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"We all love Amazon as a consumer, but as a partner, it's very difficult. Whether you're a brand, an agency, or a seller, it doesn't help you because Amazon is siloed, and it has its own directive to make money. It's not going to give you white-glove service to make a profit because that takes it away from Amazon."
— Mark Power, CEO and Founder of Podean
Amazon posted nearly $89 billion in second-quarter revenue, growing this figure by double digits year-over-year. But as the ecommerce giant continues to build its coffers, brands can’t “expect there to be an Amazon 101 guidebook available that we can go buy on Amazon.”
“If you’re on Amazon, it actually means Amazon is likely losing profit. So it’s not in their interest to help you,” Mark Power said. “But many brands really trust Amazon a lot, and they’re not willing to challenge the status quo.”
Power is the CEO and founder of Podean, a leading consultancy that provides an array of Amazon marketplace marketing services. Power is also the author of “Amazon for CMOs: How Brands Can Achieve Success in the New Amazon Economy.”
While brands are currently undergoing a rapid ecommerce transformation as a result of the pandemic, Mark Power said they shouldn’t just rely on Amazon to drive their bottom line. If profitability is the goal — as it always should be — brands need to leverage data more effectively to find a path to profitability on Amazon and transition some of their marketing investment away from this walled garden.
Power shared insights for how brand manufacturers can accomplish this on the Unpacking the Digital Shelf podcast episode "Achieving profitability on Amazon."
The COVID-19 pandemic is driving an increased focus on profitability because there has been a significant shift in media dollars toward ecommerce. With in-person events shut down for the foreseeable future, brands have been able to reinvest this budget into other channels, namely digital. But this is leading to even more attribution challenges, Power said.
"A lot of the brands we talked to were saying 'I'm already having trouble between Amazon, Google, Facebook, and all of the other wall gardens we spend with. Now, I've got Walmart. Now, I've got Target. And I've got these other walled gardens,' and that's becoming challenging because how do you manage that investment?" he said.
Brands are now making a massive investment in bringing their product experiences to life, so content is becoming even more critical. However, this means the C-suite has gotten laser-focused on getting a return on this investment, especially as the current economic uncertainty continues.
By nature of its size and reach, Amazon has become a crucial part of entry into the funnel for brands, even though it doesn't drive a considerable share of revenue for most of them.
Figuring out what's profitable on Amazon is hard. It's been difficult for brands to assess whether their investment on this platform has a long-tail impact on revenue both on Amazon and other sales channels. To put it more simply, does massive advertising spend on Amazon lay a foundation for winning on the digital shelf?
The answer to that question isn't so clear, according to Power.
"The holy grail for the modern marketer is to solve attribution," he said. "At the moment you've got Google, Facebook, and now you've got Disney. You've got Comcast and others. Then, you have your marketplaces. So really, the future for CMOs and how they manage all this wall gardening is really going to be challenging," he said.
Here are Power’s insights for how brand manufacturers can find a path to profitability on Amazon.
Power said brands must turn inward to overcome their current attribution challenges and discover what’s truly profitable.
“I think the only way to do it is to build internal resources that are going to help you — so data-science capabilities and other things — that are going to give you insights you can dive deep into and get control over versus having to rely on different agencies with different methods, models, and platforms,” Power said.
Power said companies have turned to Amazon to build their brand while hoping not to cannibalize their revenue on other sales channels. Senior executives at these companies are focused on mitigating their risks and ensuring the company's capital is invested in areas that will confidently deliver growth and sustainable profits.
But many companies' relationships with Amazon are more sales-driven than profit-driven.
"A lot of the Amazon and marketplace world has been very, very sales-centric, and we believe the conversation is quickly going to be shifting towards profitability just because the scrutiny is at a whole new level now," Power said.
"So to do that, we've got to dive deep into where brands go wrong. So I believe, firstly — and this may be controversial — but they expect Amazon to help or that there's like an Amazon Profit 101 guidebook available they can buy on Amazon, and off they go. But it's just not the case," he said.
