How Pharmapacks Made $70 Million in 2015 on Amazon Marketplace With Algorithmic Pricing

Amazon-Marketplace

Great story in Inc Magazine about Pharmapacks, an Amazon Marketplace seller, which made $31.5 million in revenue in 2014 and $70 million by 2015. Inc. Magazine:

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. (..)

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.

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. (..)

Pharmapacks now employs 16 customer-service reps, who field almost 200 concerns over the phone and by email every day. They write back to all customer inquiries within 24 hours–one of the key metrics Amazon tracks in its customer-service ratings. (…)

Pharmapacks has agreements with 16 suppliers. Some deal directly with manufacturers. Others get their goods in more circuitous ways. These tight-lipped suppliers are known by their critics as diverters. (They prefer “secondary market distributors.”) They acquire deeply discounted goods through gray-market methods, such as buying deodorant from a company that ordered too much.

There are now more than two million sellers on Amazon Marketplace.

The Amazon Marketplace is no big enough but still young enough to enable such, dare we say, platform arbitrage models.

We are now in the first stage where this platform and others (like Zalando) are big enough that the first marketplace participators experience where optimizing for these marketplaces will get you. But it is still too early for a whole service industry to form around this. (Like SEO with Google nowadays.)

Hence a bit of gold rush mentality can easily be observed.

All of this of course is great for Amazon. Sellers like Pharmapacks increase the attractiveness of the marketplace, and in turn of Amazon as a whole, for consumers.

Which is another way of saying that Amazon’s marketplace is already in a very virtuous cycle.

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