Ecommerce, commodities, and the race to the bottom

We’ve all seen this — with the rise of ecommerce juggernaut marketplaces (hi Amazon!), making a sale with any margin just gets harder and harder. It goes like this:

Our original seller, Adam, offers an new item — let’s call it Foo

Other sellers see the new item, source it on Alibaba (because that’s where EVERYTHING comes from)

• Interestingly: this does serve as a sort of barrier to entry, but not really much of one

New sellers Barbara and Clausewitz list Foo on Amazon and, as late entrants into an established market, compete based on price

Adam notices a drop in sales. Maybe he loses the Buy Box. So he drops his price to stay competitive.

Barbara and Clausewitz drop their prices as well (maybe manually at first, or maybe using Amazon’s Automate Pricing tool or one of many 3rd party tools)

Adam ups the ante by rolling all his profits on Foo sales into a bigger order from his supplier, which shaves a few points off COGS

Adam lowers his price even more — now that he can afford to, with his lower per-unit cost, and recovers the Buy Box

Barbara and Clausewitz place larger orders to lower their COGS as well

• Another filter here — competitors need the financial resources and the savvy to find a reliable manufacturer in China to partner with (my personal experience? This ain’t easy — but it’s not so hard that an awful lot of people can do it, like getting an MBA or changing your own oil)

Barbara and Clausewitz come roaring back and now there’s a three-way wrasslin’ match for the Buy Box

A, B, and C continue lowering their margins to 0%, then below

• Third filter here: some sellers are sane enough NOT to play chicken with the competition by selling at a loss. Some sellers have the money and the patience to try to ride out the battle with an eye on winning the war. And, well, there are adrenaline junkies who get truly stoked by throwing money in their competitors’ faces in order to (finally, hopefully) beat them and feel like a victor. Not being able to tell the vanquished this directly does take a lot of the fun out of it — that’s what poker is for.

Now we have to break our straight-forward narrative into a Choose Your Own Adventure. Pick one!

1. Roll d3 – on 1, Adam wins; on 2, Barbara wins; on 3, Clausewitz wins. The two losers either hike their prices to acknowledge their defeat, the same way medieval European armies lowered their royal standards. The victor now totally owns the Foo ASIN on Amazon.

2. At the factory supplying Adam, Barbara, and Clausewitz, a sharp business analyst notices the uptick in Foo production and (a) schedules a meeting with his boss, or (b) makes a few surreptitious phone calls and a couple weeks later there’s a new Foo seller on Amazon, let’s call her 大夏 (Da-Xia, or “Great Hero” in Mandarin), who enjoys direct-from-factory pricing a full 15-25% below Adam, Barbara, and Clausewitz’s.

3. Preternaturally alert Amazon sellers who constantly cruise sales rankings and, sharklike, can smell a single molecule of opportunity in a million ASINs, elbow their way into the tussle and

3.a. list Foo at whatever the going price is, just to grab a few percent of the current sales

3.b. collaborate with a factory to make a less-expensive, lower-quality version of the product which we’ll now call Foo- which dilutes everyone’s sales AND infuriates customers. Foo’s formerly 4.5-star rating declines while Adam, Barbara, and Clausewitz desperately try to source their own Foo- to stay competitive. Within a shockingly short period, Foo- is readily available on Alibaba and an increasing number of bottom-feeders pile on to the dying ASIN trying to squeeze a few sales out of its corpse.

4. A sharp business analyst who works for Amazon will pick up on the flurry of activity around Foo, analyze the sales figures, and make a case to her boss that Amazon should directly enter the Foo business. Amazon’s supply chain will source their own Foo and offer it under the Amazon Basics brand — automatically giving themselves at least a 15% break in COGS (because Amazon presumably doesn’t charge itself for sales), and the third-party sales opportunities for Foo collapse.