Power adds that too many brands place too much trust in Amazon and aren't willing to challenge the status quo. However, this comes at the expense of profitability.
"Many years ago, a lot of brands actually got into a relationship with Amazon, which was a first-party relationship, and Amazon bought product off them. But then they lost control of a lot of different things, such as pricing. Over the years, they've sort of become addicted — just like they would with Walmart and other brick-and-mortars in the retail sector — they're just addicted to POs [purchase orders] coming in and fulfilling those POs," Power said.
"We're now finding that if you get under the hood and do some analysis several years later after those relationships were initially struck, there is a huge opportunity for brands to remodel this and to now potentially embrace a third-party model," he said.
Power said brands could explore a third-party model, where they move from a wholesale relationship with Amazon to one where they sell their goods directly on the platform. However, they don't need to go 100% in this direction. They instead can embrace a hybrid approach that combines this first-party relationship with a third-party model.
Power said Podean clients who have gone this route are seeing significant results.
"We're seeing huge impacts, not only on profit margins where we've seen in some cases ranging from a 50% to 150% increase in profit, but it also impacts your revenue because you're allowed to reinvest various profits. Revenues have been increasing from 30% to 50% because you have more control over the experience. That's huge, but Amazon isn't going to come to you tomorrow and say: 'Hey, we think you could make more money as a seller. So, you guys should go and explore that,'" he said.
"We believe conducting analysis and getting under the hood of these things — working with CFOs, CMOs, and others across an organization such as supply chain and logistics experts — that when all of this is brought together, the three-P model can be incredibly lucrative if done well," Power said, adding that brands need robust data to achieve this and need to be confident they aren't going to lose sales.
"The last thing they want to do is change models on Amazon or one of these other marketplaces and all of a sudden they see a dip in sales or they see their growth not be achieved to what they've promised the market or investors," he said.
Brands likely will need to invest in new logistics capabilities to adopt a hybrid strategy. Power said he sees more brands building out their own distribution networks, turning to service providers to solve their supply chain challenges, or embracing fulfilled-by-merchant models to acquire more data that helps them get a return on this investment.
Amazon now touches so many parts of an organization, but the problem is that many companies operate in silos. To achieve profitability, it's critical to bridge these silos.
"Marketing is separate from sales, is separate from ecommerce, and is separate from fulfillment and supply chain. Bringing all those folks together is really important so that they can all align to the overarching strategy," Power said. "Profit needs to be the focus, and for profit to be the focus, you need to know how you're going to drive profit and get everyone across that."
Power said he's been surprised in his interactions with companies about how some people within the organization don't fully understand things like cost of goods (COG) sold and the difference between wholesale and retail. Within these business units and across the enterprise, the focus needs to shift from just selling more to their role in driving additional profit.
To achieve this, companies will need to identify what their sweet spot is in terms of profit and bring together their internal data with marketplace and Amazon data to determine the best path to profitability, Power said.
He gives the example of one of Podean's clients who used data insights to discover that it could be more profitable by reducing its offerings on Amazon from 1,000 products to 250.
"You've got to go deep into which products you're going to promote more than others. What's the pricing that's right? What benefit does scale bring to our cogs and what halo impact is there on other channels? The list goes on and on to ensure that you've got the right set of products that you can then promote on Amazon," Power said.
"But then you also can't just focus on sales. You actually need to get all the data together and model it to work out how you're going to promote things in a profitable way and achieve profitability that's sustainable long term," he said.
As Power suggests, brands need to regain control of their relationship with Amazon. They also need to take calculated risks based on data. But in doing so, they may be able to move from a purely sales-driven approach to one where they can successfully hack their way to profitability on Amazon.
Listen to the full episode to learn more from Power about the need to invest in the analysis, data, and actions to make Amazon a profitable channel.