Amazon – is it the right marketplace for a bricks and mortar retailer?
By Stephen Jones, CEO and co-founder at furniture and homewares online marketplace, House of Home.
It’s so easy to get distracted by Amazon. Everything you hear about their business model is big and all conquering. And now they are coming to Australia. So what do you do? How can your business respond to Amazon? What are the opportunities?
To answer these questions you need to:
- Understand what Amazon is
- Understand how you can win on a marketplace
- Understand your own business strengths
From there you can come up with a plan to keep your business growing and thriving when Amazon finally does comes to town and beyond.
Amazon has consistently and steadily grown its piece of the online sales pie. How does it do this? It has a relentless focus on making things easy for the consumer, not the retailer, not the seller, but the consumer. Some of the key ways that Amazon has done this are:
- Prime membership – consumers become a member of the Prime program and in return receive free shipping (on eligible products), access to streamed content and other value add ons & offers. It encourages frequent purchasing. Remember though that Amazon is focused on the consumer, so free shipping offers are still paid for by the seller.
- Fast shipping – Amazon has invested heavily in its logistics capabilities and as a result it gets parcels delivered to customers two days quicker on average than everyone else. They have created innovative logistics & tech solutions like Flex and local marketplaces, as well as investing in heavily automated warehouses and trucking networks to make this one of their key differentiators.
- Broad and deep product choice – it goes without saying that there is a lot of product choice on Amazon – its been called the Endless Aisle. Customers should find what they want. Your challenge as a seller is to be found.
The good news is that the arrival of Amazon will absolutely accelerate the take up of online shopping in Australia and your business can benefit from that.
What Amazon is and what Amazon isn’t
Amazon is an online marketplace, albeit a big one, but it’s not the only one. Ebay, Etsy and House of Home are all online marketplaces that are relevant to the home and may actually work better for your business.
Every marketplace offers a different channel for retailers to sell through. Your challenge as a business owner is choosing the right marketplace that supports your business strategy and plays to your strengths.
Amazon has been accused of killing lots of businesses, but the reality is that Amazon hasn’t targeted any particular business, they’ve just kept listening to the customer and fine-tuning their offering to be more and more compelling. And along the way they’ve collected a lot of data, in fact an incredible amount of data that allows them to keep learning about their consumer and further improving their offering, as well as anticipating what those customers want next.
So how does Amazon work? It’s a marketplace, and the products listed are fulfilled from three separate channels
- First Party or 1P – these are products from Amazon’s own inventory, priced by Amazon, delivered by Amazon and eligible for Prime shipping.
- Third Party or 3P MFN – these are products owned by retailers, brands, merchants, home based businesses and sold through the marketplace. The retailer is responsible for the fulfilment – hence MFN – Merchant Fulfillment Network.
- Third Party FBA or 3P FBA – This is a hybrid model where retailers place their own inventory into Amazon warehouses and Amazon fulfils the order (at a cost to the seller). These items are eligible for Prime Free Shipping.
- Amazon is an offer-centric marketplace – that means product pricing is an important part of your offering. Amazon itself is not necessarily the cheapest on every product, but it’s reasonably the cheapest overall. For its own First Party products it is generally a price follower, not a leader, so they will be the second to drop their price, not the first.
- Amazon is customer centric so it rewards product listings that respond to customer’s questions and provides all the information that a customer needs to make a decision.
- Amazon is UPC driven – you need to get into the detail of how Amazon works and understand the relationship between ASIN, Barcode & Brand owner. This does mean that it is much harder to obscure the origin of your product, and it makes it much easier for customers to compare prices on like for like products.
- If you are a brand owner and have poor channel control, Amazon will make this very obvious, with your products being listed at many different prices and encouraging customers to purchase the cheapest.
- Amazon rewards sellers who take care of their customers – their algorithm prioritises listings, which are fulfilled quickly and efficiently, and ultimately excellent fulfilment metrics are what makes a business eligible for Fulfilled by Amazon.
As a result of this strong focus on the customer, when someone makes a purchase from Amazon, regardless of who fulfils the order, the customer sees themselves as having bought from Amazon, and stays an Amazon customer first and foremost.
This is really important for retailers who are evaluating which marketplace to invest their valuable time into. As a business owner you need to be clear on the difference between winning a sale and winning a customer. Amazon customers generally stay as Amazon customers. So do you want to drive sales or win repeat customers?
You need to understand that participating in Amazon will not help to grow your off-line brand, push customers across to your own webstore or indeed into your physical store. So does that make it the right marketplace for you?
So here’s the bad news, and forgive us for being straight to the point, but we think that for the majority of Australian retailers it will be very hard for them to leverage the traffic that will be heading to the Amazon site because:
- You need to be data driven. Success on Amazon is all about mining the data, understanding the data and then responding with the right products, the right offer and presenting the right information for the consumer.
- You can’t rely on product re-branding and re-naming to avoid price comparison.
- You need to invest in creating customer centric content and develop the skills within your business to create it.
- And you need to ensure that you have efficient business processes around orders and logistics so that you can deliver quickly to your customers.
So how can you win?
First up – work with partners. Winning traffic online is hard. Partner up with channel partners like marketplaces to help support your online profile. And then focus on doing the things that will help you win. Here’s the list we think are important:
- Choose your marketplace carefully
- Make sure your product is identified properly – Use the right ASIN, barcode, UPC for your product.
- Craft a compelling offer – price, shipping costs, and delivery time frame.
- Write customer centric content by researching similar listings on Amazon (yes – no matter which marketplace you end up using, Amazon can be a great source of customer insight). Understand what questions customers have around your product and create product listing ads that answer all of the questions before they even have to ask.
- Be efficient – When you are selling online you need to focus on your business processes around order processing and logistics. It needs to be efficient and cost effective and get the product to customers fast.
- Think about where you can create market space for yourself – big & bulky items have less competition, so do customised products, so do products with strong brand association.
- Then you need to be engaged – monitor and update your listings, respond to questions….
You know – be a great retailer. And here’s the thing – if you are doing those things well, you can win anywhere. But remember you need to win in the marketing channels that support your core business.
How can your business respond?
We recommend focussing on your business strengths and understanding the opportunities.
The reality is, that even though Amazon won 36 per cent of all e-commerce transactions in the US, and 43 per cent of online revenue, online revenue still only represents 8.5 per cent of total retail sales in the US. And they are ahead of Australia – as of March 2017 only 7.3 per cent of sales happened online. Which means a whopping 92.7 per cent of sales (that $282.57 billion of sales) were made over the counter in real bricks and mortar stores.
Amazon isn’t out to destroy businesses, it’s focussed on the consumer. So here’s the thing: you need to focus on your consumer and your business.
As a bricks and mortar retailer, focus on your strengths. If you need reminding of them, here goes:
- You know who your customer is, and you get instant feedback on your range & pricing offers.
- You have a face to face, one to one relationship
- Stores have real benefits – you have an opportunity to create a memorable experience.
- You can value add the shopping experience – with a trial, advice, expertise, delivery, entertainment, hospitality.
- You offer instant order fulfilment.
- But then again you’ve always been able to do these things. The one extra thing that you need to do is position yourself to win. Be customer centric.
- What does customer centric mean? Well it means thinking about your business from the outside in.
- How does your customer find you? What are they looking for?
- How do they shop? Do they research online? Do they know what products you’ve even got in store before they come in?
- Does your pricing match up no matter where they look?
- Have you thought about how you are going to get product to customers and what works for your business and for the customer? Align your logistics and your marketing.