In the past few years, e-commerce marketplaces have grown in size and significance in most of the major economies of the world. Amazon is present in about 16 countries, with most being English speaking/understanding countries; China has Alibaba and Taobao; Indonesia has Tokopedia and most of these countries have smaller market places serving smaller customer segments. For direct to consumer (DTC) brands, marketplaces can be a boon as well as a bane. So how should DTC brands think of market places?
In theory, marketplaces are two-sided, bringing together sellers and buyers on the platform, and also playing the role of a trusted intermediary who can assure the quality of product to the buyer, and timely payment to the seller. Most marketplaces of scale are horizontal e-commerce platforms where everything from a toothbrush to a lawnmower is sold. This means that most of them operate on the philosophy of acquiring a customer, building loyalty (think Amazon Prime), and ensuring that they return to the same platform for any of their purchases. Given this thought process, a marketplace makes money over many months or years from every acquired customer, putting the bottomline under pressure for years.
With this context in mind, let us consider how DTC brands can think of marketplaces in their own growth and evolution journey. First, the positives.
- Sandbox: Every DTC brand founder goes through an extended period of iterations where she is trying to find the right product specifications, pricing and attributes that will appeal to their target group (TG). There’s no better sandbox environment than a marketplace, to quickly launch, learn and iterate. This kind of a launch may not even need the brand to create their own website. This is almost like a sandbox environment where iterations can be made very quickly. Make no mistake – this is not a recommendation to launch shoddy / half-baked products on marketplaces in the name of quick iterations. Every product launched should still be of a good quality, should be as described, and also transparent. Customers do not like to be fooled or misguided.
- Brand Discovery: In the initial years when a DTC brand is trying to establish itself in its customers’ minds, it will face the usual struggle of bringing in new customers to their own platform because the cost of acquiring customers will always be a roadblock. It costs money and more importantly a lot of time to discover the right TG, to find the right ad copies and creatives, and work through the versions to hit upon what resonates well.
- Trust Proxy: Since many small brands come and go, the typical consumer is wary of purchasing or engaging with a new brand, and rightly so. Not just small brands which did not stand the test of time, but also spurious sellers who have abused the system of trust in the past, that have built this customer behaviour. In addition, India is a trust-deficit market, where consumers assume the worst until proven otherwise. In such a scenario, the marketplace becomes the trusted party, based on whose policies the customer makes her purchasing decision. For example, most customers may not know the brand of the seller, but know that if they do raise a complaint with Amazon or Flipkart, their concerns will be addressed and that their money is safe. Further, they have a higher trust on the terms & conditions and returns / replacement policies spelt out in black and white on the marketplaces.
- Feedback Sourcing: For a new DTC brand, the most important input to the product development process is the customer’s feedback. While it is important to engage with most early customers and learn from their experience, this may not work at scale. Any good marketplace builds trust and community through trusted reviews which are hard to fake or hard to misuse. Most of them have very strong fraud detection teams and algorithms that make it hard to either boost up a brand, or to damage a competing brand with fake reviews. Thus, these reviews become a good source to truly understand what is delighting or impacting a brand’s customers at scale.
Marketplaces provide trust and visibility to DTC brands in the initial days
While these are the positives that a new DTC brand can leverage for its own discovery, product development and growth, it does not automatically mean that marketplaces are the best place to remain on exclusively.
- Adding Competitors: Marketplaces are predicated on giving as many options to buyers as possible. So once the category manager notices that this category is doing well and this product is picking up momentum, she will start scouting and sourcing more sellers with the same / similar product. The idea is to increase the available options to buyers and also to reduce dependence of the category on one superstar product. Over time, this will mean erosion of first mover advantage and also increase in cost of customer acquisition. This will result in a more fragmented seller profile for that category.
- Private Labels: As mentioned in the context setting, marketplaces are under constant pressure to hasten making profits from each transaction. One lever to achieve this would be to launch their own private label products. The best way to know which product to be launched in which category is to look at the sales numbers. One can rest assured that any product that is doing well, will very soon be replicated and launched under the private label of the marketplace. For example, Amazon has the Solimo brand products for home category, Flipkart has Perfect Homes for furniture and Myntra has Jabong and HRX. Private labels will have much higher margins, and given that they are owned by the marketplaces, they may be favoured in organic search results and more preferential visibility in the best ad inventory. This is the reason why India’s largest marketplaces are being investigated by the Competition Commission of India (CCI) for misusing their market dominance. However, the CCI may be better served by investigating how platform neutrality is better served, since the marketplace owners also operating private labels could be interpreted as conflict of interest. There have been many instances where a leading seller has been relegated to a lower position or even made unviable once the private label took over the category
- Advertising Revenue: One more way in which marketplaces generate revenue given the huge increase in traffic on their platforms, is to monetize their real estate. Research shows that customers with buying intent are tending more towards searching on marketplaces rather than on search engines. It makes sense – if a marketplace is big enough and has enough options, customers would start their search there and not on a search engine – fewer clicks. Reports say that 54% of product searches start on Amazon, making it the second largest search engine in the world after Google. This means that over a period of time, the marketplaces start pushing the brand to cough advertising money to be visible to customers, irrespective of the hard work put into earning customer trust through great service and timely resolutions over many years. This increases the cost of being present on marketplaces.
Product searches are moving rapidly to Amazon, making it the second largest search engine
Given these imperatives, it is clear that marketplaces bring in a host of benefits but also come with a set of disadvantages. While it may be good to start off a DTC brand on a marketplace, it is always better to reduce dependence on any single marketplace. The brand is better off spreading the risk across different marketplaces, and more importantly, building a standalone brand promise that stands up to the service and quality benchmarks that customers have come to expect from marketplaces.
Please share your thoughts below.