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, marketing and systems, 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. But maybe the biggest and most devastating aspect of marketplaces discussed is that they can potentially destroy your merchandising. When that happens you’re simply out of business.

At one of the conferences a representative of a large specialty ecommerce 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 MAY 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. But in the longer term do they destroy your business?

Marketplace- keyboard 300x200

I’ll give you a couple 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, number of products and colors/sizes, where would this company be? Maybe out of business.

Here’s 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 haven’t 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 size. The store is open 24 hours a day – beach all day and shop at night.

Sure, you can buy bathing suits, sweats and t-shirts in thousands of shopping malls and online. But there is only one Ron Jon’s in terms of the lifestyle clothing and destination. There are 12 additional company locations in five states, and license arrangements elsewhere in the Caribbean and Mexico.

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

Curt Barry is the Founder and Chairman of F. Curtis Barry & Company

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