Monday, March 18, 2013

Talent Scout: The New Role of the Marketplace Retailer


Just a short 10 years ago, in the Golden Age of eCommerce, people in their pajamas were able to write half-baked descriptions with pictures of products taken on their living room floor and sell wild amounts of consumer products.  Success was largely nothing more than homesteading on the frontier – being the first person to think of putting something up on eBay.  Large unit sales and margins were possible for the simple reason that demand exceeded supply.

When competition did emerge, it generally took the form of other pajama-clad Micro-Business people who copycatted the pioneers.  A price war between these retail entrepreneurs was a game of chicken, where neither party had an interest in wrecking the market.  Someone always blinked, and often prices would bounce back to normal levels.

By 2007, disgruntled eBay Sellers were eagerly looking for alternatives to the heaving oceans around the SS eBay ship.  Annual policy changes rocked business models, putting some out of business overnight.  Yet, no other marketplaces measured up by delivering buyers in large numbers no matter how slick their web design or checkout system.

Amazon took notice, and boldly attended eBay conferences whispering to sellers about the ease of listing products, no listing fees, and promises of high demand.  It was the lifeboat from the sinking of the SS eBay, and many jumped overboard head first.  To their delight, Amazon was right – an epic exodus of buyers was leaving eBay’s nightmare called “Checkout” for 1-click nirvana.

Only after investing significant time and energy into Amazon’s platform did they learn that Amazon was sending Sharks that appeared to be lifeboats.  The Sharks would steal their suppliers from under them, and then drive prices not just to wholesale, but below wholesale.  It felt to some like they had been tricked into giving Amazon free data entry to build their catalog, so they could then measure sales and take the best suppliers away by using economies of scale to get a better wholesale price with the manufacturer.

The reality was that Amazon wasn’t looking myopically at transactional profit, widget by widget.  Instead, they prioritized the goal of attracting new fiercely loyal long-term customers.  Since customer acquisition has an expense, they justified discounting near or even below wholesale as being less expensive to getting a buyer to create an Amazon account than traditional advertising.  If it cost an average of $9 of advertising to get a buyer to sign up, giving away a product for $5 under wholesale was actually not insane – it was a cost savings!

Brilliant.

When Amazon’s self-interest is factored, the savvy logic trumps all conspiracy theories about tricking sellers into building a catalog for free, then stealing the suppliers.  The problem for the small independent retailers is that no longer could they ride the wave of a sourced product for years.   The product’s Pricing Life Cycle had to be considered, and a plan had to be developed to overcome the fact that in a matter of weeks or months, competition would drive prices to unsustainable margins by Amazon.  This occurs most often when the na├»ve manufacturer fails to anticipate Amazon’s self-interest by having Brand Protection in place in the form of a MAP Program.

Successful Marketplace Retailers no longer rely upon finding a widget they can sell in high margins at high profits for years on end, but rather engage in perpetually finding brand new products from entrepreneurial companies.  They have to become sourcing experts who can see new trends, identify those who have done their IP homework, have the resources to produce them in sufficient quantities, and have innovated and imagined into being things that can be forecast to sell in high volume.  They have become, in effect, Amazon’s Talent Scouts.

These Talent Scouts attend trade shows, network with importers, and make their top priority to find exciting new products before anyone else.  They then bring those products to Amazon’s marketplace, and enjoy high profits and margins for brief periods until other small retailers, and eventually, Amazon itself notice their success.  Once Amazon has a supply of that product that is not protected by MAP, the retailer finds that their sales often drop to zero until the manufacturer wakes up and puts a MAP program in place.  Meanwhile, to keep their business going, they must continue to find more new talent to put on the conveyer belt.

Some manufacturer’s get chewed up and spit out in the process.  It’s usually the ones who fight hard against the concept of MAP programs, claiming they are impossible, ineffective, and too expensive.  Those that wait too long suffer the consequences, and in some cases lose their business.  Others who discover the problem in time salvage what they can, but it’s the ones who can see that no widget is immune from this process that are able to create and sustain programs that insulate their products from price devaluation that occurs as Talent Scouts feed the Sharks over at Amazon.

By recognizing that no product is immune from the cycle of having Amazon offer it up as bait to attract new loyal lifetime buyers, savvy manufacturer’s who anticipate Amazon’s self-interest are able to have a MAP Program in place before damage is done to their brand.  Success requires development of closed distribution practices, strictly enforced MAP polices for the entire supply chain, and automation of reporting and policing with services from companies like Channel IQ.

In effect, the retailer who acts at the Talent Scout is the only party who preaches and promotes the inherent overlapping self-interests of the Manufacturer, Amazon, and the Retailer.  All parties can win, and success is sustainable with a proactive plan.

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