E-commerce strategy for small merchants is becoming quite complicated with Amazon becoming a giant player in the space. This interview cuts through a lot of that complexity.
Sramana Mitra: Let’s start by introducing our audience to yourself as well as to Amify.
Ethan McAfee: I’m the Co-Founder and CEO of Amify. We help brands maximize their opportunity on the Amazon platform.
Sramana Mitra: Double-click down a little bit more and talk about what specifically you mean by that.
Ethan McAfee: Amazon now has 50% share of online commerce and is growing quickly. We believe that brands need to have an Amazon strategy to grasp the full potential.
To be successful on Amazon, you need a whole bunch of things. The first is to make the sales go up. We work with a brand to develop very high-quality looking product pages. We work with brands to drive traffic to their listings using Amazon-sponsored ads. That’s the cool and exciting stuff.
We also help brands do all the ugly back office things such as dealing with sales tax management, inventory management, and all the things that you need to be successful on the Amazon platform.
We believe that a lot of brands, instead of doing a lot of stuff in house, should outsource to experts much like you would outsource your PR strategy. We offer solutions for brands to outsource their Amazon strategy to people who have been there and done that at half the cost of them doing it themselves.
Sramana Mitra: Let’s talk about one brand that is particularly successful on Amazon. Let’s dissect why.
Ethan McAfee: One of the brands that we work with a lot is Fender Guitars. Fender Guitars is one of the largest makers of guitars in the United States. One of the issues with guitars is, it’s somewhat of a niche hobby. There aren’t very many guitar stores in the United States.
Some of those things can be every expensive. Your local store wouldn’t want to carry a lot of thousand-dollar Fender guitars because there aren’t going to be very many people that want to buy. That brand can be particularly successful online. It can be successful on Amazon since those products are difficult to find at your local retailers.
A higher percentage of those customers would buy those products online than at a brick-and-mortar store. You’re aggregating the demand for these hard-to-find products on one place. A platform like Amazon can offer a huge selection of those very rare guitars. We offer a huge amount of special edition guitars much more than you could find in a local retailer.
Sramana Mitra: I have a very basic question. Why Amazon? Why not a branded website on Shopify or Bigcommerce? Since it’s such a specialty retailer, what is the benefit of Amazon?
Ethan McAfee: The main benefit is that customers are already on Amazon and they want to buy on Amazon because it’s easy, simple, and they trust it. The customers expect and trust Amazon to get them the product in a quick, efficient manner and have great customer service.
Instead of selling the product on their own on Shopify, which costs a huge amount of money to drive traffic, warehouses, customer service, you get easy access to millions of shoppers by using Amazon. The shoppers, at the end of the day, like it. They already probably have Amazon Prime accounts.
Sramana Mitra: How big a role does the backend fulfillment play in this particular case study that we are discussing. Does Amazon fulfillment also kick in gear in this kind of a situation?
Ethan McAfee: To be successful in selling online or on Amazon, you really need to use what’s called Fulfillment by Amazon, which is Amazon’s fulfillment network. What that involves is a brand sending their products to multiple Amazon warehouses across the country.
The brand would still own those products, but they’re stored in Amazon warehouses. Customers would then come to the Amazon website and purchase the product. Amazon would then send the customer that product on behalf of the brand.
The reason why this is so successful is it allows the products to be Amazon Prime-eligible. They have easy returns and one to two day shipping. Amazon can provide these shipping services for much less than owning your own warehouse.
That’s because Amazon is the largest shipper of products in the United States. They get good deals on their shipping rate and they pass it on to their vendors.
Sramana Mitra: This is not a criticism; this is an observation. Your perspective is highly-biased in favor of Amazon. What is the case for a merchant like the one that we’re talking about to have an e-commerce website on Shopify or Bigcommerce? What about other channels like eBay?
Ethan McAfee: The main strategy of most brands is to create their own Shopify website. That makes tons of sense because customers would naturally go to a brand’s own website and purchase. That makes a lot of sense for the vast majority of brands. What we’re now seeing is more and more of them want to have both Shopify and Amazon presence.
Sramana Mitra: That is exactly what I’m probing. Your logic says that it takes a lot of money to drive traffic to the Shopify website. That traffic comes naturally into Amazon looking for stuff. As long as it gets good search results on the Amazon website, the traffic acquisition cost is a lot lower.