Here’s the take-away: virtually every product on Amazon will inevitably collapse into non-viability. Either other sellers (including Amazon itself) will offer it at a price you can’t match, or scavenging hyenas will cannabalize the listing with similar, lower-quality and lower-cost alternatives. Either way? Adam, who brought Foo into the world and created the whole niche, is screwed.

All right, so what are our options for surviving in an age of this ecomerce juggernaut?

Manage your margins by managing your brand

The first and most important step you can take is to build your brand. Something as simple as having your logo silk-screened onto your product or packaging makes a huge difference. You can see this vividly in clothing, consumer electronics, and personal care products like bath and beauty supplies. Brand name merchandise sports a sticker price 5-10x the generic price, and the only obvious difference is the logo.

Ideally, there’s a little more to it than that. Your brand really needs a Unique Selling/Value Proposition (used interchangeably, abbreviated USP or UVP). To quote Simon Sinek:

“People don’t buy what you do; they buy why you do it.”

To put this another way, I had the honor of spending some time picking the brain of a highly-paid ecommerce consultant who wouldn’t give me permission to use his name. Here’s a summary of his thoughts on this issue:

Why would you waste your time building a brand for every single product? That’s for gonifs and fly-by-night money-grabbers. No, what you want to do is build a brand around your pipeline. Don’t make Gripswell wrenches and Bang-It! hammers and Superspin screwdrivers. Build an identity around the whole line — ConstructoPro or whatever, and boom you got a whole identity for every tool you sell…

Sure you can try to do it your way, one by one, and you’ll kill yourself on logos and domain names and differentiation. The only reason to do branding and placement SKU by SKU is if you plan to sell off each one as its own business when it matures. If that’s not your goal, go whole hog. Make one brand that has one identity, one angle of entry into the market, and lavish your time and energy into it. Make that a success.

Think about it. In the long run, which is worth more to you: a Gripswell wrenches customer, or a ConstructoPro customer?

Anonymous, highly-paid, very smart ecommerce consultant

My experience in ecommerce has proven, over and over, this is the right choice. Specialization is good, yes — at the niche level, less so at the product level.

Make a great product (or at least a great story)

In a world where everyone sources their products from the same place, how can you differentiate? How can you make a truly superior product? Let’s assume you don’t have your own R&D shop or any competitive advantages.

Here’s what you do:

Tell a great brand story

Going back to “people don’t buy what you do; they buy why you do it” above.

I mean, sure, you can go too far with this — don’t go all We Company:

Think more like Bombas.

Then, once you have your great brand story, you have to live up to it. Using our ConstructoPro example from above, maybe your mission could be:

Then you could back that up by offering construction tools with smaller handles as female-friendly. Or in bright colors to contrast with the classic black-and-chrome palette found in most toolboxes. You could spend a lot of time and energy creating how-to content — why? Because it serves your stated company mission: helping folks take control of their tools, tasks, and work.

If you need help brainstorming on this subject, one of the best templates I’ve discovered came, weirdly, from a course on journalism taught by the exceptional Lynne Barrett. http://www.lynnebarrett.com/ We were talking about how to come up with ideas for articles that would appeal to magazine editors. She suggested a structure that’s both simple and astonishingly useful:

That’s it. X for Y.

• Home Improvement Tools for Women
• $anything for The Rest of Us
• Professional-Grade $niche Equipment for Everyone/The Public
• $genderSpecificProduct for $oppositeGender

The X for Y structure creates a juxtaposition that immediately offers you an angle into your market. Your Venn diagram has two overlapping circles, X and Y, and your target demo is right there where they overlap.

Don’t skimp on packaging

I’ll never forget my first iPhone, mostly because of the packaging. (This is the truth.) Solid cardstock construction, nice printing, and inside every component nestled into its own little cubby — surprisingly little waste, too. My iPhone made a deep impression on me before I even opened the box.

