By: Reba Rocket
For better or worse, once people realized the Internet could be used as a retail platform, a demand for progressive distribution strategies was born. When selling on online marketplaces, naiveté of and inexperience in selling on those marketplaces can crush any brand trying to maintain pricing, image, and good relationships with bricks-and-mortar accounts.
Historically, a brand with a great product required little more than a hard-working sales staff with access to as many stores willing to carry their product as possible; increased revenue was tied directly to increased distribution. Today, too many brands carry that approach into their major online-marketplace strategies. After all, more sellers on marketplaces translate into more sales…right? Unfortunately for brands, that is not the case.
Let’s say Brand X is selling widgets to 20 different retailers. Acting as a third-party seller, one of those retailers creates a listing on Amazon, and begins to sell Brand X widgets on the marketplace at the suggested retail price. Soon, they are generating 100 Brand X widget sales on the listing each day. The other 19 sellers eventually attach to that listing, and start to sell their inventory of Brand X widgets, too. Adding more sellers to the listing, however, does not increase sales on that listing.
The velocity of sales on a product listing correlates to the demand for the product, not to increased numbers of sellers attached to the product’s listing. If 100 Brand X widgets are sold each day, either 1 seller is acquiring all those sales, or multiple sellers are sharing each day’s sales. A higher number of sellers does not create more demand for the product, or escalate sell-through.
What does increase, is the likelihood of a decline in the price at which Brand X widgets are sold on the marketplace. As each seller tries to make their Brand X widget more desirable or “win” the sale, they are often inclined to lower the price at which they are selling the widget on that listing. As each one competes, the next ups the ante, and the race to the pricing floor is on.
As products listed online are sold at lower and lower prices, bricks-and-mortar retailers bear the burden of a disappearing product margin. With today’s smart phones and tablets, finding a better price online for a product seen in a store is easier for customers than ever. According to a study titled, “Showrooming and the Rise of the Mobile-Assisted Shopper” from Columbia Business School, 21% of today’s consumers use their mobile devices for input when shopping at bricks-and-mortar stores. While some of those shoppers are searching for general information about products, many are looking for the best price, even if it means waiting a day or two for product. It’s called “showrooming,” and what it amounts to is, savvy shoppers using bricks-and-mortar stores as a dressing room (of sorts), but ultimately buying the product at a cheaper price online.
While that sort of price-beating competition is great for the consumer, the downside for stores is they become saddled with product that does not sell, unless they are able to lower prices, too. When a store purchases product with the intention of realizing a certain margin, the online marketplace price war scenario can spell disaster as those profits disappear. Ultimately, the brands feel the effect when stores refuse to buy product being sold at a fraction of suggested retail pricing online, or stop buying the brand’s product, altogether.
Noel Hurst, a founding employee of Zappos’ off-price platform 6pm.com, sees firsthand the struggle between brands, vendors, and online retailers.
“Within the same breath I often hear brands tell me how important brick-and-mortar stores are and that they won’t be able to compete with online retailers. Creating pricing parody and choosing an E-com strategy that creates a level playing field (as it pertains to mom-and-pop shops) will create effective non-pricing differentiators. Also, segmenting product alone is not enough – customers want the best deal, and have been trained to seek it out.”
She notes customers are not willing to pay extra for the “instant gratification” of buying in a bricks-and-mortar store. Rather, with services like Amazon’s Prime, consumers need wait only 2 business days, and receive free shipping; a small price to pay for huge discounts. Brands may know the difference between two similar but different products that serve the same function, but many customers do not.
Noel, who currently serves as Senior Category Manager for online retailer Trend Nation says Showrooming (itself) has incentivized some brands to get creative. “Showrooming is so effective, that Bonobos has created their business model around it. At Bonobos, customers are able to try on clothing at the store, find their ideal fit/style/color, order it from the store and have it delivered to their doorstep. Bonobos has had so much success with showrooming that they are expanding to more locations.”
While that model seems to be working for Bonobos, many brands and manufacturers are not in the business of, nor are they able to fund and operate the retail side of a business. They rely on wholesale revenue and good relationships with their third-party sellers, both online and off. Much in the same way Walmart chose to invest dollars previously destined for new bricks-and-mortar locations into Walmart.com, staying afloat as a brand requires a new mindset and repositioning.
Fewer and fewer shoppers feel the need to even leave the house to shop, as more and more home devices bring the stores to the consumer. Without a distribution strategy for major online-marketplaces, brands may be destined for disaster as the price of their product erodes, their brand image tarnishes, and the doors of the bricks-and-mortar retailers slam in the faces of their sales force. Knowing the most effective methods to control and capitalize on marketplaces could mean the increasing incremental revenue as a brand grows, rather than figuring out the fastest way to liquidate. Cultivating online presence partners who are invested in brands’ image, pricing, and best practices for that online presence is paramount.