13 Min Read |
To say the world of retail is changing is somewhat of an understatement. The global disruption of online selling is a well known phenomenon. The cosy and stable environment of high street retailers buying and selling on behalf of brands and manufacturers is coming to an end.
For many businesses this is a nervous time particularly as it requires a lot of work to understand these huge shifts in consumer behaviour and develop new strategies to capitalise on new trends.
The most important change that every consumer brand needs to understand is that the digital world has opened up unprecedented opportunities to connect and sell Direct to Consumer (DTC).
As L’Oreal have publicly stated; “Everything we do now is about DTC.” Brands must wake up and realise the vast growth opportunities of selling directly. 16% of L’Oreal’s sales are now online and that’s up by over 50% in a year.
Suffice to say, L’Oreal’s perspective is; there is no going back.
But before we get too ahead of ourselves it’s helpful to define what exactly is DTC?
What Is Direct To Consumer (DTC)?
There’s no ‘official’ definition of course but it’s helpful to think of DTC as an umbrella term for any method of building a direct relationship with your customers. There are a plethora of ways to do this. Selling from your own website, building a newsletter audience and offline events can all be considered DTC.
In this article, we will tackle the biggest DTC disruptor of them all Amazon.
We’ll explain why Amazon should be considered a DTC channel, the tremendous opportunities of selling on Amazon, how to start and the ease of expanding to global markets on Amazon.
At the crux of this strategy is a change of mindset. Alongside manufacturing and distributing products the most successful brands on Amazon know how to launch and advertise too.
Whilst this can seem overwhelming we will show that taking more control of how your products are sold on Amazon can be hugely beneficial. These are the 4 main benefits I will discuss;
- Control over pricing
- Control over the brand experience
- Maximising profit by reducing parties in the value chain
- Ability to grow sales on Amazon
Before we get into those details let’s take a step back and look at Amazon as a DTC channel.
Selling On Amazon: Vendor And Seller Options
There are two ways to sell on Amazon
- 1st Party Vendors
- 3rd Party Sellers
Vendor is an exclusive club. It’s an invite-only trade relationship with Amazon. Amazon buys the products from the brand and has control of price and inventory. In this sense Vendor is exactly like any traditional retail relationship – the brand doesn’t have a direct relationship with the end user.
3rd party selling is what we’re really interested in. Amazon acts as a self-service platform. Any type of business can sell via the marketplace. All they need to do is open a ‘Seller Central’ account.
Sellers are responsible for creating listings, setting prices, advertising the products and deciding how products are delivered to the customer. Sellers can choose to use their own warehouse and carriers or use Amazon’s fulfilment centres – this is known as Fulfilment by Amazon (FBA), and is the most common way to fulfil Amazon orders.
How Big Is Amazon?
Now we understand the two ways to sell on Amazon and the ease in which anyone can start selling it’s worth considering just how big Amazon is.
- $277 billion global revenue through a combination of 1st and 3rd party sales
- $160 billion of that figure was generated by 3rd party sellers
- 280,000 sellers generate at least $100k annual sales
- Amazon is present in 15 marketplaces
Getting Started In 3 Simple Steps
There is a lot to learn about selling on Amazon. There’s no doubt about it. However, the upside is so great it is well worth investing time into learning what to do. Alternatively many choose to use an Amazon marketing agency who can launch your products and grow your sales.
Getting started is a simple 3 step process
- Create listings – titles, product descriptions and images
- Set prices
- Ship units to an Amazon fulfilment centre (assuming you use FBA)
To kickstart sales Amazon provides a variety of different marketing options
- PPC and Display advertising campaigns
- Vouchers, deals and promotions
- Customer review collection
The best performing Amazon sellers have processes to optimise their performance, mainly around 3 areas
- Image and copy that educates, informs and persuades
- Use of keywords to attract relevant audiences
- Running advertising campaigns to increase demand
Finding the right blend of sales strategies and optimising conversion rates to increase profitability are the keys to really dominating on Amazon.
No Easier Way To Sell Globally
Each country is called a marketplace. In areas where marketplaces are geographically close Amazon consolidates management of those marketplaces into one account. For example all European countries are run from one account.
Selling across Europe can be done with unprecedented ease.
Amazon will enable FBA sellers to reach all European customers through their pan-European FBA network. As a seller you ship to one Amazon fulfilment centre and they will handle moving stock into the rest of Europe.
