After working with dozens of brands representing millions of items on Amazon, it’s worth assessing the Amazon marketplace to see if we can identify trends. One such trend that we’ll focus on today is the Brand Renaissance we are seeing.
First, a little history.
Amazon 1.0: The Marketplace Phase
Founded in 1994, Amazon’s first two decades of success came from a combination of the rapid growth of ecommerce in the United States as well as a relentless investment in infrastructure that powered its direct and third-party sales. In creating the logistics network required to create a consistent customer experience, Amazon built a multi-hundred-billion-dollar competitive advantage in the form of warehouses that drives its business today.
That was Amazon 1.0, The Marketplace Phase – consumers went to Amazon to buy products from brands they recognized, often at a discount that was sold by Amazon directly or from an undifferentiated reseller that scaled on the back of the Amazon logistics network.
Amazon 2.0: The Private Label Phase
Beginning in 2015, Amazon moved beyond The Marketplace Phase and entered the Private Label Phase – Amazon 2.0. This phase grew out of the immense potential that Amazon 1.0 had revealed. Make no mistake, if Amazon hadn’t created a large enough platform during The Marketplace Phase and created consumer confidence in the shopping experience and the products sold on the platform, the Private Label Phase would never have happened. Once consumers began trusting Amazon more than the brands of the products they were buying, and the size of the opportunities on Amazon were big enough for companies to invest in, this second phase exploded.
The critical shift in strategy from Amazon 1.0 to Amazon 2.0 was that sellers went from fighting for lower prices on brands that consumers recognized, to selling their own products with their own brands.
This strategy worked because Amazon had taken the brand out of product searches. Instead of searching for “Energizer” or “Duracell batteries”, the search was just for “batteries”. This explosion of new brands from companies targeting customer search behavior removed the value from brands and turned products into nothing more than a search, a commodity – “Kitchen Knife”, “Air Mattress”, “Bluetooth Headphones”.
While Amazon 2.0 was wildly successful for thousands of companies, there was a double-edged sword to this success. Winning a search on Amazon didn’t necessarily make the underlying company any more visible to customers than the undifferentiated resellers of Amazon 1.0. All these companies were selling was a kitchen knife, an air mattress, or a set of Bluetooth headphones and oftentimes they were selling their products primarily by differentiating on price. It was this competitive pressure on price that would launch and destroy hundreds of thousands micro brands selling a handful of undifferentiated products.
The Private Label phase is coming to an end. As Amazon incrementally increases their fees and takes a larger percentage of revenue from third-party sellers for order fulfillment, storage, and advertising, the competitive advantage of offering a similar product for less on Amazon isn’t working.
There is no money left to be made.
Amazon 3.0: The Brand Renaissance
We are now beginning to enter Amazon 3.0: The Brand Renaissance.
In The Brand Renaissance, companies with products that are deliberately searched for by customers will have the ability to maintain margins and stay ahead of the increasing cost of doing business on Amazon.
These same companies with desirable products that also establish consistency on and off Amazon, will endure and thrive over the next five years.
Alternatively, any company whose products are only valuable if they are the cheapest, the competitive pressures of the marketplace, increases in platform fees, and dramatic increases in transoceanic freight costs and tariffs will destroy their business.
If you’re managing a brand selling products on Amazon, the most important investment you can make will be creating a brand with desirable products. Once you have that demand for your brand, you must ensure you have consistency across all points of distribution and sale, especially Amazon, or you’ll be back to Amazon 1.0 tactics.