Online marketplaces provide an efficient, effective selling platform for product based businesses across the world. Sites such as Amazon, eBay and Etsy give you instant access to a global shop window with the ability to target customers who are actively searching to buy products like yours. With 500 million monthly visitors to Etsy alone, it’s easy to see why so many businesses are drawn to these platforms to build their businesses.
According to Amazon, there are more than 85,000 UK SMEs selling in its online marketplace. eBay has 300,000 small business sellers and Etsy had at least 960,000 (in 2021). This gives these big three sites a great deal of power and control over the businesses and customers that use them.
In this blog we’ll be looking at the risk and reward of selling products through a third party website versus selling through a website you own, and how selling through an online marketplace could impact the future growth and exit value of your business.
The benefits of selling through an online marketplace versus your own website
Online marketplaces give businesses instant access to people actively searching for products like yours. This immediacy makes it an easy way to build an online product-based business, saving you time and effort on marketing. Simply use their algorithm to find customers who trust the site and are ready to buy your product. You can extend your reach further by investing in the paid advertising that’s built in to the platform.
With the systems and processes already in place, you can understand why so many businesses choose this method of growing a business. Setting all of this up from scratch would be expensive, time consuming and resource intensive.
On the other hand, when you sell your products through your own website, you effectively ‘own’ those customers and all their data. As long as your customers have signed up to receive your marketing and your activity complies with GDPR, you can message your database as often as you like about your products and offers. The customer relationships that develop as a result help to build value in your business.
When you sell through a marketplace such as Amazon, your customer lists will never belong to your business. They belong to Amazon. This means you can’t do any outbound marketing to them, such as send them your newsletter or put marketing materials inside your carefully wrapped packages.
Risk and reward – is it worth using an online reseller to build your business?
Are you placing too much trust in a selling platform your business doesn’t own? In March 2024, a legal case brought against Amazon US highlighted the lack of control sellers using online marketplaces have over where and to whom their products are marketed.
Amazon appealed the initial verdict, but the Supreme Court upheld the decision. The judge ruled that Amazon US was targeting UK consumers through advertisements and offers for sale of trademarked goods on amazon.com, which resulted in trademark infringement in the UK.
While we are looking at this topic from a small business perspective, the case underlines how easy it is to fall foul of legislation. Even Amazon is not immune. Let’s look at a few other risks involved.
Access to funds
When a customer buys direct from you, the funds land in your account pretty much straight away. In 2023, Etsy took the decision to withhold 75% of some sellers’ funds for 90 days, which for some small businesses equated to thousands of pounds of vital revenue. The Etsy payment dispute severely impacted the affected business’ cashflow, and their ability to buy new materials and maintain operations.
Limited marketing rights
Selling through a third party website means your business has no rights to market directly to anyone that buys from you. Why? Because their customer contract is with the third party website, not your business. To gain access to marketing opportunities, platforms generally steer you towards paid advertising or channels that generate repeat custom through their online shop, not yours.
Check what you are signing up to
Online marketplaces can and do change their selling policies at any time, so make sure to read the smallprint! Selling fees alone can be crippling. Are you signing away rights to your products or giving the third party too much control over your products? Think about your future growth strategy. What if you wanted to expand your business in a different direction? Would you have to start all over again to build a new customer base?
Financial, legal or technical difficulties
If you build your online sales on a third party platform your business becomes reliant on that platform. What happens if that website server goes down or the business gets into financial or legal difficulties? You will have no rights over, or access to, their customer databases.
How reliance on online marketplaces affects business value
What does all this risk mean for business value? At Uscita, when we value a business in preparation for sale, we assess it against eight key drivers of business value. One of these is how dependent your business is on any single employee, customer or supplier. High dependency on a third party website to market and sell your product could have a detrimental impact on business value. It can also affect two other important drivers of business value: differentiation and potential for growth. Opportunities for both these are severely limited when you don’t own your customer database or sell your products from a website you own and control. If you only sell via a third party marketplace, your business will be worth much less than a similar company that owns and controls the majority of their sales channels.
Looking to the future
Online marketplaces are great places to start selling your products and make a name for yourself, but as your business grows, reliance on them could become detrimental to future business growth and value. From an exit consultant perspective, diversification of channels and selling products through your own website are much better ways to increase the value of your business. If you’d like to talk to us about this or creating an exit strategy for your business, book a free discovery call with us.
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