Last month Nike and Amazon made headlines for calling it the quits on their two year relationship. While many lauded the global sports brand, it is worth noting that Nike is quite unique as a case as it did not get it’s dealer to list the products on Amazon. Rather, it became a wholesaler to Amazon leveraging the B2B2C model. So, after spending two years, investing resources to build a strong presence on Amazon, why did Nike pull out of the platform?
The answer lies in the question itself, Nike is pulling out of a platform to set up its own direct to customer digital presence. What does this then say about the change we are witnessing? Why would Nike want to put in so much effort in building an entire online shop, take on the hassle of logistics, keep constant updates, hire talent and more, when there are so many marketplaces which are providing these services at the click of a button? To find answers we need to go back in time where the marketplaces starting cropping up and the model they pitched for.
These marketplaces focused their energy on acquiring the supply side of the value chain and this holds true for any business which acts as a mediator between customers and brands – the B2B2C model.
Whether its Amazon, Uber, or Expedia – all of these services have to bring a quantum of suppliers to the platform and offer them incentives. In turn, the marketplaces also have to offer more variety and convenience to the customer. And a platform such as Amazon will usually have 10,000 times more items than the biggest physical store. Once the customers start getting used to the platform, the model starts shifting to focus on profit, and hence margins.
I remember during my internship days with Castrol back in 2004 we were exposed to the same B2B2C model. One of the biggest challenges we faced was that, while we were selling to the workshop, the mechanics actually held the power of recommending the engine oil to motorbike owners.
Every time I met a mechanic and asked him why our brand’s orders were going down, he would say the smaller brands offered higher margins and better credit lines. After two months of meeting thousands of big and small workshop owners, when I presented my report to the Castrol team, it decided to up the marketing spend and create a stronger pull for the brand. I remember the exact words from the then marketing lead: “I suggest we spend more time understanding our customer and give them the right reason to demand our brand.”
This situation is very similar, except there is one big difference between online and offline distribution. In the offline world, a customer is just a number. But in the online world, customers leave behind enough information to allow brands to identify them by name, phone number, address, behaviour, etc. and through digital innovation, we now know more about an individual then they have ever shared with anyone.
Although Nike started its serious eCommerce journey with Amazon, it realised the most valuable part of its eCommerce – the customer data – that powers everything from marketing strategy, to product development, to customer acquisition, was owned by Amazon. With Entropia’s own customer journey mapping tool, Elon, we’ve found the money for growth is not spent on product development, but rather on understanding customers and their behaviour.
Technology, product, talent – these are the easiest things to manage in any business. The tough one is demand generation for the product/service, that is, getting new customers and holding on to the current ones.Businesses that do not have repurchase built into their model, cannot scale beyond a certain point as customer acquisition cost will override the revenues.
Nike realised that eCommerce is not about selling its products online, but it is a data-powered engine that can drive it towards higher profitability with sharper intelligence and cheaper acquisition.
Now it doesn’t have to worry about the mechanic not recommending their brand, or in Nike’s case, about Amazon featuring it in the top search results or giving it visibility among millions of SKUs. Listing on a platform is easy, discoverability is the big challenge, and it only gets tougher as the platform moves towards maximising profits.
This is the spark for brands to start taking their power back into their hands and own the relationship with their customers. Nike’s action says sales are not only confined to deep discount on a platform that gives nothing back to it except sales numbers, but rather by building strong customer relationships and leveraging them, the brand can justify the price premium it has always commanded.
Some of the platforms in Asia are taking steps to arrive at a middle ground, for example Lazada with its Lazmall and discovery packages. I’m sure the future will be a combination of the best of both the worlds, but to reach that stage, the likes of Nike have to take control of its brand and the data that powers the brand experience.
The writer is Neeraj Gulati, partner at Entropia.