For the third installment of our costs of Amazon series, we’re examining the Amazon business expenses associated with direct selling. In the previous posts in this series, we looked at the costs of Amazon third-party sellers and the costs of Amazon Retail.
WHAT IS DIRECT SELLING & HOW DOES IT WORK ON AMAZON?
Direct selling is the business model where a brand operates as both the manufacturer and seller of a product. Amazon’s private label brand, Amazon Basics, is one example of this. Costco’s Kirkland Signature brand is another. If you want to own the supply chain, retail, and marketing portions of your Amazon business, you’re interested in direct selling.
Benefits of Direct Selling
Direct selling has many benefits, not least of which is maximum control over your brand’s online representation. Rather than relying on third-party sellers or Amazon Retail to present your products accurately and entice customers, you control your listings.
You also have control over your supply chain, potentially all the way from manufacturer to customer. Controlling your supply chain helps mitigate the risk of counterfeits entering your distribution network or unauthorized sellers undercutting your pricing.
And while we’re on the topic of price, you control that too; no one can cut your pricing when you are the exclusive seller of your product.
Challenges of Direct Selling
The first and foremost obstacle is resources. Handling production, supply chain, marketing, creative services, compliance, customer service, taxes, etc. requires a great deal of research, time, and effort.
Managing these elements is easier for brands that only have a few products because the workload grows exponentially with the addition of more product lines or marketplace expansion. To scale successfully and sustainably, you need to either expand your team (preferably with experienced personnel) and/or use software to automate processes.
WHAT ARE THE COSTS?
As the manufacturer and seller of your products, you’re responsible for nearly every expense. This is not inherently a bad thing, but it’s a major factor for determining your business strategy.
Running an Amazon seller account at scale requires employees. That means paying wages, salaries, and benefits. These investments quickly add up. If you wish to pursue direct selling, how many employees do you need, what experience and skills do they need, and can you afford them?
Logistics and supply chain will account for a significant portion of your annual expenses, with fees coming from sourcing, compliance, manufacturing, packaging, freight, taxes, warehousing, processing, shipping, demand planning, liquidation, and battling counterfeiters, to name a few.
Do you have the knowledge, tools, and personnel necessary for managing your business’s supply chain from start to finish? If not, which portions can you acquire and which can you outsource?
Amazon’s fulfillment centers take care of the final leg of the supply chain (although FBA comes with its own fees). Brands can also work with services like Deliverr to offer two-day shipping for other online marketplaces, including Walmart, eBay, Shopify, and more.
Supply chain is one of the most extensive and significant obstacles to direct selling, which is why many manufacturers turn to third-party sellers, first-party sellers (aka Amazon Retail), or agencies to outsource that segment of their business.
Marketplaces are increasingly crowded. To ensure your products can be found, digital marketing is a must.
Fortunately, not all marketing has an expense. Listing optimizations are among the most important efforts a seller can make, and they require nothing more than time, research, and effort.
Here’s a brief overview of how to create great listings:
- To optimize a listing, start with keyword research. Which search terms have the greatest relevancy to your product and what’s the competition like for those search terms? A mixture of high search volume and low competition keywords can help your product establish a foothold.
- Use short–tail and long–tail keywords. Short-tail keywords can help listings populate for more general queries (boosting visibility) while long-tail keywords are more likely to lead to conversions (shopper has specific interest and therefore stronger intent). Plug keywords into the listing title, bullets, and product description.
- Last but not least, review and revise the listing to achieve a balance of discoverability with buyability. The listing must be keyword-rich to be discoverable by Amazon’s algorithm, but it must also be persuasive to a human being. If the listing is just a string of keywords, shoppers won’t convert, and then it doesn’t matter that your listing was discovered.
You can read more in our blog post, 5 Tips for Improving Listing Discoverability.
Product images and videos are also incredibly important for improving sales velocity. Keywords make a listing appear on the search results page, but it’s the image on that entices a shopper to click into the listing itself. You can read more on that and what goes into creating quality photos and videos for Amazon here.
Another free marketing service is Amazon Live, which allows brands to livestream product videos directly on Amazon. The service launched early in 2019 and has proven to drive excellent visibility.
While free services are fantastic, brands should also consider paid marketing services. For Amazon, this includes Sponsored Product Ads, Sponsored Brand Ads, Sponsored Display Ads, Coupons, and Deals. Beyond Amazon, brands can look into paid marketing on social media with services like paid social ads, direct B2C social media engagement, and influencer marketing.
As with everything else, each of these services require time and effort, and they greatly benefit from being driven by someone with experience in search marketing or social media marketing.
Brand owners interested in selling their products themselves can research best practices, guides, and tutorials so they can take on these services themselves, expand their teams internally, or outsource marketing to freelancers or agencies.
Online brand protection is a necessity. The reality is that there are unscrupulous individuals and companies who will steal intellectual property, make counterfeits, undercut pricing, or make false allegations to get your seller account shut down.
To defend against these threats, brands need to proactively protect their IPR by filing for trademarks, copyright, and trade secrets whenever appropriate. This includes domestically and internationally.
Defending against counterfeiters means working with trustworthy manufacturers who won’t sell your designs or products to other parties, closely monitoring your supply chain to prevent counterfeits from entering your inventory, monitoring listings, and periodically making test buys to verify product authenticity.
Another element of brand protection is product pricing. Price consistency is important because it reflects brand integrity. When a product is offered for far less than the MSRP, shoppers question if its legitimate and why the MSRP is higher. If you are your products’ exclusive seller, controlling pricing is easy. If you also partner with other retailers to sell your product, you need to be able to monitor and enforce your pricing policies. This can be done manually, as detailed here, but it’s a time–consuming process that is difficult to scale without automation.
Finally, if your account is suspended due to false allegations, the quickest way to get it restored is to provide the necessary paperwork showing that you own the product you sell and that it’s not counterfeit.
You can read 11 more tips for protecting your brand online here.
THE MIDDLE GROUND – OUTSOURCING PARTS OF YOUR BUSINESS
The benefits of direct selling make it extraordinarily appealing to many brands, but many discover through experience that they’re not yet equipped to handle it. For those brands, there’s a middle ground: partner with an agency and/or utilize software.
By outsourcing to an agency, a brand gains a team of experts to run their marketing, supply chain, brand protection, or any combination of the three for a fraction of what it would cost to hire a team in-house. It’s a cost-effective approach that can drive profitability and sustainable growth, giving brands time to develop and pursue their short-term and long-term goals.
In addition or as an alternative, brands who wish to sell their product themselves can pay for software that automates and/or simplifies various services, reducing the time and personnel required to successfully run an online business. This option has the greatest profitability potential, but it again depends on who’s running the tools. If the tools are excellent, but the person using them is inexperienced, the tools will yield only a fraction of their full potential. Working with an agency or software provider who can train your team on the software is a great bridge to independent direct selling.
THE TAKEAWAY – WHICH BUSINESS MODEL IS THE BEST?
After reviewing the business expenses associated with Amazon third-party sellers (3P), Amazon Retail (1P), and direct selling, there’s no clear answer to which is the perfect solution. The best Amazon business model for your brand depends entirely on your business’s goals, needs, limitations, and priorities.
Kaspien offers services for third-party retail, direct selling with an agency, and direct selling independently. If you’d like to learn more about any of these services, reach out through our contact form.
- Amazon Retailer vs Amazon Agency: Which is the Better Financial Fit? - January 16, 2021
- Amazon Category Overview: Electronics - January 5, 2021
- Walmart vs Amazon: How the Two Largest Ecommerce Players Compare - December 7, 2020