Um, huhhhh?

This was at the end of October.  I did not receive a single piece of paper about the case until mid-December.  Sure enough, I was being sued for selling a counterfeit item on Amazon.  I call up some attorneys and am told that my legal fees would be $25k or more to defend myself.  I faint. Then I wake up and faint again.  If I don’t have the money to destroy my items, I sure don’t have the money to defend myself.

I write to the attorney for the rights holder and explain that they’ve got the wrong guy and tell them all the reasons and statistics and track record of my company, and ask them to drop the case.

They don’t, and the case progresses through the courts while I helplessly watch.

The attorneys wait until the case passes a point of no return to actually send me the evidence they have against me.  It’s a packet with photocopies of the Amazon receipt showing they bought the item from my user id on Amazon, the package they received, and the item in question, which turned out to be a brand new and sealed boxset from the TV show The Mentalist (or as my mother-in-law calls it, The Medalist).

As you might expect, I cannot tell anything from these copies. The copies are in black and white and I can not find anything wrong with the boxset.

I again write the attorney for the rights holder and tell him that I don’t see any evidence of counterfeit, that it was a new sealed item, and that we obviously can’t open new items and inspect them because they wouldn’t be new anymore.  They ignore me.

About a week later I had a dream.  I was on a brand new cruise ship with a brand new crew and I was staying in a brand new cabin. The weird part was that I couldn’t find my cabin because they were all brand new and they all looked the same.

Within 2 minutes of waking up, I literally said “holy s**t!” out loud.

The item was new.

Which means it probably wasn’t mine.

To explain,  Amazon.com FBA has a program called “co-mingling”.  What this means is that if you are in the program, and I am, if you send a new sealed item to FBA, you do not need to place an inventory sticker on it like to do for every other item you send to Amazon.  You don’t have to sticker it at all.  What Amazon does with your item is co-mingle it with all of the sellers of that item who are also in the program and Amazon’s own inventory and when they sell that item they pull a unit at random from their co-mingled stock.

In other words, the physical item I sent to Amazon may or may not have been the physical item the customer received! The item wasn’t mine.

This time I got the attorney on the phone.  I explained the situation to her, and she said “Mr Harmon, in California copyright law, we don’t have to prove that the item was yours – just that we bought the item from your user id on Amazon”.

So I called more attorneys, who were all willing to help me for $25,000. They would not verify what the rights holder’s attorney had told me, but they’d be happy to look it up for $25,000.

Ironically and suspiciously, a few days later my phone rang and it was an attorney from Amazon.  Finally! I could explain this to them and they would reopen my account and I could get back to selling again…

“I’m just calling to inform you that there were no other sellers of that item that were in the co-mingling program,” the attorney said. Oh crap – Amazon and the manufacturer/distributor were in cahoots.

“Ok. But Amazon had stock of that item, correct?” I replied.

“I’m just calling to inform you that there were no other sellers of that item that were in the co-mingling program,” the attorney said.

Mmmmmmmk.

Gang, I would love to be able to tell you that this story has a happy ending, but the fact is that I lost the court case.  I’m the proud owner of a giant fine that will bankrupt me.

The title of this article is “Third Party Sellers Need To Rethink The Amazon.com  FBA Program,” so let’s think through why I have said that:

  1. I was an Excellent rated seller on Amazon with 97% positive feedback.  We had never had a complaint for counterfeit, so the ratio stands at 169,013 to 1, or .00000592% . Amazon holds sellers to the highest standards in all of the 3rd party selling industry – that fact alone should have warranted some defense against this claim.  Yet Amazon just stepped aside and let a giant corporation obliterate me. I should also point out that the same company has sued over 80 other sellers in the same manner in the past 8 months.
  2. Once your product is at FBA, they’ve got you.  Amazon can raise fees on you, which they have done, and they can even implement fees that didn’t even exist when you sent them the items. A few years ago, Amazon implemented a new fee called a “long term storage fee” where they clobbered any seller with storage fees for items in Amazon’s warehouse for over a year.  That one cost me $50,000 in product I was forced to destroy.  As I’ve already explained, Amazon will charge you a fee to return your product or destroy it.
  3. For the love of all that’s holy, NEVER agree to use Amazon’s co-mingling program.  If you do, my situation proves that you are liable for other sellers products, not Amazon.

To prove my co-mingling point even further, I recently ordered Amazon to return some items to me so I can resell them and recover some fees.  When we sent out all of our items to the FBA program, they all went to 2 different Amazon warehouses.  Now that I’m receiving them back, guess what?  So far, the new sealed product has arrived back from 9 different warehouses.  Yep, they’re sending back someone else’s new sealed items to me.

This situation literally breaks my heart.  I was a HUGE proponent of Amazon’s FBA program for a long time.  I counseled other sellers to use it, I wrote about it, and I loved using it.  There are thousands of other FBA sellers out there, and I used to think about how smart we all were to outsource major components of our businesses to Amazon.

Now? Yeahhhh not so much.

Best,

Kevin Harmon

Come play with me on my new website –> GodImSexy.com

kevin@redshortsmedia.com

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About the Author: Kevin Harmon

Kevin Harmon is a freelance e-commerce business consultant and blogger. He is the former CEO of Inflatable Madness, LLC, one of the largest DVD and CD sellers on eBay and Amazon, and Red Shorts Media, LLC, which operated multiple e-commerce media buyback websites.