Here’s the secret to how many Chinese Amazon sellers price at or below breakeven.

Remember when Amazon aggregators flooded the space during Covid?

Buying up and consolidating brands was the name of the game.

Well, they weren’t the only ones eager to take advantage of the e-commerce goldrush.

As it turns out, China was also abuzz with activity.

Enter the factory.

Many factories—who had always just been manufacturers—were being approached by agencies to help build their own brands.

The factory would make the product—they were already good at that.

What Services Agencies Provide to Factories

And the agency would handle everything else:

➤ Market entry strategy

➤ Brand development and positioning

➤ Product listing optimization

➤ Advertising and promotion

➤ Marketplace compliance and regulation management

➤ Logistics and supply chain management

➤ Customer service and feedback management

➤ Analytics and performance tracking

This business model wasn’t new by any means.

But it absolutely exploded between 2020-2022.

Now for the juicy part.

How is everyone making money?

How the Factories and Agencies are Making Money

The agencies are getting commission on revenue and a flat annual or biannual service fee.

Meanwhile, the factories are content with thin profit margins since achieving their targeted FOB (Free On Board) price per product ensures profits comparable to those they would get by manufacturing products for foreign brand export.

The Perfect Storm for Driving Down Prices

It creates the perfect storm for driving down price and driving up advertising costs per click.

Factories bankrolled enormous catalog launches and footed aggressive advertising budgets.

The agencies were all too happy to price low to drive volume and open up the advertising floodgates.

The result?

That shoe rack you sell for $35… well the Chinese agency can sell at breakeven for $20.

Because they’re still making money and the factory is still making money.

So, How Can Western Brands Compete?

But guess who’s not making money?

Bingo—the foreign importer or brand is facing enormous downward pricing pressure.

Between inflation and its effects on consumer confidence and all of these competitive forces, it’s a tough environment out there.

More than ever, we have to innovate to continue competing.

Better product selection. Better factory relationships. Better branding.

What do you think? Given this environment, how can brands compete?

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