AMAZON | DIRECT-TO-CONSUMER MODEL
Less friction, more margin? Maybe not.
Direct-from-manufacturer listings on marketplaces like on Amazon are the holy grail of online buying as they pass the cost of added margin directly on to the consumer…right? As it turns out, this hasn’t happened. And it’s not only retailers and experts noticing—consumers are beginning to as well.
When Jeff Bezos said, “Your margin is my opportunity”, it was interpreted by the industry that it means Amazon could deliver better prices by cutting out the middleman. In theory, this sounds perfect; get the product directly from the source, cutting out time and added costs that don’t add extra value. This means you can buy directly from the factory or distributor in Taiwan, instead of an Amazon seller that has created a list of curated products.
There are a couple problems with this though…
“Your margin is my opportunity”
– Jeff Bezos
It Doesn’t Actually Decrease Costs to Consumers
Cutting out the middlemen hasn’t actually shifted the cost savings to the consumers. Many manufacturers, producers and distributors now simply sell the product at the price the intermediates do. Often they see the opportunity for a significantly higher margin—and price it at the rate established by their intermediaries. There really isn’t any incentive built into the system for them to pass on the savings to the consumer.
It Shifted Product Quality and Service Issues to the Consumers
Middlemen, like Amazon’s vendors and distributors, created a sort of self-policing force for Amazon products. It created controls based on those people only selling and promoting the best products that they deemed the best. Cutting out the middlemen however removed those controls.
“algorithms aren’t perfect as they have to go up against things like fake reviews, fake ratings… ”
The ‘friction’ created between manufacturers and distributors and vendors in brick-and-mortar stores meant that manufacturers had to stand by their products and develop solid long-term relationships with vendors and distributors. Walmart is a solid example of this; they spent decades cultivating vendor relationships, but only after a vigorous application process. The logical output created by their application process and tiered partnerships creates an environment of friction—that causes each party to operate at their very best. They seriously vet their suppliers and this fosters product quality and service to the end consumer. And this didn’t come at the risk to the end consumer.
With Amazon, vendors and distributors create the same type of environment; they aren’t as thorough and tough as Walmart—but the same concept.
Amazon sellers still need to retain their ratings and rankings by providing top products and customer service. Without the vendor-distributor ‘middleman’ model, channels like Amazon don’t have the same checks and balances in place. This puts the cost of product issues onto the sellers directly.
Product issues put on to the consumer means they need to either investigate, accept or return products. One of the biggest issues with returns is with counterfeit ‘branded’ products, which falls on the originating brand, but also the consumer. Original brick-and-mortar supply chains weeded these out. With online marketplaces however this job is now passed to the brand itself and to the consumer. On top of that is legal liability and safety. Amazon is not liable for any of the products listed, as they aren’t sold directly by Amazon.
The middlemen on places like Amazon act as counterfeit detectors, quality inspectors, customer service assurance reps and curators… all the jobs that the traditional offline model would do.
But what about Amazon’s algorithms—they help weed out issues right? Well, in theory, yes. However algorithms aren’t perfect as they have to go up against things like fake reviews, fake ratings, and other fraud and abuses. When the algorithm fails, it is the customer that suffers. Even their coveted ‘Amazon Choice’ badge isn’t infallible.
“So, what does this all mean? ”
An algorithm so far isn’t beating offline supply chain systems that have multiple protection policies in place, and the direct-to-consumer model may be cheaper in theory however it places much of the savings in the pockets of the product manufacturer or distributor. This leaves the end consumer on the hook to ensure quality control.
Essentially, this all means that Amazon vendors have an important role to fill. They create accountability in the supply-chain system. These vendors have to work alongside the algorithm to ensure that customers discover the best products, brands, quality and post-purchase experience. They are incentivised to do so regardless – Amazon’s strict seller policies mean any infraction, big or small, risks suspension of trade on the Amazon account for weeks or months. It is only this system friction that can counteract the current fallacies with Amazon’s systems.
Ecommerce still has a long way to grow and mature, but for now, the elusive cost reductions and lower online pricing remain elusive. The same overhead and checks are needed, they have merely moved location in the chain of a products lifecycle.