Are Online Marketplaces Preying on Your Business?

     

In the past four weeks, I have presented at three conferences: MCM’s Operations Summit, Lett Direct’s Symposium and the Ability Commerce Symposium. While they had widely differing agendas in operations and marketing and systems, the attendees had one common strategic concern: How do we compete with online marketplaces in terms of breadth and price, time-to-customer, and free shipping? 

Time-to-customer and free shipping are increasing pressure points most businesses are experiencing and are very real concerns. However, maybe the biggest and most devastating aspect of marketplaces discussed is that they can potentially destroy your merchandising. When that happens you are simply out of business. 

At one of the conferences, a representative of a large specialty e-commerce and brick-and-mortar company talked about its short-lived foray into an online marketplace. They had put up 10 better-selling products with the idea of testing and then deciding how to expand their presence.

Within two weeks, site sales were very good, but then they got a call from a vendor alerting them that the marketplace had called them to see if they could source the identical products and offer a wider assortment at a lower price. Thank God for the vendor’s loyalty! They took down all the products and ended the relationship. 

Let me ask you a few questions about your strategic use of online marketplaces:

  1. Would you hand over your product sales history and vendor information to any other competitor? NO
  2. Do you have the use of the marketplace’s customer names buying your products? NO
  3. Do your marketplace contracts guarantee inventory availability and higher standards in terms of fulfillment for their customers than you provide for your customers? MANY TIMES THEY DO
  4. Is serving the marketplaces changing you from being an innovative retailer into a wholesaler? I WOULD SUBMIT IT MIGHT NOT BE A GOOD STRATEGY FOR MANY DIRECT-TO-CUSTOMER BUSINESSES in terms of gross margin and exclusive products.

 We can understand how the sales growth has been great for many DTC merchants through marketplaces. However, in the longer term do they destroy your business?

 Let me give you a few examples. One of our small clients designs and manufactures its exclusive assortment of apparel offshore. They have an average order value of $135 and a maintained margin of 60%. At $5 million in sales, they are earning a profit. While it is a small business, it is growing at 20% per year. 

The lure of the marketplaces and the exposure to tens of millions of their customers would lead to significant sales growth, but at what cost? So far, the company has chosen to invest in limited assortment and wants to strategically broaden out its categories, SKU count and price ranges. I would maintain that handing a marketplace their selling history and assortment would show them a lot about the fabrication and styling and price points that affluent customers are willing to spend money on. If the marketplace understood the merchandising statistics and they invested in broadening categories, the number of products and colors/sizes, where would this company be? Maybe out of business.

Here is another example. Being near one of the conference sites, I had a chance to visit Ron Jon Surf Shop’s 55,000 SF store in Cocoa Beach, FL. When you search on Amazon for Ron Jon you find an extremely limited – and I would say unexciting – assortment of Ron Jon merchandise and stickers. They have not given over their huge product assortment and SKU depth to Amazon. Even for a baby boomer like me, the store is vibrant and full of colorful, generally value-priced product and in my XXL size. The store is open 24 hours a day – beach and surf all day and shop at night.

 Sure, you can buy bathing suits, sweats and t-shirts in thousands of shopping malls and online. Nevertheless, there is only one Ron Jon’s in terms of the lifestyle clothing and destination. There are 12 additional company locations in NJ, MD, SC, FL, AL and license arrangements elsewhere in the Caribbean and Cozumel.

The more commodity-oriented your assortment is, the bigger the merchandising threat marketplaces can be. The threats from Internet marketplaces – shortening delivery time to the customer; free shipping; and competing price and merchandising offers - are not going away.   What is the right marketplace strategy for your business?