Your prototypes were well-received in market research testing, you got funded and hired your team, and your first full production is arriving next week. How are you going to sell your product? If I ever hear the words, “It will sell itself; we don’t need marketing” from an inventor / founder, it’s a clear sign of inexperience, ignorance, or possibly, malignant narcissism. Don’t be that person!
Selling Messages and Channel Strategies Matter
Assuming you have completed quality market research, and you know how customers are going to react to your offering, then your channel strategy is critical to ensuring customers have a way to buy.
What is the right mix of channels? It often depends on who your customers are, and meeting them where your target demographic is most apt to open their wallet for your product. In today’s retail environment, products can be successful at a custom-built e-commerce site. If you build your own retail site, you will need to have established your plan for driving traffic to your store, which can be expensive depending on how crowded your market is. You will need your own warehouse and shipping system. Third party logistics companies are not inexpensive, and often take time to set up. That means you will take time away from selling.
Enter Amazon and other Marketplace Sites
Depending on your product category, Amazon could be a good fit. They offer companies that ability to warehouse product at Amazon for a reasonable fee, your product could be available as a Prime item. Amazon allows merchants to drive traffic to their products through search term adverting and other methods, like headline ads, and brand registration.
I started my business using both an internally built e-commerce site, and sold at Amazon. I was performing a long term A/B Test to see which channel performed better over time. I was launching a brand-new product in a crowded segment, controlled by two much larger companies. My offering was unique, and offered customers a higher quality product at a premium price, but I needed to find a way to beat my competition because traditional brick and mortar retail would not have been profitable for us.
Here’s What Happened
Over the course of the first 12 months, 50% of my total sales came from Amazon, and 50% from my own e-commerce site. Sales were growing at equal rates, and I was able to drive enough customers to my own site. Over time, my e-commerce sales began to diverge. I built a million dollars in annual e-commerce sales after the second year, and Amazon accounted for 64% of the online channel.
Amazon allows customers to easily review products and rank them using a star system. Once customers experienced our product and were able to leave positive reviews, we began to see higher growth rates at Amazon versus our own online retail site.
Did using the Amazon channel impact our bottom line?
With more than 3 years of data to analyze, I undertook a project to see if Amazon’s fee structure was fair to our company’s situation. Certainly we sold more there, because of greater customer access and our good reviews. But was our profit per unit as good?
Amazon’s total fee to use Fulfilled By Amazon (FBA) was about 32% for our products. The actual fees vary, depending on time of year, and special offers from Amazon.
Factoring in our cost of manufacturing, and other operational expenses, such as inbound freight, our Amazon Net Margin percentage was 48%. Net margin in this case, is calculated by using the net proceeds we receive for each sale from Amazon. For us, this was not a bad gross margin because our cost of sales at Amazon were decreasing over time as we gained more brand awareness.
Looking at our own third-party logistics approach, and including the same services that Amazon provided to us, our cost to manage our own distribution was 41%. The resulting Net Margin was 40%.
We all are aware of the myriad reasons to have your own product website, and having a slightly lower net margin versus Amazon is not a reason to abandon having your own e-commerce site. But you do not need to fear putting resources into Amazon marketing strategies to drive sales in that channel, compared to your own site.
Action Items for Founders
- Decide where your customers are going to buy your product.
- If your product lends itself to e-retail, Amazon and other marketplace sites can be a good choice.
- Building your own site it not a bad idea, but be aware that the cost of managing your own logistics can be more costly than with a marketplace.
- Make sure your team includes someone who has experience in search term marketing, and understands Amazon’s approach to driving product rankings. Getting customers to review your product is essential to growth.