Even where there is no geographic connection Amazon enables sellers to link accounts across the globe. Each account is pretty much identical.
The only exceptions are where Amazon is catering to local laws or possibly where they are testing new features before rolling-out to all marketplaces.
This is where selling on an online platform truly begins to bear fruit. Sellers offer millions of products and in return Amazon makes it incredibly easy to expand into new countries.
Speaking of these millions of products. Did you know that often, especially in the beauty sector, it is not the brand that is selling the products on Amazon but any number of resellers?
Most customers think they’re buying from Amazon or the brand. Handing this experience to another business is not only a missed opportunity to engage directly with your customers it also adds an unnecessary step in the value chain.
We’ll now explain why it is in the manufacturer and/or brands interest to sell directly on Amazon.
Who Is Selling Your Product On Amazon?
Anyone can sell on Amazon. That means, no matter what type of business they are and what product they have they will be able to sell it on Amazon. This is a boon for customers. The increased supply increases competition which in turn keeps prices low.
Let’s look at an example to explain why this can be detrimental for brands.
Dermalogica is a US company that sells a range of skin care products. Many people will be familiar with the brand.
At this point it is important to note that Dermalogica are one of many mainstream brands that find themselves in this situation. We’re using them as an example because this is such a clear case of where selling directly would be a far more advantageous way of approaching Amazon
Their products are available on Amazon.co.uk yet it is not Dermalogica that sells the products. Instead there is an array of resellers.
Our definition of a reseller is any business that is buying products from a manufacturer then selling those products to the end-user.
There is nothing inherently wrong with working with resellers but we will show how it is a sub-optimal solution when selling on Amazon.
Let’s start with pricing.
Selling Via Resellers Means No Control Of Pricing
The screenshot above is the Amazon.com price for Dr Dennis Gross Collagen Cream.
You can buy this product for $54.90 from a distributor called Premium Household.
The same product retails at $72 on the Dr Dennis Gross brand website. Their reputable retailers, such as Sephora, also sell this product for $72 on their websites.
This pricing disparity has a number of serious consequences
- Retailers that are honouring recommended retail prices are losing sales
- The brand website is losing sales
- The brand positioning is harmed by the lower price
Dr Dennis Gross, and any other brand in this position, would find it very difficult to force these resellers to honour MSRP. The only way to control the situation is to start selling directly on Amazon and establish stricter supply chain regulations.
The same pattern plays out in all Amazon marketplaces. Below is an example from Amazon UK
The screenshot is the price list for Dermalogica’s 100ml Intensive Moisture Balance cream.
You can buy this product for £43.98 from a distributor called Beauty Dist. Dermalogica sells this product on their website for £68. Dermalogica’s reputable retailers, e.g. John Lewis, also sell this product for £68 on their websites.
Control is the name of the game but control also extends to other aspects of the buying process. We’ll now look at the dangers of allowing resellers to represent the brand.
Gaining Control Over The Brand Experience
By delegating responsibility for selling your products to a reseller you are also delegating responsibility for how those products are merchandised on Amazon.
This is all well and good if you’re selling to a major retail website. They own the website and have a responsibility to their own brand to ensure that customers get a great experience.
In our case, Amazon isn’t selling the product and has no involvement in how it is presented on the site.
The reseller is probably selling 1000s of products. They won’t have the resources to produce appealing product pages. In all honesty, they don’t really have the incentives to do so.
They know that the products will sell through on Amazon even with below-par content. Resellers are playing a volume game. Caring for the brand experience is not on their radar.
To make this point clear, let’s compare a listing that is managed by a reseller with one that is managed by a brand
Reseller Managed – Jan Marini Cleansing Gel
Brand Managed – Viola Skin Vitamin C Serum
|Jan Marini||Viola Skin|
|Title||Basic product name – doesn’t use opportunity to promote the product||Descriptive and contains useful information|
|Product Features||Very basic product information. No effort to educate or inform Amazon customers. No explanation of product benefits or what makes the product effective||Detailed and informative bullet points. Lots of reassurance and explanation of the product benefits. Tone is consistent with other Viola Skin listings|
|Images||1 product shot||High quality photography Use full complement of images. Images complement the copy to give customers useful information Video also used to further enhance customer understanding|
|Customer Feedback||Lots of negative reviews but no one to acknowledge them and try to address customer feedback||Lots of questions being asked. Viola Skin are active on the listing answering customer questions|
Why spend so much time on product development, brand and packaging to then allow a reseller to present it in such a suboptimal manner.
