Research by Internet Retailer shows that 90% of UK and USA independent retailers and suppliers sell through online marketplaces like Amazon, Ebay, Etsy and others. Online marketplaces are providing retailers and suppliers an easy way to get their products in front of millions of potential customers.
Is selling on an online marketplace the best invention since sliced bread?
BloomReach Inc found that 55% of people uses Amazon as a starting point when searching for products. This might flock retailers to sell their products via online marketplaces such as Amazon as a way to expand their business.
Marketplaces are designed to be easy. Making an account takes a few minutes and you are ready to list your items. Within a few hours you have access to a huge, engaged audience to sell to.
Some retailers owe most of their business to online marketplaces. However, there are some risks to consider.
Decreasing profit margins
Cost of business: Most common risk is the declining margin. Online marketplaces have seller fees. Seller fees can be a combination of monthly subscription fees, shipping fees, referral fees, and closing fees. They are all part of the cost doing business on a selling platform.
Price competition: multiple resellers offering the same products and multiple manufacturers producing similar products are in the same online marketplace. This results in easy comparison capabilities for cost-oriented customers. Customers are often looking for the lowest priced item. This forces the suppliers and retailers to continually lower the price of their items.
Race to the bottom: These two factors will really squeeze a retailer's profit. Research from Web Retailer shows; around one-fifth of retailers operate on margins under 10%. (across product categories, the margin might vary)
Your business is on "Rented Land"
The online marketplace is taking care of the maintenance, branding, and set-up. The retailer just has to comply with the platform's selling rules.
What happens when the platform implements major adjustments? What risk does retailers face when the platform changes their platform business rules? History shows that online platforms like Amazon changes its fees during holiday months. You as retailer have to accept the higher fees impacting your margin.
What will happen when you make a mistake? Some sellers and retailers have difficulties keeping accurate stock levels on marketplaces. Amazon will kick you of the site for good when you oversell! Most marketplaces take customer reviews in the equation to show you or your competitor first. In case your average customer review ratings are below a threshold, you will be removed from the shop. Arbitrary such decision is complicated and time consuming, leaving you with no turnover in the mean time.
Mentioned risks are some issues sellers are facing on marketplaces. You are subject to comply with the platform's rules and changes. You're not in control. You're essentially operating on "rented land".
No brand building
The marketplace is focused on selling products instead of building brands. You have no control on your brand image. There is little opportunity for you to build your brand.
With your own ecommerce platform, you have the opportunity to build your brand while online platforms limit you in brand building. If you don't fulfill items yourself, shipping materials cannot be branded to your unique company. Instead, the marketplace's branding is front and center for your customers.
Small retailers don't take the time, effort and resources to do their own branding. They are focused in a quick buck instead of a life-time relation with their customers. They accept that they always have to fight pricewars or being first with a new product.
Counterfeit Products sold in your name
A serious problem can be that your customers will receive a counterfeit product instead of your original product. You are not the only seller of your products and have to compete with other retailers. These other sellers can sell counterfeits. This will diminish the value of your authentic products.
Amazon is having difficulties with counterfeits. Amazon's FBA program can use a process that commingles your inventory at its fulfillment centers, mixing authentic and fake products together. Commingling inventory allows Amazon to efficiently ship items to their customers. Amazon might send a counterfeit product to your customer instead of your real one. When your customer discovers the fake, you might get a bad review. Bad reviews have impact on your ranking and you might lose your first place in the supplier list.
Competitors can also sell counterfeits on a lower price. This will diminish the value of your products. A well know case is Birkenstock versus Amazon. Birkenstock faced counterfeits on Amazon and decided to leave Amazon. The loss of turn-over by leaving Amazon was less than the damage to their brand by negative reviews from customers assuming having bought the original.
Competing with your marketplace
Large marketplaces carry their own product assortment. Based on their insight gained from analyzing the successful products of suppliers the marketplace knows exactly what product is 'hot' and what product is 'not'. They have got access to data and resources you don't.
Products you are selling well might get attention from the marketplace triggering them to bypass you and start selling it under their own name or brand. Your biggest competitor is your own marketplace.