Case Study: Direct to Consumer vs Amazon Online Marketplace
Tuesday, March 5, 2019

Categories: Thought Leadership

Case Study: D2C vs Amazon Online Marketplace

Online Marketplace Case Study - HBR Mar-Apr 2019 Cover

An interesting, retail-oriented case study appears in the March-April 2019 copy of HBR Magazine. The case study is “Sell Direct-to-Consumer (D2C) or Through Amazon.” It details a major challenge facing Mark Ellinas, the CMO of PedalSpark. Specifically, the challenge being how to market the firm’s new luxury, $4,000 electric bicycle. More specific, should PedalSpark market the bicycle D2C (it’s standard way) or on Amazon’s online marketplace?

Also, don’t miss the great infographic from Internet Retailer on the Top Online Marketplaces in 2018 at the very bottom of the blog.

Amazon Online Marketplace Challenge

Two opposing opinions in this case being characterized by Mark’s two direct reports. One, Giddeon Bear (sales manager) favors the aggressive Amazon sales approach. The other, Tamar Nourse (product manager) favors D2C sales, retaining full ownership and control of their sales process.

Why Take It Slow? Online marketplaces could become a source from which competitors learn and copy

Tamar’s concern about selling the new bicycles on Amazon is the threat of feeding the enemy. She mentions that “the day we put the bike on sale Amazon will start vacuuming up information about our customers, our margins and the market’s potential. If it ever decides to get into the e-bike business, we’ll have hand-delivered all the data it needs to squash us.”

In the case study, Tamar provides an example of how her friend founded a startup as CEO. She develops the prototype of a new product. Sourced manufacturing. Then she starts sales of a new tablet stand. Ultimately, copycat products emerge. The worst of them being Amazon Basics. They created their product just different enough to avoid lawsuits. But, they introduce their product at a 50% discount to Tamar’s friend’s product. Most importantly, this ends up putting her friend out of business.

It is a going concern. Inc Magazine highlights that Amazon has 100 private label brands. These offer over 4,600 products. Their private labelling projection is to reach $25 Billion by 2022.  In this respect, the online marketplace could become a source for competitors to learn and copy.

Online Marketplace Upside

Gideon Bear expresses the other side of the coin. He expressly highlights that although there is a considerable risk, there is also tremendous upside. Gideon points out the 100 million active subscribers on Prime. And of course, even if only a very small fraction of those members purchase – sales dramatically shoot up for a small firm.

Gideon provides further reasons for partnering. Amazon does have logistics services and capabilities to be leveraged. He points out that PedalSpark could simply experiment with one of its products, as a test run. If successful, and smooth; then the options open up for other SKUs. Finally, Gideon also highlights that other well-known brands also sell on Amazon. He highlights Apple, Versace, Rolex, and Jimmy Choo. All good points.

Industry Advice 1: Sell

Man making a choice between different online optionsStephan Aarstol, CEO of Tower Paddle Boards, advises Mark to sell on Amazon. His point is to be transactional with the online marketplace. While it makes sense to sell on Amazon, then do it. Their practices are to offer the marketplace to vendors as long as it makes sense for Amazon. So, adopt the same practice and philosophy as a marketplace operator.

Amazon takes a significant cut of the sale. It is definitely a pay to play market. There are seller fees, and listing fees, just to be seen. They make it competitive. In negotiating, they hold all the cards. Do not go into this arrangement with the expectation of having a balance of power. That does not exist. But, if the thinner margins are made up by the volumes and exposure, then proceed.

Position with the High End

Stephan advises Mark to position its high-end luxury range of products as the test case. In fact, run the test case before introducing the e-bike. An online store on Amazon opens access to an exponentially larger market than PedalSpark’s own. Given the overcrowding of this online marketplace, a differentiator may be to avoid the low end where there are many vendors, already. By focusing on the luxury bicycle, PedalSpark helps to build out its own brand. Using high-end goods will give them more manoeuvring room on margins, too.

Pulling Out

An aspect that many online retailers forget, is the option to stop. Being on a top online marketplace like Amazon will have a huge impact for a small player like PedalSpark. But, small businesses might not be able to take the margin drain. Product categories may be oversaturated. Monthly fees may be too high. Online sellers on a marketplace like Amazon, may find they need an exit strategy. Before PedalSpark proceeds, they need to outline and define their limits. How much does it mean to them to proceed? At what point should they consider backing out?

Tower Paddle Boards found this was the case for their situation. Stephan points out that as Amazon evolves “it looks more and more like an online convenience store with traditional retail markups.” Their business found this marketplace for sellers to be overcrowded. As a result, Tower Paddle Boards pulled their products from the platform, returning to direct sales.

So, despite being a great platform from which to ignite PedalSpark’s big sales growth, Mark must keep an eye on the metrics. Pulling out must always be an option. This especially true if their metrics swing to the red, beyond PedalSpark’s preset limits.

