Online marketplaces provide superior convenience, access to a vast array of products, and the ability to comparison shop with ease. Having been fully embraced by consumers, online marketplaces are growing rapidly worldwide—and are projected to keep growing at an exponential rate.
However, the online marketplace explosion has also brought many new challenges for manufacturers and brands selling products in the United States. Historically, companies distributed their products as widely as possible without imposing any restrictions on where or how their products could be resold downstream. Now, open marketplace platforms and dynamic pricing algorithms have become the new reality in virtually every product vertical. A new and ever-growing industry has emerged in which unauthorized sellers obtain products from a brand’s existing distribution networks and sell them online. The end result is intra-brand competition, thwarted eCommerce sales growth, massive channel conflict, and impaired brand value, which, left unchecked, will only get worse.
Nearly every brand owner is facing these challenges, whether they are fully aware of the scope of the problem or not. There are four telltale signs that your brand has lost control of the online sales of its products, which will invariably lead to channel conflict and impaired brand value. However, there are steps you can take to fix it.
1. You see an increase in sellers on the online marketplaces who you don’t recognize.
The first sign is typically a steady increase in the number of unauthorized sellers selling your brand’s products on online marketplaces. These sellers may be existing distribution channel partners that are selling your products online without your permission. Or, these sellers may be diverters you cannot identify, as many of them operate anonymously. These sellers often do not—and are unwilling to—invest in the quality controls and other measures necessary to ensure delivery of the highest quality products to consumers. This lack of quality control dramatically increases the risk that consumers will receive an incorrect, counterfeit, damaged, expired, used, or otherwise low-quality product. Suboptimal quality control is particularly likely to cause problems on online marketplaces where consumers—in addition to being unable to see or feel products before purchase—are often confused about the actual seller of the products at issue.
2. You see an increase in negative online reviews about your products.
Second, you notice more and more 1-star or otherwise negative online reviews about your products. Consumers receiving poor-quality products from unauthorized sellers can easily voice their dissatisfaction through negative online product reviews to, quite literally, billions of people. Notably, these negative reviews often blame the brand rather than the actual seller for any quality issues. By way of example, many of the 1-star product reviews on Amazon reflect the types of issues often associated with unauthorized sellers—such as the consumer receiving the wrong product, a damaged product, a used product, an expired product, or a product of otherwise-compromised quality.
The reality is that negative product reviews are highly damaging, as online shoppers enjoy an instant array of infinite product choices and often rely on these reviews to inform their purchase decisions. Moreover, reviews also impact algorithms and search engine placement. As a result, consumers researching a brand online will often first see negative online reviews or aggregated product ratings before the brand’s own content. Once the consumer searches a bit more, the consumer then sees numerous sellers offering numerous products with wildly varying review ratings, advertised pricing, and product information. This leads to a significant amount of confusion on the part of consumers and the risk of the consumer ultimately selecting a competing brand with fewer negative reviews and better control over the online customer experience.
3. Your authorized distributors and retail partners express frustration with the state of your brand on online marketplaces, like Amazon.
Third, channel conflict between your online and offline channels ensues. Brands whose online sales are out of control will hear frequent complaints from their brick-and-mortar channels regarding the brand’s online presence, the prices advertised in the online channel, and their inability to compete in such an environment. Brick-and-mortar channel partners invest significant resources promoting brands in their stores and do not favor brands whose lack of control allows numerous unauthorized sellers to free-ride on their efforts. Ultimately, high-quality authorized sellers in other channels may go so far as to significantly reduce their investment in the brand or stop carrying it all together.
4. You are not able to implement a viable minimum advertised price policy.
Fourth, in large part because of this channel conflict, you find yourself unable to implement a minimum advertised price (MAP) policy. Unauthorized sellers typically do not adhere to your brand’s MAP policy. As a result, companies that do not control online sales invariably cannot maintain a successful MAP program. For example, when many sellers on Amazon’s marketplace compete, the temptation to break MAP is great and, when one seller lowers its price, other sellers follow suit in domino fashion. The effects of these actions extend far beyond Amazon, often causing cascading MAP violations throughout all authorized channels, making a successful MAP program impossible.
Regaining Control of Online Sales
Many brands grappling with these new market dynamics are frustrated, confused, and mistakenly believe they have no recourse. There are, however, steps brands can take to regain control and respond to these challenges. The path to regaining control of online sales will vary based on a brand’s pain points and goals—the best solution for your brand will depend on your existing commercial realities and distribution structure, current policies, number of unauthorized sellers, biggest obstacles, and ultimate desired commercial outcomes.
A brand should select an online marketplace sales strategy. While there are many different factors that must be weighed in determining the best approach on each marketplace, one widely-applicable best practice is to limit each marketplace to only one authorized seller, or a small number of sellers that will be appropriately motivated to protect and grow the brand in the channel. Other approaches—such as allowing large numbers of marketplace sellers—often thwart sales growth and are dilutive to both brand image and value.
A brand should implement agreements or policies with all authorized sellers, across all channels of distribution, to establish rules on where, how, and to whom the brand’s products may be sold. These policies provide a basis for taking action against authorized sellers that divert products to unauthorized sellers. They also serve as a vehicle for setting the brand’s expectations with respect to product quality and customer service, and these requirements can be used as a way to distinguish products sold by authorized sellers from products sold by unauthorized sellers.
A brand should establish a legal foundation for claims against grey market and other unauthorized sellers. It is imperative for companies to understand that, as a general matter, in the United States it is legal to buy and resell legitimate products without repercussion under a legal doctrine called the “first sale doctrine.” This doctrine is the primary defense raised by unauthorized sellers once targeted with enforcement. There are, however, well-established exceptions to the first sale doctrine upon which brands can rely in asserting legal claims against unauthorized sellers.
The brand should work to identify and address the root causes of the product diversion, channel conflict, brand equity erosion, and other disruption it is experiencing. This entails reviewing a brand’s business policies, practices, and other procedures to determine whether business changes can be implemented to eliminate sources of diversion and eliminate arbitrage opportunities.
The best solution will invariably be holistic, integrating multiple business functions, including eCommerce, sales, legal, and executive-level decision makers. There is no “one size fits all” approach notwithstanding what some software or monitoring vendors may try to tell you. Moreover, fragmented tactics like attempting to rely on MAP policies alone or sending scary letters inevitably fail to work and potentially subject the brand to liability. In the end, your brand must be able—in a commercially realistic manner—to assert adequate control over authorized channels and have an appropriate, true legal foundation for enforcement against unauthorized sellers. There are no shortcuts.
Such a holistic and comprehensive approach to controlling sales in the age of eCommerce will help you protect and grow your brand and maximize your investment in your strategic marketing relationships.