Again we can see that delegating control of tasks that are low priority for resellers ends with an experience that presents the brand in a negative light and can cause lasting damage.
Maximising Profit By Reducing Parties In The Value Chain
This is self-evident. Selling to a reseller who then sells the product on Amazon is an unnecessary step in the transaction.
By simply removing the reseller from the process a brand is able to take more of the profit on each sale.
If we use our earlier Dermalogica example we can estimate the profit
|Estimates annual sales^||$250,000|
|Amazon 15% commission||$37,500|
|Fulfilment by Amazon ($2 per product)||$11,392|
|COGs* ($4 estimate)||$22,785|
^ – according to Helium10.com
- – estimated based on similar products
So the question is; do Dermalogica make more than $128k by selling those roughly 5,700 units to a reseller?
From FordeBakers experience the answer is a firm no.
Now of course, some of that additional cash will be invested in resources to manage an Amazon store but this will still be a significantly more profitable approach. We’ll share a real client example, to prove our point. We’re working with one sun protection brand that was relying on resellers to sell their products on Amazon. We took over in December 2019. As of March we are generating a 165% year-on-year increase in gross profit when compared to the profit the brand was making by selling to the reseller.
The reason that cutting resellers from the chain creates incremental profit is that the marketing agency or in-house team that you replace them with will be actively growing sales on Amazon. Resellers are simply picking up demand that you’ve created outside of Amazon.
This is a fundamental difference. Brands can make Amazon not just another distribution channel but a marketing platform that increases demand and sales.
Let’s now explain how that is possible.
Brands Create Demand, Resellers Pick-Off The Sales
It’s a simple fact that the vast majority of Amazon resellers don’t invest in marketing the products on Amazon.
The selling dynamic for most resellers is to sell a large range of branded products and be the point of sale on Amazon. They then wait for the brand to invest in creating demand and simply pick up those sales.
Of course, there are some exceptions to this rule. If you’re working with resellers that are also investing in Amazon advertising, then you may find it more prudent to maintain this relationship.
If not then selling directly on Amazon is the better option. Why do we say that?
Well, Amazon is of course an unrivalled distribution channel but increasingly it is also a place where people go to discover new brands and products. It’s estimated that about 50% of product searches now start on Amazon. Of those searches 80% are reckoned to be generic searches e.g. not for a specific product or brand but a general search such as ‘vitamin C serum’.
This is an opportunity to advertise products to these undecided customers and grow sales beyond the brand’s existing customer base. Given that there are 150 million Amazon Prime subscribers (plus many other millions of non-prime Amazon customers) we can now conclude that a smart advertising strategy will reap substantial returns.
Resellers aren’t capable or interested in this opportunity. That’s not their business model. Brands who start to advertise directly to Amazon customers are the ones that will grow the quickest.
And the good news is that advertising on Amazon is extremely profitable. According to this report from FeedVisor, brands usually see a 7x-10x return on their advertising spend. Our clients also see similar results.
So, the audience is huge, Amazon offers an excellent suite of advertising products and they are highly profitable.
Resellers are unlikely to be investing in these products to grow your brand on Amazon and increase your profits. The only way to do that is to start a brand store on Amazon and sell directly.
Resellers have a part to play in a global retail strategy. They should be used to build reach and distribution into channels that you otherwise wouldn’t be able to gain access to.
Amazon doesn’t fit that description. It’s built to be accessible to any manufacturer or brand. Amazon provides the reach and customers. Resellers are then simply ‘taking’ profit that a brand could easily take for themselves.
The ease with which brands can sell globally on Amazon means that you don’t need big teams to manage sales on Amazon. Yes, you need some expertise to navigate Amazon, to make the right strategic decisions and to market the products but these are not roles that a reseller can fulfil.
Partner with an agency that can act on your behalf or recruit a team (or a hybrid model). This will enable you to take advantage of Amazon’s phenomenal audience size and to do so in a way that is highly profitable.
Speak With A Strategist.
Start growing your business on the world’s biggest marketplace. If you believe your brand has the potential to scale on online, get in touch with our strategists who will vet your Amazon account and create a custom growth strategy for your brand.