The Single-Brand Retailer's Challenge: Balancing DTC Success with Online Marketplaces

By Nikolai Lien

|

August 14, 2019

Online marketplaces shine a beacon of light in retail. Amazon has shown single-brands that selling via wholesale and the marketplace model can drive revenues without requiring significant resources. Following Amazon’s example, big names in the wholesale game including Walmart, Zalando and Target have aped the strategy, introducing a marketplace element to their site in an effort to entice eCommerce brands to sell through their platforms. But all these additional distribution options leave eCommerce brands with some tricky decisions to make. Online platforms promise sizable audiences, but pitfalls, too.

Traditional eCommerce is transforming…long live the platform economy

Traditional retailers walk an uncertain path. Visits to offline stores are down; and their online channels face tough competition. Forced to adapt or die, many who once offered a binary choice (store or website) have turned to offering online marketplaces to counter heightened competition. Drafting brands onto their platform helps retailers maintain momentum and serve a wider variety of consumer needs.

The rise of the platform economy

This shifting landscape - one that sells through platforms rather than just retail outlets - means that brands have had to adapt. Obviously, they feel obligated to follow shoppers: Amazon alone receives 197 million US visitors a month. The opportunity to expose your product at that scale is too enticing to resist.

197 million U.S. shoppers visit Amazon each month

Yet managing that scale and complexity has meant that brands need to develop new skills and build new capabilities. The traditional, siloed approach long favored by brands won’t succeed in an environment that rewards responsiveness and cross-enterprise integration. The platform economy requires a new approach to mitigate risk and maximize success.

Challenge 1: Breaking down traditional silos

In the marketplace age, a brand's departmental alignment can make or break its chances of success. In many cases, employees responsible for DTC efforts remain distinct from colleagues focused on the brand’s wholesale or marketplace requirements. Each team will often work toward separate KPIs and, crucially, separate data points.

A simple example lies in the differing economic incentives that exist between departments. Marketers are traditionally incentivized on performance - usually Return on Ad Spend (ROAS) - or if they're clever, something more relevant. In their ideal world, they'd own the performance that comes from brand terms, and take sole control over the customer relationship and subsequent data layer.

Internal culture clashes encourage mismatched capabilities

Yet wholesale and marketplace relationships automatically create roadblocks. Re-sellers have their own performance KPIs to achieve, so they negotiate and receive an open market in which to compete.  In some instances, merchants might provide re-sellers with economic incentives in the form of market development funds or co-op spend. Even more challenging, some re-sellers have flexibility in pricing and promotions that the DTC brand managers can’t match.

Such culture clashes encourage mismatched capabilities. Often, those in charge of wholesale operations will also oversee marketplace commerce. But this doesn't guarantee that they have the necessary level of data-driven advertising skills to achieve the latter. To alleviate this, digital marketing teams tend to manage the advertising element, while their wholesale colleagues own P&L. Should things not work out in this setup – a real possibility – brands go through an internal blame game.

The end result is an environment of rising advertising costs, a battle for customer ownership, and misaligned perspectives. Even as brands begin to access the benefits of these platforms, they hamper their growth through internal politicking  

Answering this challenge is a layered process. It requires coordination of internal systems, but also a careful and disciplined approach to managing the data layer. Before engaging with a wide range of marketplaces, brands must first bring all the performance metrics together in a single, integrated view. No other way exists to accurately measure organizational impact, new customer rate, and incremental revenue growth.  

Challenge 2: Cannibalization (Don't eat your own)

Once brands have the ability to view all incoming channels through a unified lens, it becomes easier to compare the DTC channel against each re-seller partner. Here's a helpful starting point: You can identify the new customers coming from each channel. This way, you can see if your marketplace and wholesale customers are cannibalizing revenues that might have been achieved through DTC channels.

Gaining access to this data may not be easy. Amazon provides a “new-to-brand” metric, but due to data privacy policies, won’t allow for true Order ID-level identification. Other marketplaces are also hesitant to share this data, considering it core to their ongoing success.  

Are marketplace and wholesale customers cannibalizing DTC revenues?

Gaining access to customer-level data is achievable within the marketplace model. The corresponding address data is shared with the brand in order to fulfill delivery – scrubbing that data against an existing customer file is possible. The wholesale environment is a different matter. Brands should seek to include customer information as part of their ongoing merchant negotiation, but there is no built-in incentive for them to share that information.

Regardless of any data access issues, a best practice for brands is to try and measure the long-term revenue and margin contribution of new customers acquired from each channel. Own-site sales may look lower on a per-transactional basis, but subsequent purchases from each newly acquired customer can quickly change the calculus.  

Not all marketplaces cannibalize existing business by default. Instances of opening new markets, product expansion, or simply extending reach into new audiences all can create unique and valuable revenue streams. Regardless of the complexity, the question that brands should seek to answer remains simple: What incremental gain can this marketplace bring my business?

Challenge 3: Every product has its place

As we alluded to already, building a trustworthy data layer and understanding the value of each new customer is key to building a successful platform sales model. One way to put that data to work is in applying it to a smart product distribution strategy. Certain products may drive a higher new customer rate and Customer Lifetime Value (CLV) brand – giving these away to re-sellers may be equal to sharing your crown jewels.

Many retailers have used CLV to determine their product assortment strategy. For example, core items, basics, and non-differentiated products can easily be sold through marketplaces. They tend not to drive frequent repeat purchases, have lower margins and yield a lower new customer rate. By the very nature of being basics, they also are more competitive, increasing acquisition costs via search and other marketing channels.

Both Burberry and Nike have distinct assortment strategies

Brands can follow a dual strategy here. While allowing marketplaces to carry the cost of acquiring these "evergreen" customers, they get to keep products that lead to repeat purchases and/or high margins within their own consumer-facing website. Doing this has the added benefit of controlling price and inventory levers, as well as maintaining brand equity.

Brand leaders such as Nike and Burberry have adopted this strategy. Nike removes all sneaker drops and high-value merchandise from Amazon and other marketplaces. Meanwhile, Burberry only sells commoditized items—such as sunglasses and perfume—via the channel. This allows them to build and own the relationships with their most important customers. Full data ownership unlocks the ability to drive CLV, re-target shoppers…and use cheaper, more organic channels to cross and up-sell products.

Brands as omni-channel, data-driven advertising gurus

Selling solely via DTC offers clear benefits. It sidesteps pricing inconsistencies and issues of diluted brand loyalty. It also accurately measures customer data and marketing impact.

However, adopting the marketplace model does increase complexity. The reporting that you get from each marketplace only measures that specific ecosystem. Questions surrounding incrementality, cannibalization and margin impact remain unanswered.  

The most successful single-brand retailers invest a lot into their technological capabilities

Solving these challenges requires a significant investment into business intelligence and technology. A potential re-alignment of organizational systems may also be necessary. Brands need to press their internal teams to improve communications, and invite the merchant team into the performance advertising world.

The platform economy seems like the lifeline that brands have been searching for. An intelligent approach to measurement, product strategy and data systems can ensure that it fulfills that promise.

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