How merchants can avoid being commoditized on marketplaces

In this post we discuss the main ways in which marketplaces can commoditize their merchants and some of the strategies and tactics merchants can use to avoid being commoditized.

The risk of commoditization

Large marketplaces, such as the ones run by Alibaba, Amazon and Apple, have made it much easier for merchants to be discovered and reach new customers. They bring in customers who are specifically on the site looking for suitable products or apps. Indeed, the majority of shoppers in the U.S. start their product search on Amazon (close to 75% according to this recent report).  

But as merchants on Alibaba and Amazon, app developers on Apple’s iOS and Google’s Android, restaurants on DoorDash, Grubhub, Uber Eats and Seamless, hotels on Booking.com and Expedia, small businesses on Tencent’s WeChat and others have discovered, participation on large marketplaces can be a double-edged sword. Along with the increased chance of being discovered comes the increased risk of being held-up and/or commoditized. This risk can take several forms:

• Marketplaces can extract higher fees over time. Take Property Guru for instance, the leading marketplace for real-estate properties in South East Asia and the dominant player in Singapore, where it is almost exclusively used for property searches. In 2019, it increased the listing fees charged to agents in Singapore by 10 to 25%, to the dismay of those agents.

• Marketplaces can make advertising (paying for prominence on the marketplace) more and more important for merchants to maintain visibility (as Amazon has done over time).

• The environment on large marketplaces may become increasingly competitive. This can be the result of both natural growth (more users and more merchants are attracted to participate), and of marketplace design changes (e.g. the recommendation algorithm places a higher weight on offerings with lower prices or those that pay to be promoted).

• Some marketplace owners may vertically integrate into some of their merchants’ businesses after observing which products and designs sell better. This practice has been employed by Amazon, Apple and Microsoft, among others. We wrote about the merits of allowing platforms to do this in an earlier post. Regardless of those merits, from a merchants’ perspective, this is obviously bad news, especially if the marketplace is using their private data to inform its decision as to whether to compete against them.  

• Marketplaces tend to weaken merchants’ relationship with buyers (their customers). This occurs naturally because buyers come to (and typically register with) the marketplace first. Sometimes marketplaces may go further, only sharing buyer data partially (if at all) with merchants, as seems to be the case on food delivery marketplaces.

To some extent, marketplaces may purposefully try to commoditize merchants in order to get them to compete harder on price (and sometimes quality), which in turn makes the marketplace as a whole more appealing to buyers/customers, therefore attracting ever more of them. It is, however, important to realize that marketplaces also create self-reinforcing cycles that go in the opposite direction, i.e. help the (few) merchants who know how to navigate the competitive waters of large marketplaces. Namely, the more a merchant’s product aligns with what consumers are searching for, the higher its ratings will be, increasing the chances that the platform’s algorithms will drive target customers to it. That means more people will buy and rate the product, further increasing its competitive advantage.

That being said, most merchants face an increasingly competitive environment on marketplaces, which raises the question of what such merchants can do to escape the commoditization trap. Below we propose a few strategies to consider.

Develop direct channel making full use of new online tools

Even if it is impossible to avoid conducting business on key marketplaces, merchants should always seek to build direct relationships with their customers via their own channels (e.g. a branded website and/or app). These direct channels can help limit the merchants’ dependence on marketplaces and protect them against the changing whims of the marketplace owners. The good news is that given the widespread availability of business-in-a-box solutions such as Shopify, BigCommerce, Magento, WooCommerce, Mailchimp, Square, Appy Pie, and Wix, creating a fully functional online storefront is increasingly easy and affordable.

The key difference between relying on such providers of software tools and relying on a marketplace is that the former do not control the merchants’ relationships with their customers. For example, Shopify provides all the digital tools and infrastructure a brand needs to sell online, typically without consumers realizing that the brand’s store is powered by Shopify. Part of the reason Shopify is so appealing to online merchants (it has more than one million as customers) is that unlike Amazon, Shopify is not a marketplace connecting them with consumers and therefore does not commoditize them. In the words of Tobias Lütke, Shopify’s founder and CEO, “Amazon is trying to build an empire. Shopify is trying to arm the rebels.”

Similar business-in-a-box solutions are available in other verticals. Consider the restaurant sector. DoorDash, Grubhub, and Uber Eats enable consumers to place takeout orders and arrange for delivery in the U.S. Because restaurants have become increasingly reliant on these marketplaces in the past five years, they now charge a 15% to 30% commission. In contrast, ChowNow and Olo, two fast-growing start-ups that provide back-end technology to enable restaurants to sell directly online, allow the restaurants to keep full control of their customer relationships. Restaurants choose delivery and sales channels, and pay these providers subscription fees for powering their websites and mobile apps, handling orders and payments, running the restaurants’ loyalty programs, and helping with marketing services.  

