Aaron Shapiro

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Navigating the Commoditization Conundrum

December 11, 2018

It’s the classic problem facing every company looking to sell online: what to do about Amazon?

Amazon has been both a fantastic sales channel and threat to merchants for years - one that becomes more fantastic and more threatening each year as Amazon’s ecommerce marketshare systematically grows. Amazon’s threat is two-fold: not only are they a massive retailer that puts every brand on par with each other for a given category; increasingly, they’re selling their own merchandise, in the form of roughly 100 private label brands.

One way to understand Amazon’s threat to brands is to think about the relative importance of price and features in making purchase decisions:

On the top-left, we have purchases where price is paramount to the decision. It’s no surprise that the origin of Amazon’s business—books—is the perfect example of this. When I buy, say, The Catcher in the Rye, all I care about is price; I don’t care about book features because I’ve already made my reading decision, so I care about convenience and price, which means Amazon wins.

By contrast, Amazon is terrible at selling cars—an example of products in the bottom right corner of the matrix. Cars have many features that need to be evaluated by the consumer; price matters but far less than many other purchases because of complex financing options; and in the blaze of all the features we are drawn to a brand to help make the purchasing decision. I trust that a certain brand means quality and is a reflection of my identity, driving the purchase decision.

To round out the chart, we have products where neither features nor price are particularly important in buying decisions. Impulse buys, like grabbing something at food stand, are a great example of this. And, we have purchases where both price and features are tremendously important—these purchases, like renovating a house, have complex sales cycles that generally require people to close.

The scary thing for brands is that over time time, as Amazon has taken over the world and consumers have become more willing to buy more and more products online, the quadrant in which Amazon is dominant has expanded downward and leftward. Amazon’s convenience allows for more and more impulse buys, and consumers get more comfortable navigating complex buying decisions relying purely on digital resources, lessening the need for human sellers.

Amazon is also most effective for products that are conducive to private-label. They’re:

  • Products that readily fit common search queries
  • Products that can be easily understood based on the product name, description and photo
  • Products whose quality can be quickly assessed by user ratings

If the above are satisfied, then the lowest price from a trusted, convenient source wins—and in the consumer’s mind, that’s usually Amazon (even though studies have shown they’re not the cheapest a significant amount of time). So they win.

Amazon’s entire design and ecommerce experience orients us towards the lowest-price-above-a-certain-quality is king mentality. The grid or row of products makes all sunglasses like identical; why pay for the expensive ones when the $19.95 version looks fine? Why buy Energizer AA batteries at $0.51 per battery when AmazonBasic’s batteries are just $0.28? In the list that is Amazon’s search results, no amount of messaging will convince the public that energizer batteries really do last longer, and therefore are worth twice the price. Cheapest with acceptable quality wins… and Duracell doesn’t even show up on the search results page for “batteries” — not a surprise; they’re even more expensive.

For brands to compete, they have two choices: embrace commoditization and win within Amazon’s price-is-king world, or stop playing Amazon’s game and verticalize their business:

Winning as a Commodity

The commodity route can be viable for many companies. For some manufacturers and brands, Amazon isn’t such a bad game to play: if you can compete in Amazon’s marketplace on price—or can make the economics of heavily Amazon advertising work—then take advantage of Amazon’s massive reach and sell away. The strategy is simple: for a given Amazon search query, the cheapest-price-at-acceptable-ratings wins—especially if you manage to buy or hack your way into good placement on the search results listings. In fact there’s a whole ecosystem of companies who do nothing but play the Amazon SEO/SEM game, and have a nice business as a result of it.

Anker is an excellent example of this: by heavily leveraging Amazon they grew massive sales in portable battery chargers, and a reputation for high-quality, low-cost products. So much so that they’ve beaten the many copycats. While they may not be the absolute least expensive, they certainly win the lowest-price-above-a-certain-quality battle with almost all of their products, making them a success.

The businesses that win the commodity game share several attributes: they sell a standard offering that is readily understood by consumers; they have a low price; and they scale with broad distribution—not just on Amazon but everywhere they can sell the product. Volume is what drives victory.

Winning with Verticalization

Not every company can become a low-price business; indeed, most brands are built on providing premium, added value and the higher prices that go with it. For them, Amazon may be a perfectly fine short-term boost to sales, but this is at the expense of exposing their business to commoditization over time. At some point, the pressure to lower price becomes unstoppable, or sales will start to dry up.

The alternative to short-term gain is to not to play the game at all: avoid Amazon and verticalize. Focus on products where features win—or create features that make consumers rethink formerly price-driven categories. Make the brand the shortcut for buying everything those features represent. Then, control all aspects of marketing, product, commence and more importantly own the direct customer relationship and their data, instead of abdicating the customer relationship to Amazon. While a massive sales channel is lost, smart D2C brands have shown that savvy use of social can more than make up not for having Amazon drive sales. And once the marketing channel is established and sales start to grow, these brands can do a better job maintaining brand value and premium pricing because they cannot easily be compared to the competition. Those Warbly Parker eyeglasses look fairly generic when part of a sea of Amazon search results, but when on its own site and in its own stores, with all the personalized service wrapped around it, the glasses become truly special, worthy of the price point.

Indeed, the most successful new consumer brands today are direct-to-consumer businesses, fully vertical, controlling the entire customer experience. In many ways, these brands are emulating Amazon but in the reverse: just as Amazon is starting as retailer and verticalizing by selling its own brands, cutting out third-party products, brands have the opportunity to sell exclusively through their own channels, cutting out the retailer.

In the end, when facing the Amazon question, brands don’t have to go all-in on a commodity or verticalization approach immediately, but they most know the path in which they’re taking, as long-term, the two extremes are the only businesses that win. Companies must choose between being cheap or being exclusively special… because there won’t be much left in-between.