The Unsolvable Headache of Counterfeit Goods in Amazon Marketplace

Every year over $50 billion worth of products are sold on Amazon marketplaces by third-party sellers, yet none of those billions of products are controlled by Amazon. Some of them have limited physical inspection since they pass through the Fulfillment by Amazon (FBA) warehouses, but a lot go straight to the customer. This has allowed Amazon to grow their catalog and offer best pricing, but has also meant that the marketplace is a breeding ground for fake products.

China share of seized counterfeit goods

Every year the U.S. Chamber of Commerce Global Intellectual Property Center (GIPC) releases the “Measuring the Magnitude of Global Counterfeiting” report, which provides a breakdown of the share of physical counterfeiting. The report released last year estimates the global counterfeit market at $461 billion. 86 percent of all seized counterfeits originate in China and Hong Kong’s markets.

The problem of counterfeit is much bigger than Amazon, but the marketplace model and the number of visitors of Amazon makes it one of the most lucrative places to move products through. This is one of the biggest headaches for Amazon since it frustrates both the customers and the legitimate brands loosing sales. But Amazon doesn’t want to cut out Chinese sellers either, who might as well be the biggest source of counterfeit products, since as much as 25 percent of the marketplace is Chinese sellers

Seller ratings, launched first by eBay in the 90s, was the first attempt of introducing accountability for sellers. It gave customers an opportunity to alert future buyers about shipping, quality, and payment issues. In theory this allows avoiding bad actors by utilizing the community of buyers. However, it is incomplete in a fundamental way - a new seller account can be created, forgetting the history of bad ratings.

On Amazon.com there is a new seller joining every 30 seconds. Any one of them might be looking to abuse the marketplace in any of the many ways, selling counterfeit products being one of them. Obviously if a seller sent a completely different product the customer would notice it, and report it. But if they received a counterfeit product they might not even notice it.

Because of this over time Amazon has made the marketplace more strict. New sellers are now welcomed with an email asking for “copies of invoices, receipts, contracts or delivery orders from your supplier issued in the last 90 days.” The days of being able to go thrifting and listing items on Amazon are just about over. It is not unreasonable that soon enough no product would be sellable without proving a legitimate source. Yet this will require a lot of staff hours on Amazon side, which means it will be both a slow and an expensive process.

Amazon and other marketplaces have tools to report infringement for both intellectual property and counterfeit products, but it’s an imperfect system. Over time it has become a point of abuse, attracting false infringement claims which often require the seller to prove their innocence without much work for the claimer. Abusive sellers and brands are using this to cause trouble for competition.

So by letting anyone sell a product Amazon was relying on infringement and counterfeit reports to catch bad actors, which hasn’t worked. And now Amazon is reversing the process by requiring sellers first prove they have a legitimate source for a product, which is an unscalable challenge too. In both of these scenarios Amazon is acting as the decision maker trying to pick who is right or not, but given the hundreds of millions of products and millions of sellers it doesn’t scale. Some of the big brands will get cleaned up, but it will continue to be a problem.

For smaller brands, which have been in the news over the last few years having been hurt by this are yet to hear great news. Amazon’s efforts to battle counterfeit products are growing - Amazon released Brand Registry 2.0 (an updated version) in May of 2017.

We think this will force Amazon to continuously make the marketplace more strict, and to prefer sellers who make their own products. The simple retail arbitrage model of anyone-can-sell-anything doesn’t work anymore. We even think that Amazon should introduce verified sellers:

“A verified seller is checked by Amazon to have a valid business, no history of counterfeit, good rating, etc., but also willing to publish their business information. It’s a seller who doesn’t need to hide behind the anonymous name.

This would be beneficial to all parties. Being anonymous benefits scam sellers and counterfeit sellers, but adds no value to true retailers. Retailers would benefit by being transparent about their business, since those running fraud couldn’t do the same.”

Most marketplaces allow starting afresh by creating a new marketplace seller account. This means the seller ratings are practically useless for any seller with bad intentions. By instead slowing down the process of seller creation, and introducing attachment to a business entity it would make jumping seller accounts much harder. It of course doesn’t solve it completely, but is one of the many ways to make the marketplace more reliable by introducing strictness.

The best way to think about this problem is that Amazon operates by building systems which scale. Meaning they don’t get harder or more expensive as they grow in size, they can grow beyond. For example, Amazon has built some of the largest fulfillment infrastructure in the world, and it allows many sellers to benefit from it. But introducing any sort of fake product checking into it is an example of an unscalable process. Same applies for the marketplace, and checking of source of products through invoices.

Amazon is one one side balancing the problems with counterfeit products, while on the other side of the scale sits the slowing down of the system. Solving counterfeit would mean slowing down the marketplace to a halt. And that’s why we think it is unsolvable.

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Juozas "Joe" Kaziukėnas

Founder of Marketplace Pulse, Joe wears multiple hats in the management of Marketplace Pulse, including writing most of the articles. Based in New York City. Advisor to other startups and entrepreneurs. Occasional speaker at conferences.

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