If I were a small business, what is the case for my not shutting this Shopify website and going full blast on Amazon? Or keeping a basic Shopify site but not really investing money in driving traffic onto that site?
Ethan McAfee: I think it’s very costly to drive traffic to the Shopify website. People are going to go to fender.com because they know Fender Guitars. If you’re a small brand, it’s difficult to drive traffic and set up a whole logistics network yourself.
What we’re seeing is these smaller brands, oftentimes, will just have a very simple website that, at the bottom, says, “Click here to buy our products on Amazon.” That saves them a lot of time and effort building up their e-commerce abilities and structure.
When I think about myself, I’d rather buy products on Amazon because I already have my credit card set up there. I already have Amazon two-day shipping. It’s usually free.
When I go to some small merchant Shopify website, I have to reenter my credit card information. I have to pay $8 for shipping and handling. It’s an extra layer that a lot of vendors are avoiding by directing traffic to their product pages on Amazon.
Sramana Mitra: What about other channels like eBay?
Ethan McAfee: We’ve always focused on the Amazon channel because Amazon is 12 times the size of Walmart and Jet combined. A lot of the products on eBay are oftentimes used or collectible products. It’s not as much new products.
The main issue with eBay is, it’s very difficult to scale compared to Amazon. The reason why that’s the case is that the amount of customer service and handling is much higher on eBay than it is on Amazon.
All else equal, you’d have to charge higher prices to compensate for those issues on eBay, which means charging $40 for a $30 product on Amazon.
Sramana Mitra: The bottom line is, if there’s one channel that you want to bet on for small businesses, it’s Amazon.
Ethan McAfee: You focus on the one that matters. Most brands don’t have a very good Amazon strategy. It better to have a great Amazon strategy than a mediocre Amazon strategy.
Sramana Mitra: Let’s talk about the cost structure. If you’re not buying a lot of traffic for your direct website by bidding on expensive Google ads, you’re saving a lot of money. Amazon is charging. Can you talk about the fee structure of Amazon and compare that to an independent website?
Ethan McAfee: Amazon charges two main fees. They charge a referral fee. That’s just for helping you sell the product. For most categories, that’s 15% of revenue. If you think about it a little bit more, that’s roughly 3% credit card fee and 12% referral fee.
I always say, “If you’re going to buy on someone’s website, it’s going to be 3% credit card fee.” Amazon’s basically charging you 12%. Secondly, they charge for shipping your products. Depending on size and weight, it’s $3 for a small product and maybe $10 for a heavier product.
Depending on the product, you’re probably talking 25% total cost for shipping and handling and the referral fee. That compares to a lot of brands now that are paying 25% to 50% on marketing alone. We believe that Amazon is cheaper and easier to attract and retain customers.
Sramana Mitra: One of the things that you said right at the beginning is, customers still have to market on Amazon. You need sponsored listings. That is marketing on top of the basics.
Ethan McAfee: Of course, yes.
Sramana Mitra: What percent are we talking in fees that goes into that kind of marketing?
Ethan McAfee: If you’re really going to use a sponsored ad strategy, most brands do it on Amazon to really drive sales. The rule of thumb is, one-third of your sales will come from sponsored ads and will cost roughly 10% of your overall revenue budget. That’s what we’re seeing from the brands in the market.
Sramana Mitra: Depends on the category also – how crowded the category is and how differentiated your product is.
Ethan McAfee: Absolutely. If you think about cellphone case, which is a crowded space, it’s going to be much higher. If it’s more of a niche product or you have a bigger brand, then it’ll probably be lower.
Sramana Mitra: It’s quite tricky because you run into the same problem of very crowded and very expensive traffic on Amazon as well.
Your claim that it’s a breeze on Amazon and it’s expensive to acquire traffic elsewhere is not entirely true because you can get buried in Amazon and make no sale at all.
Ethan McAfee: Of course. I didn’t mean to say that Amazon was easy. It’s very complicated.
Sramana Mitra: From a macro perspective, what’s happening? Is the industry seeing a tremendous shift from Shopify to Amazon?
Ethan McAfee: Market share of Amazon has been growing. Right now, Amazon has over 50% online commerce. Amazon’s market share growth is coming from two eBay and Walmart. I think they’re also taking market share from individual brand websites. It used to be that you would go to fender.com to buy a Fender guitar. Amazon has basically become the default mall of the internet.
