News & Insights
Why Amazon is Becoming the Most Profitable Channel for Many Brands
For the past decade, brands have consistently made their direct-to-consumer (DTC) website the priority among their sales channels. As a result, the additional fees that come with selling on Amazon made it a less attractive business model. However, this has been changing in the past few years, and many brands now realize that Amazon is their most profitable channel. So how did we get here? And why the change?
In the past
Previously, brands, often fueled by venture capital dollars, grew quickly using online channels. The internet made it simpler for these companies to sell directly to consumers via their websites and on a much bigger scale than ever before. For many of them, there was no need to get into brick-and-mortar retail since they could attract new customers using “cheap” traffic sources like Google, Facebook, and Instagram.
In addition, these brands viewed direct communication with their customers via countless advertising emails as critical for their growth. Using a “retailer” like Amazon made little sense. Amazon would take a costly cut of their revenue and didn’t allow a direct connection with their customers. They felt that selling on Amazon would be cannibalistic to their website sales while adding little value to their future growth.
More recently, the viability of this approach has been shifting, with many brands touting Amazon as their fastest-growing and most profitable channel. Several circumstances are driving this change.
An Increase in off-Amazon advertising costs
When Google, Facebook, Instagram, and other social media channels were just gaining traction, advertising was cheap. These platforms use an auction-style approach to selling advertising. As more advertisers entered the market, the price went up dramatically. Furthermore, Apple’s recent change in cookies has made it much more difficult for brands to target customers, adding to advertising costs. For many DTC brands, advertising costs are three-to-five times more than they were 10 years ago. This increase comes directly out of a brand’s profit margin and makes it difficult for many of them to maintain both profitability and exponential growth. The result is that we see many DTC brands like AllBirds, Warby Parker, and others losing substantial sums of money on their DTC sites.
A change in free shipping requirements
Customers hate paying for shipping, but many brands charge for shipping on their DTC website. Amazon has offered free shipping to Prime members for many years but would charge this cost to the seller. Thus, some brands relied on an apples-to-oranges comparison that included shipping costs in their Amazon profitability but not on their website. In reality, the customer was much worse off since they were paying for the shipping charge in addition to the product’s sales price.
The market now forces many brands to offer free shipping on most orders. Once they make this change, they realize that FBA fees are often a fraction of the cost that their warehouse or 3PL charges for order fulfillment. Additionally, the time to deliver is usually much different. Amazon delivers products in one or two days. It’s not unusual for DTC website purchases from a major brand to take seven days or more to arrive. Guess which experience shoppers will opt for when given that type of choice.
Incremental vs. cannibalistic growth
Historically, brands were worried that offering their product on Amazon would take customers away from their websites. Why should a brand pay for all the Amazon fees when they could have that same customer on their website with no fees? The latest data is causing many brands to abandon this concern. First, more than 80 percent of the searches on Amazon are for non-branded terms like “tennis shoes,” while less than 20 percent are for branded terms like “Nike.” Sellers realize that Amazon is rarely as cannibalistic as they previously thought. Instead, it is a great way to get in front of many customers who would not otherwise be familiar with their brand or visit their DTC website. Secondly, brands realize the importance of meeting their customers where they prefer to shop. For many of them, that is primarily Amazon now.
Change in thinking around overhead costs
Of course, included in the Amazon fees are many services that brands would otherwise have to do themselves. For instance, when using Amazon to sell, the vast majority of customer service fees are included in the cost. Warehouse expenses are usually a fraction of the price that a privately-owned warehouse or 3PL would charge. Credit card fees on the website, usually three percent, are already captured in the Amazon referral fee. Brands often forget to include these costs on the website side of the equation since they were “sunk” costs, but add them to the Amazon side of the ledger because they were clear and transparent. Once they adjust to create a fairer comparison between the two options, many brands see their website is not as profitable as they thought, and selling on Amazon is much more profitable.
Trust your future to Amify
For many brands, Amazon is now their largest and most profitable channel. So it’s crucial for brands to have a valid apples-to-apples comparison of costs and growth opportunities across the two channels. Amify has the experience and team to do just that. Reach out to discuss your business needs with one of our experts and let us build an Amazon plan for your brand.