Another story: I worked extensively with a fantastic print salesman, Ralph Navarro, on a huge number of consumer packaged goods. He always brought samples to show me what his other customers were doing. I learned the difference between a $30 cosmetic and a $99 cosmetic was usually about $3 in per-unit packaging costs. Then, we did our own experiment with one product packaged three different ways: in a cheap plastic tube, cheap plastic tube with overbox, and in a clear acrylic jar with overbox and inserts to keep the jar from sliding around inside the box.

Here’s the approximate breakdown, including purchases per customer:

• tube: $0.60 cost, $29 retail, 1.5 avg orders/customer
• tube + box: cost $1.60, $49 retail, 2.2 avg orders/customer
• jar + box: cost $3.45, $99 retail, 4.8 avg orders/customer

Just to be clear — the contents of all three packages were identical. The most expensive option sold better, sold more, and kept customers coming back.

Why? I think it’s partially due to the placebo effect and we know that higher cost enhances this effect. I think the customer experience of the expensive packaging added to the product’s perceived value (just like my iPhone!) which delighted the customer, even though they could’ve saved $70 per unit and gotten the same results. It just wouldn’t feel like the same results…

And don’t forget to put your website on your packaging. This will be important later.

Build a website

Doesn’t have to be the Taj Mahal — hire somebody on Fiverr or give your nephew a case of Red Bull to set up a WordPress + Shopify ecommerce site. Use it to tell your brand story. You don’t even need product listings up front, but you do need a website.

Make sure it has your contact information: phone, email, social media if you have bandwidth/staff to manage them. (Very little’s more pitiful than a corporate Facebook page with 2 fans and zero updates…)

Offer solid service

I doubt I need to belabor this point. Have a phone number where a real person (NOT an IVR) can offer help, answer questions, and take care of customers.

Maybe I DO need to belabor this point… because there’s a particular problem I’ve seen at many businesses. CSRs aren’t taught to take care of customers’ concerns or problems. Often, CSRs are undertrained and rely on their own personal experiences and channel the brusque unhelpfulness we’ve all faced when calling a credit card company, a telecom, or — well, basically everywhere. If you don’t set the right expectations and enforce them constantly, your CSRs will treat your customers like hassles rather than like royalty.

Never forget: Once your customer has made a purchase, the battle is far from over.

Just compare acquisition costs between new and existing customers (usually quoted as 5x though I’ve seen ranges from 3-10x). It’s so much easier (and cheaper) to keep an existing customer happy than to replace them. Make sure your CSRs know this!

Always be first

Amazon no longer lets just anybody edit product descriptions, add attributes, contribute images, etc. Typically only two parties can update a product listing: the owner of the brand, or the first seller to set up the ASIN.

You absolutely have to OWN your ASIN on Amazon. You can only do this if you’re the first to list your product, with a unique UPC. Lots of people waste time and energy, and run risks of getting their seller account suspended, using unofficial UPC codes. (For the love of God, just buy a block of legit UPCs. They’re not that expensive!)

Stay on top of it

This is really just a continuation of Offer solid service. Ship on time, reply to your customers, don’t sell when you’re out of stock, etc.

What happens when you do it right?

Here are the benefits of using Amazon the right way:

You build a brand and create loyal customers

Once you’ve delighted a customer, they’ll come back to YOU for more. This is how you move customers away from Amazon into a direct relationship with your business. That’s why you need a website.

You own your Amazon ASINs

It’s going to be very, very hard for competitors to poach or hijack your sales.

You don’t have to engage in the race to the bottom

Sure, somebody can buy a no-name Chinese hammer for $2 on Amazon. But people will pay more for a ConstructoPro hammer. Why?

• Because they believe in your mission
• Because you’ve delighted them in the past
• Because your product and your brand stand out in an ocean of Me-Too! commodity sellers

… to be continued

Listen: there’s always going to be more to say on this subject. I’ve spent the last 5 days trying to condense everything I’ve learned about ecommerce in the age of marketplaces into just one article. I hope you find this inspiring and it gives you the gumption to break out of the commodities trap and start building your own brand.

(It’s totally worth it.)