Industry Advice 2: Build a Brand First

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Gil Efrati, CMO at Nectar Sleep, suggests PedalSpark focus on building their brand. This, before jumping onto Amazon. He warns that “if it doesn’t do that first, its e-bikes may get lost in the sea of similar products on the site.”

Gil mentions that Nectar Sleep took a similar approach to Stephan’s suggestion. They recently started selling their high-quality mattresses on Amazon. But, he points out that Nectar Sleep only started with the online marketplace after their brand was strong. This provides Nectar Sleep with a built-in differentiator. It is important when compared to the many knock-off, private label and no-name (no recognizable name) products.

Nectar Sleep provides a better customer experience on their own site. In fact, Gil claims the vast majority of online shopping and sales occurs on the Nectar Sleep website. In addition, if customers buy directly from Nectar Sleep, they get bonuses and excellent customer service. For example, D2C (direct to consumer) purchases get a 365-day trial period, a lifetime warranty, and other advantages.

Strategic Choices

Gil suggests that PedalSpark’s needs to continue to do well on their own online site. He notes that “customers are loyal to Amazon, NOT the brands they’re buying on it.” This is a key point. If customers here are purely transactional, this is not a great option. If they only seek the lowest price, that’s bad for the retailer. Rather, the Nectar Sleep approach uses the online marketplace as a customer awareness mechanism. Then it is up to the vendor to guide shoppers back to their own e-commerce platforms, for better customer experiences.

Ultimately, Gil points out that PedalSpark must choose between building a brand and driving high volume. Amazon can be a quick fix for driving fast sales growth and cash flow. But, Gil also warns that this will not lead to long term profits nor sustained growth.

Industry Advice 3: Other Online Marketplaces

Online Marketplace - eMarketer July 2018PedalSpark should leverage the Amazon online marketplace. This is important to their business growth, helping them scale and mature. But, they must be careful NOT to paint themselves into a corner. Stephan noted that his company, Tower Paddle Boards, has opted to exit Amazon. To do this, you have to continue to build out other sales channels. Amazon can be a great option as far as marketplaces to sell, go. After all, as eMarketer’s research points out 49.1% of e-commerce flows through Amazon.

However, don’t forget the other online marketplaces. Don’t discount eBay, Apple, Walmart, and such. One big reason is to give yourself negotiation room. Becoming completely dependent on one channel is dangerous. A prime example was the disputes with book publishers over pricing in the early 2000’s. An extreme example was having all McGraw-Hill publications removed from Amazon’s online site. With an estimated 40%+ in sales coming from Amazon, such an impact could be devastating for any retailer.

To avoid this scenario Mark needs to set out a strategy to launch in 3 online marketplaces. This will provide multiple order entry sources. Yes, this will increase the complexity of the business. To manage the additional complexity, he will need to bring in distributed order management technology. It will both handle the incoming order sources (all of them) and orchestrate the order fulfillment. Essentially, it will help PedalSpark with:

  • inventory visibility,
  • optimal routing for fulfillment,
  • create a customer and order record, and
  • manage returns.

Paddle the Amazon with Great Care

When it comes to online marketplaces, start first with an experiment and grow it from thereIdeally, PedalSpark should start selling on Amazon. Mark should position their luxury or high-end products first. Start with an experiment, and grow it from there. This way there are learnings in place, and it is introduced as a palatable option to the PedalSpark. Then follow the Nectar Sleep example of providing a premium experience. Offer bonuses for shoppers willing to purchase directly from PedalSpark. The intention being to migrate the customer bases from Amazon to PedalSparks’ own, more profitable online site. Here they can sell online for a higher margin while building a customer following. This following will be more loyal to PedalSpark, rather than the online marketplace.

Finally, don’t rely on only one marketplace. Yes, Amazon is the dominant player. However, nurture at least one or two others to provide PedalSpark with options. Use advance distributed order management technology to manage order flows, payments, order record keeping, orchestration, and routing orders for fulfillment.

All told, these three strategies will help PedalSpark boost sales, while growing its own brand. All this while also avoiding one channel from overtaking all other options. Josef Rosenfeld, president Health Flavors, notes that “selling on Amazon has more pitfalls than opportunities. Amazon’s policies are to its advantage, not the seller’s.” It is wise for Mark and PedalSpark to heed the warnings. Paddle strategically and with great care.

Top Online Marketplaces in 2018

Author: 

Charles Dimov, VP of Marketing at OrderDynamics

Charles Dimov is VP of Marketing at OrderDynamics. Charles has 23 years experience in Marketing, Sales and Management across various IT and Technology businesses. Previous roles include Chief of Staff, Director Product Marketing, and Director Sales. Charles has held roles in brand name firms like IBM, Ericsson, HP, ADP, and OrderDynamics.

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