I can’t think of a better parallel to what we are seeing in eCommerce. A retailer for twenty-five years, I started my first eCommerce business in 2015 . After several millions of dollars in sales, four brand creations and a bunch of successes and failures, I have seen a lot in just five years. This industry measures its change cycles in weeks, not years.
This “Small Beats Big” phenomenon is significant inside the Amazon marketplace. Almost across every category, smaller, lighter and nimbler brands are literally outselling multinationals to a startling degree.
The results are hard to believe, as Jeff Bezos (laughing all the way to the bank) details in his 2018 letter to shareholders.
I paraphrase: “Third-party (typically smaller brand) sellers are kicking our first-party (large brand) butt.” Jeff Bezos 2018
Jeff Bezos’s 2018 letter to shareholders.
Some facts on 3P versus 1P selling on Amazon.
• 3P sellers growth in last 20 years is 52% compounding. (Smaller Brands)
• 1P sellers growth in last 20 years is 25% compounding. (Larger Brands)
• Amazon recently cancelled many 1P accounts worth less than US$10 million, further accelerating the trend.
• In 2018 alone, on Amazon US$117 billion in sales went to 1P brands while US$160 billion went to 3P brands.
• It is predicted that by 2025, only one-third of items sold on Amazon will come
from 1P businesses; in 1999, this was more than 99%.
The table above is current sales data pulled directly from Amazon.com and shows that smaller brands occupy 9 out of the 12 available spots for top selling multivitamins and are outselling the multinational “big pharma” brands 4 to 1. (3P monthly revenues: $5,160,063 vs. 1p Monthly revenues: $1,470,273)
Lessons for Down Under.
As Amazon grows to the predicted A$10 billion marketplace here by 2030, the question for Australian brand owners is two-fold:
1) Should the same lessons be learned here?
2) Why has this happened? What can be learned to avoid the same pitfalls?
The answer to the first question is a resounding yes. Amazon Australia is just under three years old. As an Amazon agency, we are directly involved in watching the marketplace unfold, and we already see the familiar script playing out. Brands are approached by Amazon to list as 1P; however, early successes are short-lived when smaller 3P sellers flood the categories and, as the months go by, overtake and win the sales race.
Simply put, small sellers—with modest budgets, smaller brand recognition and just a handful of SKUs—are outselling 1P brands on a per SKU basis. In Australia, we are seeing the same early signs of lessons learned from overseas where Amazon has been going for a decade or more.
The second point needs further analysis. There is nothing sinister about this mediocre result for 1P sellers. Amazon does a good job of getting you listed and set up. It’s in their (and our) interest to get as many products in the catalogue as soon as possible. At the end of the day, however, Amazon is primarily a world-class wholesaler with an eye-wateringly good logistics capability. Retailers they are not. They have a standard listing template, and all brands are treated with the same formula. It’s perhaps hyperbole, but the Amazon approach to branding would be akin to banning the use of colour or graphics on the supermarket shelf so the customer had a recognisable, predictable experience when shopping. It leaves your brand exposed to a disrupter.
So, let’s take a closer look at why the biggest shopping website in the world advantages the Davids over the Goliaths. Perhaps this seemingly anomalous result is not unexpected. Perhaps the Davids are set up to win.
Seventy per cent of shoppers on Amazon DO NOT include a brand in their search query.
Whilst hard to hear for many brand owners, online shoppers overwhelmingly want Amazon to “show-me-whatcha-got”. They exclude specific brands from their search behaviour. In turn, Amazon has designed its algorithm to show the customer the best-loved and best-performing products and is utterly indifferent to established brands. Reviews, price, conversion and customer satisfaction power the algorithm which delights customers and drives sales. Smaller 3P sellers can now level the brand playing field and compete on an equal footing with household names. Often technology destroys traditional moats of protection for established companies. Amazon is a prime example, giving all players equal access to customers.
Amazon loves data.
3P sellers can “tight-focus” on niches and super optimise their small catalogue. They take advantage of the hundreds of tools available to maximise their narrow market. The level of detail is punishing, right down to the long-tail keyword. Amazon even tells them what millions of customers are looking for and not finding. Fancy knowing that!
It’s not that 3P power is not available to big brands; it is. Big brands, however, tend to engage with Amazon on a 1P basis. To a large degree, these tools are only available to 3P sellers; plus, you need a very high degree of competence to use them. Compounding the advantage to 3P, there is a dearth of talent when employing Amazon specialists, so it’s very much a “self-taught/trial and error” dynamic. “Self-taught/trial and error” is just not in the big brands’ playbook. Small, specialist 3P sellers fail fast, fail cheaply and master the game, whereas large, complex, generalist multinationals have too much to lose and too much on their plate.
Given its search-behaviour-levelling effect, 3P sellers can directly target big brands and often build disruptive and stunningly attractive listings that compare very favourably to the standard Amazon 1P listing. This drives heavy conversion in favour of the smaller brands. The algorithm learns this and promotes the “better performing” smaller brand to the top of the page, further driving sales. Large multimillion-dollar 3P brands have been built in the last five years, selling just a handful of SKUs in categories where multinationals still dominate the brick-and-mortar space. Success off Amazon does not equal success on Amazon.
That 3P sellers often do better than 1P sellers on Amazon is a David and Goliath story: initially surprising but upon examination, not so much. It’s not that big brands can’t win on Amazon, they very much can, and they have the brand equity to capitalise on; they just need to engage in the right way to match the new reality.
The analogy we use when explaining the two models is this: With Vendor Central (1P), it’s pretty much the same as selling into Coles and Woolies. You ship product, they do everything else, and you have little or no control over what happens afterwards. With Seller Central (3P), it’s the equivalent of sending your goods to Coles and Woolies and sending your favourite sales rep to stand beside your product, offer taste tests, talk to customers and relocate items to a better shelf. Is it really surprising which model is better for sales?
Tim is a Senior Partner at machete.systems