Wednesday, July 27, 2016

Why It's Nearly Impossible To Stop This Amazon and eBay Scheme

Fred Ruckel was an advertising guy. At 25, he started his own agency, and over 12 years he developed commercials for the Super Bowl, Lays and Pepsi. But he never considered himself a Mad man. “I’ve always been an inventor,” he says. A tinkerer. An explorer. He was a guy with ideas but no time to pursue them. So in 2011, his wife, Natasha, gave him the gift of a lifetime: Quit your job, she said. She’d cover the bills while he built a new career. Ruckel immediately went to his business partner and said, “I’m out. I’m going to go change my life.”

He opened a production studio. He sunk $30,000 into an app. He experimented. And on Valentine’s Day 2015, as his wife was playing the piano at home, he watched their cat, Yoda, discover a new toy: a rug under the couple's drum set. It had become rippled, and Yoda swatted at the resulting funny shapes. Ruckel knew: This was it.

He called it the Ripple Rug. It’s stupidly simple, as all great cat toys are: There’s a small rug, you see, and on top of that is another rug. The top rug, attached by Velcro, is full of holes. It’s designed to be a crumpled mess, with bulges and tunnels for cats to explore. Soon hundreds of yards of carpet and Ripple Rug designs cluttered Ruckel’s home. So in June 2015, the couple made another concession to inventions: They left Manhattan, where they’d lived for 22 years, and moved upstate to a house they built as a future retirement home. There, Ruckel would truly have space to invent.

Ruckel hired a factory in Georgia and developed a way to make every Ripple Rug out of exactly 24 recycled bottles. The product debuted in September and went live on Amazon in December. Sales quickly spiked to $2,000 a day, and he became obsessed with the numbers. “Amazon is, without a doubt, Kickstarter on steroids,” he says. “It’s adrenaline. It’s like crack -- ahhhhhh, all day long.” There’s another word for this drug: validation. He was finally a successful inventor.

Then his brother-in-law called.

“Did you see that people are selling your Ripple Rug on eBay?” he said.

Ruckel looked. It was true. Lots of people were selling it -- and not used, either. They were selling new Ripple Rugs. “I’m like, ‘Oh, man, what is that? They copied my stuff!’” Ruckel says. “I’m thinking, Where are they getting it? Is one of the guys in my factory selling it on the side? So I called up the factory, and of course I looked like a jackass.”

The factory was innocent. But as Ruckel kept digging, he discovered the true cause. It’s an industry of people who transform themselves into uninvited middlemen -- either as a form of reseller or, depending on your perspective, a parasite. They steal brands’ marketing materials and make money off their products, creating all sorts of consequences for small retailers like Ruckel. And yet, these people also represent a difficult new reality for entrepreneurs: In the increasingly complex world of e-commerce, everything about a brand -- from its reputation to its pricing -- can be up for grabs.

To understand what’s happening, it’s helpful to visit a different site -- the place largely credited with launching this middleman army: It’s The site, which says it has had more than 140,000 users, launched in 2013 and spawned a universe of copycats. Over a cheery ukulele, a man in a video explains its offering: “DS Domination is the first and only platform of its kind that allows the average person to harness the power of multibillion-dollar companies like Amazon, eBay and Walmart at the push of a button,” he says, like an infomercial pitchman. “Using our unique platform, any user can create an income within minutes, simply by copy-and-pasting product information from one company to another.”

The internet is, of course, full of promises like this. Work from home! Get rich with no effort! If you have a few years of your life to waste, you can go down the mother of all rabbit holes trying to understand them. Suffice it to say: Most rely on something called MLM, or “multilevel marketing” -- pyramid schemes, basically. DS Domination does offer an MLM element, but its main service is something more unique: It’s called “Amazon-to-eBay arbitrage.” It sells software and strategies to make this possible.

A quick language lesson. Arbitrage means to take advantage of price differences between markets: Buy low in one place and sell high in another. DS stands for “drop shipping,” which means to sell a product and then have it shipped directly from the wholesaler or manufacturer. In this world that DS Domination sparked, the terms are used somewhat interchangeably. But both play a role in the cleverly complex transaction that enables someone to sell Ruckel’s Ripple Rug on eBay -- and, occasionally, make more money on it than Ruckel himself does.

To see how this works in real time, I go to eBay and buy a Ripple Rug. There are five listings for the product on this day, and I select one from a seller called AFarAwayGalaxy. The price is $49.51; on Amazon, Ruckel sells it for $39.99. So, how’d this listing get here? Almost certainly, the seller is using some kind of software -- made by DS Domination or a competitor -- that scans Amazon for its best-selling products. (They can also do this on large sites like Walmart’s, though most seem to focus on Amazon). The software found the Ripple Rug, which, on the day in June I buy it, is ranked number 25 in cat toys. Then it copied everything in the Amazon listing and pasted it into an eBay listing --amusingly, right down to the part of the product description that says,“Thank you for viewing our Amazon version of the Ripple Rug.”

The price is usually set between 5 and 15 percent over the Amazon price. When I make the purchase, the person behind AFarAwayGalaxy simply goes to Amazon and buys a Ripple Rug -- but instead of buying it for themselves, they designate it as a gift and have it shipped to me. Because I paid $9.52 above the Amazon price, that’s profit, which AFarAwayGalaxy can keep (minus Paypal and eBay fees). This seller has more than 11,000 items listed on eBay. That can quickly add up to real money.

