COVID-19 will be here for months, disrupting our communities and our businesses in ways that we are only beginning to understand. If you have only operated your business in brick & mortar stores, moving your brand online can help you shield your business from adverse effects of the economic fallout from the coronavirus. We can speak from firsthand experience: Kaspien was founded at the height of the last recession in 2008. While many industries struggled to survive the rough economy, we not only survived the recession, we thrived in a vibrant and fast-growing market.
Yes, online marketplaces like Amazon are a different beast today than they were 12 years ago, but there is still security to be found in diversifying your assets. Expanding your brick & mortar business to have a strong presence on Amazon, Walmart, and other growing online marketplaces is a smart way to position your brand to survive unexpected shifts in the market, like the one we are currently experiencing.
How to Start Selling on Online Marketplaces
When expanding to major ecommerce platforms like Amazon and Walmart.com, brands have three general routes for listing their products online: first-party, third-party, and direct-to-consumer.
- First-party (1P): A first-party business model is when you sell product wholesale to the marketplace (like Amazon Retail or Walmart Retail), and they sell the product at retail price on their platform. In a 1P relationship, you get paid a large check once every few months.
- Third-party (3): A third-party business model is when you sell product wholesale to a third-party seller (like Kaspien), and the 3P sells the product at retail price on Amazon, Walmart, or wherever else you’d like to curate a brand presence. In a 3P relationship, a single retailer can represent your brand across all channels. As with the 1P relationship, you get paid a large check every few weeks to few months.
- Direct-to-Consumer (DTC): A direct-to-consumer business model is when you, the brand, manufacture product and sell it on marketplaces yourself. Instead of a periodic large paycheck, you generate a much smaller but steady stream of profits as products sell. This can be done independently (hiring the necessary teams internally) or by partnering with an agency (hiring the necessary teams externally).
Other than the cash flow model, the biggest difference between the three business models is in who provides the personnel, expertise, strategy, hardware, software, infrastructure, and time needed to successfully run an online business.
A Word of Warning About DTC
Although the idea of cutting out the middleman may have strong appeal to individuals with a strong and wholly commendable do-it-yourself attitude, there’s good reason that 1P and 3P not only exist, but flourish. Providing the needed resources – material and immaterial – is a lot of work. It takes teams of people and years of experience to excel at, so many brands find it easier and still highly profitable to use 1P or 3P. If they so desire, they can then work towards DTC while still actively growing an online presence.
We say this not to warn you away from DTC because we’re a 3P (through our platform model, we can actually serve as your 3P, agency, or provide you with industry-leading software for your own teams to use. To us, it doesn’t matter how you sell; we can help in the way that best serves your brand. But that’s another story). We say it to simply educate you about the reality of the situation and equip you with the information needed to make an educated decision.
Which Online Business Model is Best?
To determine which business model will best serve your brand as you look to expand your online presence, we’ve compiled a list of key considerations, as well as a list of next steps you can take immediately.
Our whitepaper, The Costs of Amazon, explores each of these considerations and more in greater detail.
Download it for free!
4 Key Considerations for Selling Online
There are four basic key considerations as you plan to expand your business on Amazon, whether it’s for the first time or you’re scaling your efforts there.
1. Cash Flow
We touched on this in our definitions of the three primary business models, but cash flow differs in each business model. In 1P on Amazon, for example, brands are typically paid on Net-90 or Net-120 terms. These PO’s also tend to be larger than what 3P’s purchase. In a 3P relationship, brands are typically paid on Net-30 to Net-60 terms, so brands are paid more frequently. In a DTC model, brands operate off of sales revenue. Each cash flow model has its pros and cons, and which serves a brand best depends on the brand’s existing infrastructure and whether a brand can adapt their revenue model.
Does your team have the experience and knowledge needed to run an efficient online business? This includes marketing, product preparation, inventory management, brand protection services, tax compliance, and more. Does your business already have the hardware and software in place to manage your processes and infrastructure? This is doubly important as businesses begin to work remotely to comply with social distancing mandates. It takes a village to run an optimal online business. The answers to these questions will be a significant factor in determining whether you pick a 1P/3P retail model versus a DTC model.
We just mentioned the many services that go into driving a successful business on Amazon. In addition to asking “if” you have resources for them, you should also consider the quality and price of each. 1P and 3P’s offer many of the same services. Now it’s a question of who can provide the better results for the better price.
Finally, and crucially, there is the question of brand control. When you work with another business – whether it’s a manufacturer, logistics provider, seller, or agency – you relinquish some control of your business. That’s just the reality, which is why it’s so important that you take time to explore their services, negotiate contracts with clauses about who can sell your product and who can update your product listings, and generally make sure you find a company that will work with you as a partner in the full sense of the word.
Next Steps to Start Selling Online
Those are the considerations, but what action items can you take today? Supply lines are hurting at both ends, and there’s a strong sense of urgency to act now so you can minimize the adverse impact to your business caused by COVID-19.
Here are our recommendations:
1. Shop Around
We’d love for you to work with us as your 3P, agency, or software provider, but you should do your homework. There are many 3P’s, agencies, and software providers out there. Which one offers the best customer support, the most effective services, and the best pricing? While selecting a partner to help you launch or expand your online presence is not a permanent decision, it will have lasting impacts, so do your due diligence and find a partner who will position your brand for long-term stability and growth.
2. Ask for Advice
Reach out to your professional and personal network for advice. Get advice from people with firsthand experience, whether that’s friends, family, colleagues, or even competitors. Faced with the threat of this crisis, it’s our duty to put aside competition and work to protect our communities and businesses, and thereby help prevent any greater economic hardship than we already face.
3. Once Informed, Be Decisive
Do your research but do it quick, and once you’ve found a good match, act quickly. The sooner you can get your online business running, the more damage you can mitigate.
4. Scale Smart
Ignoring online marketplaces as a business venture is risky, but going too far too quick can also be dangerous. As you seek to expand your brand online, make sure that you’re putting your best foot forward. Which products have the best opportunity to succeed? Making this assessment is largely dependent on category saturation and competitors. Invest in your most differentiated products first, and then expand your online catalog from there.
We recently published a whitepaper that explores each of these factors in much greater depth. Download The Costs of Amazon whitepaper for free here.