The second thing you’re seeing is as Amazon lowers the shipping time, that will continue to make them take market share. It will also dramatically increase the market share that they’re taking from brick-and-mortar.
As we go from a week to one day, the percentage of sales that people buy online versus brick-and-mortar will continue to dramatically shift towards internet. I always ask the question, “If I could order something on Amazon in four hours, would I ever buy most products at a local store?”
Sramana Mitra: That’s all fine. The shipping and logistics part is absolutely correct. What about personalization? If I’m an online merchant and I want to provide personalized products and services to my customers, I can’t do that if I don’t know the customer and if I go through Amazon’s user interface.
The only way I can do that is on my own website where I can provide the personalization. Especially when it comes to owning the customer. If I have a customer that has bought something from me and I start getting to know that customer, I can’t upsell and cross-sell on Amazon.
Ethan McAfee: You’re right. There are certain things that Amazon is good at and certain things that Amazon isn’t. Amazon would be very good at personalizing you as a customer across multiple brands. Amazon would not be good at personalizing your individual brand experience.
If you happen to like one brand, they’re not going to recommend other brands that are similar. That’s one category where Amazon is just never going to be very good at.
What Amazon is good at is selling you products that don’t have to be personalized and that you probably don’t buy that often. Repeat purchases or personalization would be good for Shopify websites or your local brick-and-mortar stores.
Sramana Mitra: I think Amazon is the best place for repeat purchase of general merchandising category. If you’re talking about something that has personalization, that’s where a branded website has value.
We cover is Shopify in our Technology Stocks series. One of the questions that I’m thinking about is the potential of this stock. The stock is very expensive today. If Amazon is going to cut very seriously into their customer base, what does that do to that stock? Have you thought about it?
Ethan McAfee: Shopify is one of the best platforms for small to mid-sized businesses. Shopify will continue to take market share in that space. Overall, that space continues to grow.
The second is I continue to believe that Amazon is going to take more and more market share of online ecommerce just because their fulfillment and distribution is going to be so much better than everybody else’s. Stocks prices are based on people’s expectations.
The Shopify stock price is highly priced because the expectations for it are very high. I’m always fearful when you have those types of stocks and the expectations aren’t realized, stocks could go down dramatically.
Sramana Mitra: The big problem with the Shopify stock is the threat from Amazon. It has had a very good run because the trend is towards massive growth in ecommerce. Shopify has benefited from that.
Furthermore, there’s been a massive shift from brick-and-mortar to e-commerce from a small merchant point of view. Instead of setting up a shop in downtown, people now setup e-commerce sites on Shopify. That has been the trend.
For sure, Shopify has benefited from that trend. All these people who have setup shops on Shopify, are they going to continue to be on Shopify or are they going to abandon Shopify en masse and move to Amazon?
Ethan McAfee: My sense is that brands hosted on Shopify will continue to shift towards Amazon. A brand is still going to have their website but more and more of the traffic is going to go to Amazon over Shopify. I don’t want to pay $8 shipping and wait eight days.
Sramana Mitra: If there’s a brand that you like and you like to see what else the brand has, you can search on the brand’s website and do the browsing there but buy on Amazon also. That behavior is even easier to do.
Ethan McAfee: The price on Amazon is often cheaper than on the website. Would you buy a television from Sony or would you buy it from BestBuy or Amazon? If you went to Sony to buy a television, the prices are really high. You go to Amazon or BestBuy, you always see a sale.
Brands don’t want to compete against their retail channel partners. They’re going to have a website that sells stuff, but their prices are going to be at suggested retail price rather than the Amazon price.
Just a background, before starting this company I was an investment analyst for 11 years covering the internet sector.
Sramana Mitra: I have a final question for you. What do you think are open areas in the e-commerce space where if you were to start a company today, what kind of a company would you start?
Ethan McAfee: There is a huge amount of white space for brands to create products and sell them direct on the Amazon marketplace. Amazon is really opening up a huge amount of opportunity for small to mid-sized product makers.
If you take some existing product and make it better, you can sell direct to consumer on Amazon versus the old model of selling it to a retailer.
Sramana Mitra: Your opportunity identification is leaning towards proprietary products that are unique and differentiated, and that can go-to-market directly through the Amazon channel.
Ethan McAfee: Yes.
Sramana Mitra: Thank you for your time.
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