Marketplaces, Are they Worth it?
By: Azad Sadr
According to Forrester, half of all online shopping was conducted on marketplaces last year. Given that this figure is expected to grow to two-thirds over the next five years, it is impossible to ignore the importance of marketplaces for a brand’s omnichannel strategy.
For a refresher on the major differences between marketplaces and drop shipping, check out this post by our founder Jeremy Hanks.
Here I’d like to discuss both the benefits and drawbacks that supply-side companies face when deciding whether or not to sell their products on marketplaces.
Benefits of Marketplaces
There are a number of important benefits that brands get from marketplaces:
- Exposure to Millions of Customers: It’s been estimated that Amazon has close to 300 million active users worldwide, 65 million of which are Prime members. Equally important, more than half of US online consumers turn to Amazon for their first product searches. Amazon, eBay and Alibaba’s Tmall alone accounted for about $365 billion in sales worldwide in 2016, or 31% of all e-commerce. Selling on such marketplaces gives brands immediate exposure and access to millions of potential consumers.
- Product Control: Since many brands will eventually find their way onto marketplaces through unauthorized sellers and forgeries, selling on marketplaces allows you to offer customers your own authentic products.
- Convenience and Easier Logistics: Using a marketplace allows companies to participate in ecommerce while not having to set up their own digital storefront. Additionally, for certain categories such as apparel with a high percentage of returns, marketplaces might make all the moving pieces easier for you, your supply partners, and the customers. Lastly, many marketplaces offer certain advertising, logistics, fulfillment, and financial services for a fee that can be a great benefit to brands and suppliers that lack such capabilities.
- Brand Recognition: Brands that are not well known may not get much traffic to their own direct-to-consumer sites. Selling on Amazon or Jet.com allows such companies to piggyback off a marketplace’s popularity.
Drawbacks of Marketplaces
In addition to the above benefits of selling on marketplaces there are also several important drawbacks:
- Loss of Ownership Over Shipping, Sourcing, and Consumer Data: Sharing retail and supply chain data may be the most dangerous part of selling on marketplaces. After all, access to such data allows companies that run marketplaces to copy best-selling products, turning the likes of Amazon and AliBaba into competitors able to undercut brands and suppliers on their sites. This isn’t just a groundless fear. Amazon has successfully replicated the products of its third party sellers through homegrown brands such as AmazonBasics, MyHabit, Happy Belly, Mama Bear, Presto!, Lark & Ro, and North Eleven, to name a few. This has led to some sellers on its site going out of business. (For a more indepth discussion on the dangers of working with Amazon for brands, check out this post.)
- Overcrowded Market: Selling on a marketplace means competing with millions of other brands, suppliers, third party sellers, and individuals. It can be difficult to get your products or brand noticed on a marketplace when you are lost among the general white noise. This somewhat mediates the greatest benefit that marketplaces offer in the first place: access to customers.
- Tough Marketplace Rules and Requirements: Marketplaces often have strict rules and requirements related to customer service, fulfilment, delivery times, and returns. Some of these requirements can be extremely difficult for smaller sellers to comply with, such as Amazon’s recent announcement that third party sellers are subject to the same refund rules as items shipped by Amazon. Such tough rules can lead to extremely small margins.
- Unresponsive B2B Support: Marketplaces are not business partners. They are offering a platform for millions of users to sell and buy products. Unless you’re an extremely large company, when issues such as forgeries or unauthorized selling occur they can be difficult to resolve. That’s why Birkenstock now refuses to sell its products on Amazon. In his post on working with Amazon, Jeremy gives another example:
“Amazon’s business-to-business support center is almost entirely automated. So, as a brand, if one of your resellers or competitors accuses your company of fraudulent or illegal activity, Amazon will remove your products for two weeks while your lawyer subpoenas the accuser to get it to retract its report. You’ll find it nearly impossible to speak with a human at Amazon to state your case. How would two weeks without revenue impact your company?”
- Loss of Control Over the Consumer Experience: When you sell on marketplaces you are essentially training your customers to buy your products from Amazon, Ebay, and/or Walmart. Once these habits are formed it becomes much more difficult to redirect customers back to your own stores or ecommerce site. Toys R Us experienced this after its 2001 deal with Amazon, when its toysrus.com site sent visitors to its page on Amazon. The result? Its customers got into the habit of buying toys on Amazon and not just from Toy R Us. Many cite this as one of the major reasons behind the toy maker’s recent bankruptcy. It’s also why some analysts are worried about Nike’s new partnership with Amazon.
Brands and suppliers should be very careful about deciding to sell their products on marketplaces.
Besides weighing the various benefits and drawbacks, you must be comfortable with the fact that marketplaces are not just neutral platforms for selling products but competitors in their own right who will have access to your sensitive customer and supply chain data.
If that’s a problem then a better move might be to build your own ecommerce storefront in order to organically develop a digital customer base for your brand.
Such a move may take longer to reach the levels of revenue that marketplaces offer, but in return you gain the ecommerce experience and customer loyalty necessary for longer term success.