Even in 2021, many manufacturers still have fear sitting at the table when it comes to the topic of online retail and online marketplaces. The fear that sales prices will erode and that a downward price spiral will be set in motion.
Very often, the largest marketplace in particular – Amazon – is viewed critically. Again and again we hear in consulting sessions “Amazon sells our products too cheap”, “our retailers complain about Amazon prices” and the like.
But let’s be honest:
Is Amazon really to blame?
If guilty means Amazon starts the price war, then clearly no. But if guilty means that Amazon has created a level of market and price transparency not seen before, then yes.
After all, Amazon only makes visible what was previously in a sorry state: the manufacturer’s international pricing strategy – or lack thereof.
Whereas it used to be no problem at all to give the retailer in Lüdenscheid a different purchase price than the retailer in Freiburg, and it usually went unnoticed if the Italian sales organization sold the product range 30% cheaper than the German one – today, in the age of completely transparent online marketplaces, this is immediately noticeable.
The threat of dumping on the Net is approaching from three directions:
- The stationary retailer is not as stationary as you think
- The wholesaler not only supplies the small dealers in the area
- Amazon sours its goods globally
The stationary retailer as a price driver
Not only since Corona and the lockdowns have smaller retailers been desperately looking for sales alternatives. Foot traffic in the pedestrian zones is declining, sales are dwindling, so people are looking for salvation in online retailing and becoming sellers on Amazon. There, however, each product is available only once and all sellers try to obtain the famous buybox.
“Add to cart” – that’s the Buybox. In this example, Amazon itself is the seller (source: Amazon)
All other merchants can get in line behind, in our example 73 more sellers.
Their almost only chance to differentiate themselves and get into the buybox is price. And this is already the first reason for the downward price spiral.
The wholesaler reinvents itself
Wholesalers had an important function; they were the interface and transshipment point between manufacturers and local traders. However, this function is increasingly receding into the background, not least due to the death of many small merchants and retail stores. It was all the more surprising to us during goods flow analyses how strongly the sales of a manufacturer with a wholesaler suddenly grew.
Upon closer examination, it turned out that it was by no means the small merchants who had experienced a second heyday, but rather the wholesaler selling the goods to Amazon via a vendor contract. In doing so, he used his price advantage and even offered the products to Amazon at a lower price than the manufacturer itself did.
This means that the price spiral is not visible on the outside, because Amazon does not pass on the purchasing advantage, but the manufacturer destroys its own margin.
Amazon is global
Amazon buys its goods globally. In Germany, this means that Amazon uses its pan-EU network and sources in Germany, France, Italy, Spain, the Netherlands, the UK (currently restricted by the Brexit), but also in the new locations Poland and Sweden.
All it takes is a few percentage points difference in “landed costs” (the price at which products arrive at Amazon’s fulfillment centers) and Amazon no longer buys from its local “preferred vendor” but from other European countries.
If the country organizations of the manufacturer now act independently, perhaps even organized as their own profit centers, it can very quickly happen that the Italian department is delighted about a huge jump in Amazon sales, but the goods disappear completely in the German market and the German sales department wonders why its sales are declining.
Vendor tools like AMVisor show such differences, but without such data-driven help, it is very difficult to identify the causes.
The solution is a uniform European pricing strategy
An English colleague once put it nicely:
“Amazon is the mirror of a brand’s distribution strategy”.
Amazon brings transparency to the market and mirrors the manufacturer’s distribution and pricing strategy. Things that have been hidden for a long time suddenly come to light and the only viable and future-proof way is to question and reorganize one’s entire pricing strategy.
This is difficult and will meet with massive resistance in most companies, but the Internet and Amazon are not going away again; transparency is here to stay.
Dear manufacturer: Get it done, modernize your sales, pricing and incentive structure and you will see, your business life will become much easier.