A new trend has emerged on the Amazon marketplace: seller diversification strategy. In increasing numbers, notable brands are choosing to partner with 2-3 third-party sellers to retail their products on Amazon. This approach has always been possible, but the alternatives – wholesaling to either a single, exclusive third-party seller or wholesaling to anyone and everyone – were once more popular options.
In this post, we’re examining what sparked this change, and some of the advantages a limited seller diversification strategy offers.
What is Diversification Strategy?
Diversification strategy is the practice of not putting all your eggs in one basket. It’s a tried and true method that spans many industries. For brands selling on Amazon through third-party (or first-party) sellers, diversification strategy simply means selling through multiple sellers instead of a single seller. A limited seller diversification strategy is the practice of working with a select few trusted sellers.
We broke down the pros and cons of an exclusive partnership vs multiple sellers in a prior blog post. The short version is that an exclusive partnership maximizes control and streamlines strategy, whereas multiple partnerships risks disjointed strategy and diluted performance because your sellers compete against each other as well as your competitors.
Why are Brands Adopting a Limited Seller Diversification Strategy?
If an exclusive partnership has such strong benefits, why then are some major brands choosing the limited seller approach?
It comes down to four chief reasons:
- Seller diversification mitigates inventory coverage risks
- Exclusive contracts can feel like a trap if the partnership doesn’t deliver results
- Exclusivity creates the risk of a single point of failure
- Exclusive partnerships lengthen the time it takes to identify a reliable partner
Importantly, the brands we see adopting this approach with the greatest success are segmenting their catalog by seller. Each seller is permitted to carry only a specific set of ASINs. In this way, brands prevent their sellers from competing with each other on the same ASIN, while still diversifying their strategy to mitigate risks.
Tired of chafing against the limitations of exclusive contracts and wary of under-performing competitors, major brands have begun to split test their B2B partnerships. These brands are segmenting out their catalog to two or more agencies to see which performs better. This allows these brands to see what each company has to offer before making a final commitment.
This ‘try-before-you-buy’ diversification strategy does seem to have merit, and not just for the brands. Let’s explore the potential benefits of diversification – and possible pitfalls – to determine how brands and their agencies can make the most of this growing trend.
A Limited Seller Diversification Strategy Protects Coverage
In 2020 and 2021, Amazon tightened inventory caps in response to growing demands that were outpacing their limited fulfilment center space. As discussed in the blog post, Overcome Amazon’s Restricted Inventory Limits with Dropship, Amazon’s power to make such unilateral decisions can have devastating effects on thousands of brands with little or no notice.
A partnership diversification strategy is a way to solve this issue. Diversifying business-to-business sales gives brands a secondary option should one seller not able to send in enough inventory.
At the same time, third-party sellers with robust inventory management teams and extensive Amazon experience can easily flex their skills in a head-to-head face off with competitors. During times of unexpected supply chain demand and changing regulations, experienced business-to-business marketing agencies have the knowledge and resources to pivot quickly and save their brands pain in the long run.
Exclusivity Becomes Limiting if the Partner Doesn’t Deliver
Exclusive contracts can be scary. If the seller doesn’t uphold the standards a brand needs, the exclusivity clause shifts from a sound strategy to feeling trapped.
Working with multiple sellers mitigates this risk. If one seller hits an obstacle, the brand can lean on the other seller to make up the difference. This safety net extends to purchase order amounts, inventory coverage, and sales.
More Eggs, More Baskets
By far the most obvious advantage of working with multiple third-party sellers – and of any diversification strategy, frankly – is the mitigation of risk. By putting the proverbial eggs in multiple baskets, brands can avoid “losing it all” should anything drastic happen to any one partner.
And if the last few years have taught us anything, it is that drastic can happen.
The downside, of course, is multiple partners mean multiple of everything: multiple fees, multiple points of contact, multiple strategies, multiple campaigns, and multiple opportunities for things to go wrong.
Multiple Partners Lets Brands Find the Ideal Partner Quicker
For that reason, many brands still eventually want to work with only one or two partners. The trick is identifying which partners are worthy of that commitment. If brands partner with only one seller for Amazon at a time, they may cycle through three partners – and three years – before they find the right fit.
By partnering with a select few, top-tier sellers at once, brands can compare their service and performance. If one seller consistently delivers better service and performance than another, the brand can confidently proceed to an exclusive partnership.
My expertise in e-commerce and Amazon marketplace strategies spans various aspects, including seller dynamics, brand partnerships, and diversification tactics. One key aspect of Amazon's evolving marketplace involves the strategy of diversifying seller partnerships. This trend isn't merely theoretical; it's a practical response to the changing dynamics within Amazon's ecosystem.
The article discusses the shift in strategy from exclusive partnerships to a limited seller diversification approach. This strategy involves major brands opting to collaborate with multiple third-party sellers (2-3) instead of exclusively partnering with just one. The rationale behind this shift is multifaceted and rooted in addressing several critical factors:
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Risk Mitigation Through Inventory Coverage: Amazon's tightened inventory caps in 2020 and 2021 prompted brands to diversify their seller partnerships. This strategy serves as a buffer against sudden inventory restrictions, allowing brands to spread their products across multiple sellers and thus maintain coverage even if one seller faces limitations.
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Avoiding the Pitfalls of Exclusive Contracts: Exclusive partnerships can backfire if the partner fails to deliver expected results. By engaging with multiple sellers, brands safeguard against the risk of being solely dependent on a single seller. This approach enables them to distribute orders, maintain inventory levels, and balance sales across different sellers.
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Diversification as Risk Mitigation: The fundamental advantage of this strategy lies in risk mitigation. By collaborating with multiple sellers, brands spread their risks across various channels. While this lessens the chances of catastrophic losses, it also introduces complexities such as managing multiple strategies and fees.
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Identifying the Ideal Partner Efficiently: Brands are using this diversified approach as a sort of trial period to identify the best-performing sellers. By segmenting their product catalog among different sellers and analyzing their performance, brands can assess which seller aligns best with their goals, service standards, and performance expectations.
Moreover, the article underscores the importance of segmenting the product catalog among different sellers to prevent competition between the sellers and optimize diversification without diluting the brand's overall performance.
These strategies are not only a response to market changes but also a proactive approach by brands to ensure resilience in the face of evolving market conditions and unexpected challenges within Amazon's ecosystem.
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