Amazon: Helping or hurting your business?
Across all the businesses we work with, a large percentage of companies leverage Amazon as a one of their core channels. Before launching Amazon though, we often get asked by founders if they should consider Amazon now or in the future.
Let’s be honest, more than 50% of product searches initiate on Amazon, and as the largest marketplace, why wouldn’t you be on Amazon? Makes total sense, but before saying yes, you need to consider a few things:
How is my brand affected by Amazon? On Amazon, you have much less control of your branding or what other products you may be placed next to on their digital shelf. You also have much less control of reviews and fake reviews that may hurt your ratings.
What about merchandising? Amazon tends to sell most products one-off, meaning not part of a kit or bundle. Order values tend to be lower as a result of this, but Amazon also requires you to sell at the lowest price point across any channel, otherwise your buy-box may be removed.
Do the margins work for your business? With the lower order values, can your business maintain the necessary margins when factoring in the 15% seller fee? Note that some businesses have different seller fees depending on price point, category, etc.
The last question, and likely the most overlooked question, is Amazon incremental to my business or just cannibalizing your DTC business?
To answer this last question, we need to look at a few different metrics. First, when you increase your non-Amazon digital spend on platforms such as Meta, do you see an uptick in your Amazon business? What about PPC (pay per click)? Are most of your dollars being spent on branded search terms? If so, this may be a sign that Amazon to some extent may be cannibalizing your DTC business.
If the answer is Amazon is likely cannibalizing your business, then you need to decide if that’s okay. Fortunately, Amazon provides enough data to help us evaluate the unit economics of each customer.
At EAV Partners, we put more focus on LTV and CAC, something that is more difficult to track on Amazon. The reason we don’t focus on ROAS, TACOS or MER is because existing customer reorders can inflate these numbers, so it can be misleading to assume you’re seeing improved marketing efficiencies. The definition for LTV is simply: average number of orders x AOV x GM% (including all shipping & handling + merchant processing fees/seller fees). For CAC, it’s also a simple definition: total media spend divided by total NEW customers. Note that many companies don’t include things such as shipping & handling in the LTV calculation or exclude certain costs in their CAC formula. Be honest with yourself when calculating these metrics so you can understand your true unit economics and optimize the business accordingly. For Amazon, even though the 15% seller fee may not be included in COGS from a GAAP standpoint, you should still include it in the LTV calculation since it is a variable cost associated with every order.
What we typically find across almost every business we see is that LTVs are lower on Amazon. Why is this? Well, we know order values tend to be lower, as do margins when we factor in the 15% seller fee, but more so, repurchase rates tend to be a lot lower. This may be a result of subscribe & save being smaller part of your Amazon business relative to your DTC site, or perhaps your CRM is dialed in for DTC but not much you can do to build a relationship with the Amazon customer.
While the LTVs are notably lower on Amazon, you will see your PPC marketing spend being much lower on Amazon, at least compared the CAC you see on DTC. But again, if we determine that increased spend on non-Amazon digital platforms are in fact driving sales on Amazon, then perhaps we should blend these metrics across both channels. Meaning, it’s best to include total spend across all paid media including Amazon and divide this by total new customers (DTC + Amazon). Similarly, let’s use a weighted average to blend LTVs on DTC and AMZ. Now compare your LTV to CAC and overall new customer volumes with how your metrics looked prior to Amazon to determine what is best for your business.
Blended LTV = (DTC % of New Customers x AOV x # of Orders x GM%) + (AMZ % of New Customers x AOV x # of Orders x GM%)
Blended CAC = (DTC Total Media Spend + AMZ Total PPC Spend) / (DTC New Customers + AMZ New Customers)
For some businesses, we see Amazon have massive cannibalization and actually hurt both the brand and financials. For others, we see Amazon as being highly incremental, but those businesses may either rely less on direct response advertising or be in categories where broader search terms within PPC perform very well. It just depends, but it’s definitely something EAV Partners can support on running an analysis for.
Other considerations for whether or not to be on Amazon may include resellers selling your product on Amazon. While they may need to price higher than your DTC site to ensure they remain profitable, they will inevitably cannibalize your sales. There are a few tactics you can take to limit this, but resellers can be a constant battle. Stage of company may also factor in. If your business is an established brand or sells on numerous marketplaces and retail channels, you may need to think more omnichannel and less about each channel’s unit economics. Overall, a good problem to have, but the mindset does change as you get to different stages in your company lifecycle, or have enough market penetration.
There is no perfect answer across all brands, but you just need to be cautious (and honest with yourself) about the value Amazon brings your business. If you need help evaluating, reach out to us.