In recent years the “Shopify for X” approach has been applied in more and more sectors. Dumpling lets people start their own personal shopping businesses so that they can reduce or eliminate their dependence on platforms like Instacart. NearSt lets brick-and-mortar retailers in the United Kingdom make their inventories searchable on Google without listing them on Amazon. And by now there are many startups that enable online merchants to fulfill orders (Shipbob, MasonHub, Airhouse, Fabric and so on) so they needn’t be reliant on Amazon to offer world-class fulfillment.

The downside to such business-in-a-box solutions, of course, is that merchants must figure out how to get customers to their sites. The solutions providers can help to some extent through partnerships. For instance, Shopify entered into a partnership with Facebook in May of 2020 to allow its merchants to create storefronts on Facebook and Instagram. It partnered with Walmart that June to allow its merchants to easily become third-party sellers on Walmart’s e-commerce marketplace.

Multihome

Whenever possible, merchants should multihome, i.e. list on multiple competing marketplaces. This can allow merchants to become less reliant on any one of them. Merchants can try to steer their customers towards their preferred platform, like they do when they put up signs “We prefer MasterCard” or “We prefer Visa”. Alternatively, if one marketplace tries to push unfavorable terms, merchants can delist from it and thereby steer customers to transact through other rival marketplaces. The threat to steer business (or delist altogether) can keep marketplaces in check, provided the merchant is strategically important, or can coordinate with many other merchants, or can do something newsworthy to highlight their plight.

Use marketplaces as showrooms

Few online merchants can completely wean themselves off the dependence on large marketplaces given the huge numbers of consumers these marketplaces attract. But by taking advantage of the business-in-a-box solutions discussed above, merchants can use marketplaces mainly as funnels for obtaining new customers, while serving repeat customers directly. This approach gives merchants more control over their customer relationships, including customer data, enabling them to better tailor their offerings and differentiate themselves. Essentially, it lets them use the marketplaces as showrooms.

One tactic for doing so is to offer deals and directions to the seller’s own channel when filling orders through a marketplace. For example, restaurants can drop coupons into the bags picked up by food-delivery platforms, steering customers to their websites and offering discounts on the next direct order.

Merchants should also limit their offerings on marketplaces and offer a broader variety of products, services, and loyalty rewards in their direct channels. Some do so with Amazon: They use Amazon’s marketplace to obtain their first order with a customer, and when fulfilling it they include a coupon aimed at attracting the consumer to their own channel for repeat orders, sales of other products, and subscriptions.

These principles have become all too relevant to content creators on OnlyFans since last week, when the platform announced it would ban sexually explicit content starting October. This policy change threatens to wipe out the revenues of many creators who are largely responsible for the platform’s quick growth over the past few years. These creators now probably wish they had started investing in their own channel and “showrooming” OnlyFans a lot earlier.

Of course, the most obvious way to get consumers to buy via the direct channel is to charge lower prices there. Some marketplace contracts forbid that. In the U.S., Amazon has had a policy of prohibiting merchants from undercutting the prices offered on Amazon’s marketplace when selling through any other channel including directly via their own websites. While that policy was removed from its Business Solutions Agreement in March 2019, according to one lawsuit, a similar policy resurfaced shortly afterwards under Amazon’s Fair Pricing Policy. To the extent the policy applies, the practice of offering discounts via coupons for repeat orders can help avoid it.

Booking.com and Expedia have the same type of contracts with hotels, preventing them from undercutting the prices they set on these platforms when selling via other channels (including directly on their own websites). Many hotel chains have responded by offering customers loyalty rewards and additional perks, such as the ability to choose specific rooms and to access upgrades, when they book through the hotel’s own channel. Moreover, by enrolling repeat guests in a loyalty program, hotels can offer them lower prices since the rates do not need to appear on the hotel’s public website.

Conclusion

While many merchants have become increasingly reliant on large marketplaces to attract consumers, merchants needn’t become completely beholden to them. There is an increasing set of backend tools that merchants can use to become less dependent on marketplaces. By employing these tools and the strategies of multihoming and showrooming, merchants can gain more leverage over existing marketplaces to develop their own brands and take back the relationship with their customers. Another option that is becoming increasingly common is to sell to marketplaces aggregators like Thrasio (discussed in our previous post) and let them develop the brands over the long haul.