This article was originally posted on michaelsutyak.com
As a follow up to my article on top Direct-to-Consumer companies, I wanted to briefly dig into the rise of DTC, how that has been spurred along by e-commerce platforms like Shopify, and how Amazon has pushed more products into the hands of Shopify.
The initial DTC wave was ushered in by ease of distribution made possible by new online channels. By being able to leverage channels online for distribution, DTC companies were able to reach consumers without distributors and take advantage of a consumer base that increasingly became comfortable purchasing online.
Now in 2020, due to a confluence of factors – COVID19, WFH orders, Amazon’s Greed (which I’ll dig into in a bit), plug and play e-commerce platforms, etc.. – DTC is here to stay and bigger than ever.
As I pointed out in my article on scaling up DTC companies, the main struggle with creating a DTC brand is sourcing demand. Unlike marketplace businesses, sourcing the product is fairly straight forward and repeatable (if you have the right partners).
For a while, Amazon stepped in to provide distribution for DTC sellers. But more and more, DTC companies are moving away from Amazon in favor of setting up and investing in their own Shopify stores.
When Amazon first started allowing the sale of other goods and services on their platform besides books, it was a revelation. Centralized demand of high-intent buyers allowed sellers to reach a huge audience and drive a lot of purchases. On top of it all, Amazon had built its logistics muscle, and helped with that aspect of the process (providing packaging and shipping).
Today, Amazon has more high-intent buyers visiting its platform than ever (~ 2.5 billion visits per month – to be exact). But there are several aspects that are making the platform less attractive for savvy entrepreneurs.
- A crowded marketplace is making it more difficult to get noticed. Amazon forces a race to the bottom for sellers. Consumers there generally look at price and reviews to make their decision. As a seller, especially a new one, you have very few levers in terms of what you can do to stand out. You are also at the mercy of Amazon’s algorithm in terms of your placement in the hierarchy of products (which largely dictates your sales). Which brings me to…
- Amazon is also learning from retailers and pushing its own inventory – rigging the game. If you happen to have success on Amazon, Amazon will recreate your product and push their own version. Returns diminish even further.
- But more than that, it’s about increasing margins and building a brand…
Amazon has wielded their power with impunity as the go between of consumer and seller. They help sellers from top to bottom logistically, but they charge heavily for the privilege. The list of fees is dizzying – from promotion rebates, to selling fees, to FBA fees, to transaction fees, to miscellaneous fees and more.
When you own your own distribution through your own web experience (or social following) – these fees disappear, and your margins start to sing.
But margins are one thing. The more important aspect is that of building a brand. It is near impossible to build a solid brand using Amazon. Amazon is focused on Amazon – not its sellers. The sellers are merely feed for the Amazon machine. Your product does not shine on the platform like it can on your own web portal and social profiles.
The Rise of Shopify
Shopify knew this and became the anti-Amazon. A distributed platform focused on individual products and letting them shine. DTC companies took to Shopify, and now with e-commerce being more important than ever, that company is benefiting extraordinarily.
Shopify has seen great success on its own, with millions of SMBs and DTC players relying on its platform to market and sell goods. But they are hardly resting on their laurels.
Facebook too sees the power of Shopify and the DTC e-commerce experience. Facebook partnering with Shopify is a shrewd move. Platforms like Instagram are already selling machines with the highest average purchase price of all social networks. The only issue facing individual sellers on Shopify is generating demand. Facebook provides demand at the largest scale possible.
The Future of E-Commerce
Given the trends that I am seeing in the e-commerce space, I can see a world where Amazon is the go to place for all basic goods – things like toilet paper, paper towels, bathroom and kitchen supplies, etc…
Higher quality goods, or brands that seek differentiation, will build demand funnels outside of Amazon.
There will be a reversion back to artisanal stores that are dedicated to their craft. This will work against the Amazon store, with a perception of the brand being synonymous with lower quality. Specialty stores with artisanal goods will rise. People will pay for quality and associate individual sites (like Shopify provides) with that quality.
More selling will be done through video. The companies that do this the best, particularly selling through live video, will be the dominant e-commerce platforms of tomorrow. Amazon Live is attempting to do this, but this is a new muscle for the company. The space is still wide open for the taking.
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