The Age of DTC: Why Brands Shouldn’t Leave it to Resellers to Distribute on Amazon
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.
L’Oreal isn’t the only brand betting its future on DTC; Adidas aims for DTC to be 50% of sales by 2025. In conjunction with their end of year results, the sporting giant announced a four-year plan, dubbed ‘Own the Game’, which calls for a shift to a DTC-led model. The company plans for direct to consumer to make up 50% of net sales by 2025.
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 I find it 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, I will tackle the biggest DTC disruptor of them all Amazon.
I’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 I 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) as is the most common way to fulfil Amazon orders.
To learn more about Amazon’s fulfilment methods, read our FBA V SFP V FBM guide to find out which Amazon fulfilment method is best for your business.
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.
- $386 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 18 marketplaces
- 150m Amazon Prime subscribers worldwide
Amazon’s Global Presence
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.
I’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.
At this point, it is important to note that Dermalogica are one of many mainstream brands that find themselves in this situation. I’m 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.
My 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 I will show how it is a suboptimal 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 retail pricing.
The only way to control the situation is to start selling directly on Amazon and establish stricter supply chain control.
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 1,000s 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
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 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
^ – according to Helium10.com
* – estimated based on similar products
So the question is; do Dermalogica make more than $178k by selling those roughly 5,700 units to a reseller?
From my 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.
I’ll share a real client example, to prove my 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 December 2020 we were 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.
I’ll 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.
Common Problems with the Distributor Model
The general business model of the distributor is to make maximum profit with minimal risk, this strategy has several disadvantages to selling on Amazon –
- Stock is kept ultra-lean making it difficult to take full advantage of onsite promotions
- Lead times can vary from brand to brand therefore forecasting effectively can prove a challenge
- Pricing from Brand to Disti is generally negotiated to the brand’s baseline margin, meaning that the Disti is responsible for any marketing/ad funding, the Distributor would generally make a marketing provision from items sold, however, any unused marketing spend is seen as an additional profit, meaning appetite for ad spend is very low.
- Stock is usually evaluated at brand level and at a monetary value, so we hold £100K of stock for Brand X. This means that distributors often won’t extend their stock holding until the overall holding for that brand is reduced to a certain level which in turn means that top-selling SKUs are often out of stock whilst other slower selling items sell-through.
If not then selling directly on Amazon is the better option. Why do I 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 reasonably 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. To learn more our Amazon Advertising Guide: How to Audit, Increase Sales and Reduce ACoS, is a great place to start.
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.
7 Steps to Help You Transition Away from a Distributor Model
- Create your Seller Central account at sellercentral.amazon.com (OR .co.uk, .de and so on)
- Create an Amazon Brand Registry account – you’ll need this to establish that you are the recognised brand owner
- Find out how much stock your distributor holds at Amazon – there are 3rd party tools which can estimate this for you, they tend to be very accurate.
- Decide whether to stagger the transition or immediately take control of all products
- Plan how you are going to manage your first shipments and subsequent replenishments
- Build out advertising campaigns before your launch your inventory so the products don’t lose sales momentum
- Consider incentivising your distributor to sell-through their remaining inventory
As I’ve shown there are significant benefits to selling directly on Amazon but it can get quite complex very quickly. Sourcing expertise in these early stages will enable you to make the transition with confidence and capitalise on everything that Amazon has to offer.
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. If you’d like to know more, email firstname.lastname@example.org.