A new trend has emerged on the Amazon marketplace: seller diversification strategy. In increasing numbers, notable brands are choosing to partner with 2-3 third-party sellers to retail their products on Amazon. This approach has always been possible, but the alternatives – wholesaling to either a single, exclusive third-party seller or wholesaling to anyone and everyone – were once more popular options.
In this post, we’re examining what sparked this change, and some of the advantages a limited seller diversification strategy offers.
What is Diversification Strategy?
Diversification strategy is the practice of not putting all your eggs in one basket. It’s a tried and true method that spans many industries. For brands selling on Amazon through third-party (or first-party) sellers, diversification strategy simply means selling through multiple sellers instead of a single seller. A limited seller diversification strategy is the practice of working with a select few trusted sellers.
We broke down the pros and cons of an exclusive partnership vs multiple sellers in a prior blog post. The short version is that an exclusive partnership maximizes control and streamlines strategy, whereas multiple partnerships risks disjointed strategy and diluted performance because your sellers compete against each other as well as your competitors.
Why are Brands Adopting a Limited Seller Diversification Strategy?
If an exclusive partnership has such strong benefits, why then are some major brands choosing the limited seller approach?
It comes down to four chief reasons:
- Seller diversification mitigates inventory coverage risks
- Exclusive contracts can feel like a trap if the partnership doesn’t deliver results
- Exclusivity creates the risk of a single point of failure
- Exclusive partnerships lengthen the time it takes to identify a reliable partner
Importantly, the brands we see adopting this approach with the greatest success are segmenting their catalog by seller. Each seller is permitted to carry only a specific set of ASINs. In this way, brands prevent their sellers from competing with each other on the same ASIN, while still diversifying their strategy to mitigate risks.
Tired of chafing against the limitations of exclusive contracts and wary of under-performing competitors, major brands have begun to split test their B2B partnerships. These brands are segmenting out their catalog to two or more agencies to see which performs better. This allows these brands to see what each company has to offer before making a final commitment.
This ‘try-before-you-buy’ diversification strategy does seem to have merit, and not just for the brands. Let’s explore the potential benefits of diversification – and possible pitfalls – to determine how brands and their agencies can make the most of this growing trend.
A Limited Seller Diversification Strategy Protects Coverage
In 2020 and 2021, Amazon tightened inventory caps in response to growing demands that were outpacing their limited fulfilment center space. As discussed in the blog post, Overcome Amazon’s Restricted Inventory Limits with Dropship, Amazon’s power to make such unilateral decisions can have devastating effects on thousands of brands with little or no notice.
A partnership diversification strategy is a way to solve this issue. Diversifying business-to-business sales gives brands a secondary option should one seller not able to send in enough inventory.
At the same time, third-party sellers with robust inventory management teams and extensive Amazon experience can easily flex their skills in a head-to-head face off with competitors. During times of unexpected supply chain demand and changing regulations, experienced business-to-business marketing agencies have the knowledge and resources to pivot quickly and save their brands pain in the long run.
Exclusivity Becomes Limiting if the Partner Doesn’t Deliver
Exclusive contracts can be scary. If the seller doesn’t uphold the standards a brand needs, the exclusivity clause shifts from a sound strategy to feeling trapped.
Working with multiple sellers mitigates this risk. If one seller hits an obstacle, the brand can lean on the other seller to make up the difference. This safety net extends to purchase order amounts, inventory coverage, and sales.
More Eggs, More Baskets
By far the most obvious advantage of working with multiple third-party sellers – and of any diversification strategy, frankly – is the mitigation of risk. By putting the proverbial eggs in multiple baskets, brands can avoid “losing it all” should anything drastic happen to any one partner.
And if the last few years have taught us anything, it is that drastic can happen.
The downside, of course, is multiple partners mean multiple of everything: multiple fees, multiple points of contact, multiple strategies, multiple campaigns, and multiple opportunities for things to go wrong.
Multiple Partners Lets Brands Find the Ideal Partner Quicker
For that reason, many brands still eventually want to work with only one or two partners. The trick is identifying which partners are worthy of that commitment. If brands partner with only one seller for Amazon at a time, they may cycle through three partners – and three years – before they find the right fit.
By partnering with a select few, top-tier sellers at once, brands can compare their service and performance. If one seller consistently delivers better service and performance than another, the brand can confidently proceed to an exclusive partnership.