Amazon Exits Incentives Market * What It Means for You

News broke this week that is exiting the corporate rewards merchandise fulfillment business it entered in 2007. For its traditional catalog merchandise incentive company partners, Amazon’s Merchandise Rewards arm acted as the unseen drop-shipment fulfillment provider. According to Incentive Magazine, Amazon’s merchandise rewards partners were given 45 days notice with a few of the largest partners being given more time. Amazon is not exiting the gift card and electronic gift code business.

Two important questions arise from this announcement:

Why is Amazon exiting incentives?
There is much speculation, but four credible reasons rise to the surface.

1) Taxes -- This week, Amazon fired thousands of affiliates in Colorado, saying it refused to be forced to collect taxes under a new state law. (More details available from the Denver Post.)
2) Direct Customer Access – Amazon wanted direct access to the consumers choosing rewards through the Amazon platform, which was blocked by the incentive company partner.
3) Customer Service – Paul Hebert at Incentive Intelligence tells us his sources say: “Although profitable, the decision was made to drop fulfillment through incentive programs due to customer service issues. … From Amazon's point of view this created a negative impression of their customer service.”
4) Excessive markups by incentive providers - My own sources tell me that customers were complaining to Amazon of feeling ripped off by the prices they were paying for the incentive reward (usually 30-50% greater) in comparison to the price of the item directly on Amazon, hurting Amazon’s brand image.

What does this mean for companies who offer recognition or incentive programs to their employees?
The answer depends on who you rely on as your recognition or incentive program provider.

If you rely on a traditional merchandise catalog provider, you can expect:
1) A far smaller catalog offering as your provider will have to remove the thousands to hundreds of thousands of options they offered through Amazon, drastically limiting employee reward choice. Although these merchandise providers will be looking for an Amazon replacement, any who might consider it will face the same challenge of state taxes and the same desire for direct customer access.
2) Removal of low value rewards entirely or replacement of these rewards with gift cards. Amazon made it easy for traditional rewards catalogs to offer smaller merchandise awards with a value less than $50 – something they could not do otherwise as the S&H expenses are too high.
3) A continuation of massive markup rip-offs on merchandise reward items.

If you rely on Globoforce to provide a mix of globally desired rewards, there is no change. We are a long and trusted partner of Amazon, offering their gift cards and electronic codes through our global ex*change network of thousands of providers around the world. As always, we give your program participants access to ALL of Amazon’s merchandise at no mark-up. Dollar for dollar, euro for euro, yuan for yuan, employees know the exact value of their reward.

Ask yourself:

If you use a merchandise provider to fulfill your recognition or incentive program, how do they justify this massive rip-off of employees? Amazon chose to exit the market rather than harm their brand image. How do you envision offering such a program would affect your own brand image?

Do you really know who your suppliers are? What happens to your recognition program if one of their hidden suppliers decides to end their relationship, like Amazon recently did?

2 comment(s):

At April 09, 2010 8:30 AM, Paul Hebert said...

A couple of things relating the reasons Amazon is leaving.

The tax issue is a non-starter for me. As the States look for ways to drive income internet sales are a logical and big target. Amazon will have to deal with that issue whether they do incentive merch or not. It is a big issue with the affliates - not just with incentive companies. While they may be postponing the problem - they still need to deal with it.

The higher priced merchandise is also somewhat suspect. In an analysis I did of the typical incentive company "costs" on merchandise it ran somewhere around 15% below Amazon pricing - and Amazon was typically about 30% below typical merchandise pricing in incentive catalogs (a spread of about 45%). That means most incentive companies could mark up the Amazon prices 30%+ - still be making good money - and not be that different from the prices they were charging before.

For the many small companies they needed to go through a middle man - who did raise their costs by a factor of three in the last couple of years. That could have made the deal untenable.

I think the net-net is that the value of the market to Amazon was far smaller than the damage they were taking on the customer service side.

But it does make you think. There were many, many, many companies that saw the value - and therefore there is a demand. I would think some smart company would look at this and find a way to make it work.

Anyone want to call to discuss? I'll share the profit!

At April 09, 2010 10:27 AM, Derek Irvine said...

Many thanks Paul for your comments (as ever!) - this one has a ways to run yet, before the dust settles and we really discover why they have decided to abandon the market. But as you rightly say - it is a very big market, and we certainly stand ready to help any customers who feel let down by their exit.