Partying with Mephistopheles

Why no D2C challenger brand can ignore Amazon


In Goethe’s 1808 magnum opus, “Faust – A Tragedy”, the eponymous hero strikes a pact with the devil to show him the wonders of the world, in return for selling his soul. Fast-forward 211 years and countless tortured German schoolchildren later, and the same Faustian bargain is one faced by every righteous modern challenger brand: to strike a pact with Amazon, or not?


On the face of it, the choice seems straightforward enough. After all, the hallmark of every great challenger brand is mastery in connecting with, and selling directly to, consumers. They boldly say “no” to distribution in Wal-Mart, “no” to relying on Ad Men to script how to talk with their consumers, and “no” to pricing timidly below the big-brand incumbents. So why would any challenger brand ever want to go on Amazon, that corporate devil incarnate, where aside from selling out on their righteous cause-driven mission they also stand to lose control over the soul of their brand, pricing and comms?


Because ignoring Amazon risks relegating any challenger brand to immateriality, on a par with ignoring Google – and just as Faust out-foxes the devil at the very end, so crafty challenger brands too can get wonders from a deal with Amazon, without ending up selling their soul.


It begins with halving the opportunity…


To understand why Amazon is the Supermassive Black Hole no brand can escape, consider this stat: 55% of all product searches in the US now begin on Amazon, not Google. Let that sink in: more than half of all product queries begin with consumers searching within the closed ecosystem that is Amazon, rather than the open internet at large. Critically, these are not just brand-specific searches (eg “Shiseido”), but mostly discovery-led searches (eg “retinol skin cream”), where consumers get to see all the brands and products matching their specific interest. Moreover, Google gives Amazon priority ranking in its own search results, meaning any consumer conducting product discovery on Google still ends up being presented Amazon’s listings on the first page. And to compound matters, evidence suggests that many consumers check a brand’s presence on Amazon as validation of trustworthiness even if their search began on Google. All this means that - right off the bat – any brand that’s not represented on Amazon is potentially missing over half of its organic customers. It’s as bad as hiding your website from Google.


Then the squatters take over…


Regrettably it doesn’t end there. While fledgling challenger brands might merely lose out on sales from ignoring Amazon, as their scale and attractiveness grows, squatters swiftly move in. That’s because Amazon, just like Google, allows brands to pay for placement against specific search terms on their platform. Which means that the moment a young brand has captured any level of consumer attention, its competitors start advertising with their products against the brand on Amazon, just as brands bid on their competitors’ adwords on Google. Any consumers searching for a specific challenger brand simply end in the lap of the incumbent competition. Imagine typing “Tesla” into Google and only seeing links for BMW.


It ends with broken brand promises


The final step in Amazon-ignoring value-destruction comes in the form of grey-market, third-party resellers. If demand is large enough, all products invariably end up on Amazon regardless of whether the brand lists them themselves or not – sold on via independent importers and wholesalers, often at uncompetitive prices, with poor listings and brand representation, poor customer service – and frequently being either out of stock, or on long shipping timelines that erode consumer confidence in the brand. It’s the equivalent of your local convenience store doing a side business in selling Rolex wristwatches.


Ignoring Amazon, therefore, risks clipping the lion share of organic consumer discovery, handing easy pickings to competitor brands, and fuelling an undesirable ecosystem of third-party resellers. Not a happy story.


Winning the Faustian bargain


How then should insurgent challenger brands avoid the downsides of not being on Amazon, without swapping loss of opportunity for loss of control, margin and brand? The answer lies in judicious choice of SKUs and pricing.


The most successful challenger brands use Amazon as a channel for customer acquisition rather than a wholesale account. They take full ownership of their brand representation and customer experience on the platform, but they cleverly segment their offering to ensure that subsequent, repeat purchases happen on their own websites. One trick is to think carefully about which SKUs to list on Amazon, and which to hold back for direct sales only. Trial sizes and “discovery” bundle packs (at higher price per unit of content) can work well on Amazon, with full sizes and individual packs reserved for D2C. The same applies for starter/entry-level products, with the advanced range only available on the own site. Understanding the trial/adoption/advocacy journey for a brand lies at the core of the ability to segment new customer acquisition (where Amazon is inescapable) from ongoing retention (where Amazon is undesirable). Price discrimination is the other lever to achieve this, where subscriptions (at lower unit price) can be held back to the D2C site, and Amazon restricted to one-off purchases. A good understanding of price elasticity of demand across a brand’s range is the prerequisite here.


Bringing it home to Mephistopheles


Regardless of approach, the insights for challenger brands are clear: Amazon’s lure can’t be resisted, same as Google’s can’t be avoided. Those brands who get the bargain right stand to benefit from a richness of acceleration and growth. Those who turn it down are handing easy wins to their competitors. Crafty choices around SKU selection and price discrimination offer the opportunity to outfox Amazon for customer acquisition, while minimising the downsides of a lost soul of brand and margin erosion. Goethe would have approved.


Ernesto Schmitt is co-founder at The Craftory, the brand-new counter-corporate anti-VC on a $300M mission to back the world's boldest insurgent challenger brands in the consumer goods space.