After I place my order, I get an email from AFarAwayGalaxy: “This is to let you know we got it, processed it and have sent it on to the warehouse for shipping,” the note says. Of course, that leaves out a few details. The “warehouse” is actually Amazon’s fulfillment center, which is where Ruckel stocks his Ripple Rugs.

“That’s genius!” says David Bell, a professor at the University of Pennsylvania’s Wharton School, who studies e-commerce. He’d never heard of this scheme but laughed loudly when I explained it.

As it turns out, retail experts didn’t see this coming. In 1997, in the dawn of e-commerce, a New York University professor named Yannis Bakos wrote a well-regarded paper that predicted the internet would change pricing forever. Imagine the old days: You went to a store and had no idea what other stores charged for the same products -- which meant the store you were in could jack up the price. But once everyone could comparison shop online, Bakos reasoned, every site would likely have to offer the same price. And yet, it turns out, many shoppers don’t do the research. If they like eBay, they buy on eBay. Simple as that. Bell’s conclusion: “I think if you’re a small guy, you just have to accept the fact that the platform is the place where the product is going to be sold.” But which platform, and at which price? That’s hard to control.

Ruckel wasn’t feeling so laissez-faire. The more he understood what was happening, the angrier he got. At first, he was protective of his product. “Brand consistency is primo for me,” he says, and the eBay listings were often janky. But then he began seeing an uptick in returns and pieced together what was happening: Someone orders the Ripple Rug on eBay, but the product shows up in an Amazon box. The customer is confused, goes to Amazon, sees how much cheaper the product is there and feels ripped off. “Who are they immediately mad at?” Ruckel says. “The people at Ripple Rug, not some person from nowhere!”

The customer then returns the product, setting off a crazy series of events. Let’s say I want to return the Ripple Rug I just bought. I’d push the “return” button on eBay. AFarAwayGalaxy would then go to Amazon, acquire a return label (which is free for Amazon Prime customers) and send it to me. But because eBay sellers can set their own return policies, AFarAwayGalaxy reserves the right to charge customers a 20 percent “restocking fee” -- which in this case would come out to about $9.90 -- as well as a shipping fee. Meanwhile, Amazon would charge Ruckel a return fee and ship him the product so he could inspect it. Almost always, Ruckel says, returned products have been opened and are covered in cat hair -- making them impossible to sell again.

So, in total: I could have lost more than $10. Ruckel would lose $19.51 (that’s the $2.05 per unit it costs him to stock at Amazon’s warehouse, $12.06 in nonrefundable fees for Amazon to process a sale and $5.40 in return fees). And AFarAwayGalaxy, the only person in this transaction to never spend a dime, just made enough money for lunch.

The fees add up. Ripple Rugs have been returned to Amazon 219 times -- that’s nearly $8,000 in losses since December -- and while Ruckel can’t prove they were all arbitrage-related, he says that sales through his own website have yielded only one return. That’s why this whole thing makes him furious. He has appealed to eBay and Amazon, but arbitraging doesn’t appear to violate either platform’s rules. Amazon declined to comment for this story. An eBay spokesman told me, “We don’t specify where sellers obtain the products they sell.” Hitesh Juneja, DS Domination’s cofounder, says he has “a very good relationship with eBay.”

And so, Ruckel has tried taking his campaign to the arbitragers himself. He’s gotten into email arguments with them. He finds other anti-arbitrage sellers and swaps strategies. One of those people, Eric Wildermuth, who sells a line of children’s hats called Snuggleheads, came up with a particularly sneaky punishment: He bought his own hat from an eBay arbitrager for $27 -- and then, before the arbitrager could go to Amazon and make the purchase, Wildermuth changed his Amazon listing price to $199. Result: The arbitrager could either lose $172 on the sale or cancel the purchase, which would damage the arbitrager’s eBay ranking. Wildermuth repeated this about 10 times. “I got these frantic calls [from the arbitrager]. He said, ‘Please don’t do this,’” says Wildermuth. “He knew what I was doing. And I let out a string of expletives.”

This summer, Ruckel tried a new approach: He put his own product on eBay and titled it “All other eBay sellers are fake.” A few weeks later, he stumbled upon an eBay listing with a familiar title. “All other eBay sellers are fake,” it said. It wasn’t his, of course.

Someone had copied that, too. (...)

At its heart, none of this is new. In the Mycenaean period, no doubt, some clever ancient Greeks were arbitraging wine. Ticket scalpers are arbitragers. People have accused McDonald’s of arbitraging meat, selling the McRib only when pork prices drop. The difference today, however, is the breadth of commerce happening on just a handful of platforms. In exchange for the massive, unprecedented reach companies like Amazon and eBay provide, a product like Ripple Rug must relinquish some measure of control and identity. It is not a box on a shelf, carefully positioned and branded. It is a clickable subject line, a few photos and some text. And in this environment, it wouldn’t even occur to most customers to wonder: Who’s actually selling this?

by Jason Fiefer, Entrepreneur |  Read more:
Image: uncredited