The Amazon Rent

Tom Foster, Editor-at-large at Inc, wrote on the generation of Warby Parker-like brands fueled by entrepreneurs and venture capitalists. Warby Parker valued at $1.75 billion now boasts 61 retail stores across the United States and is the prime example of a direct-to-consumer brand.

The appeal of direct-to-consumer is the removal of middlemen, most notably retail stores (even though increasingly brands are building omni-channel presence which also includes brick-and-mortar stores). As a result brands can afford to offer better quality, design, and lower pricing because they’ve cut out retail markups. By selling direct-to-consumer brands also get to talk to consumers directly, allowing to better control the message, and capture more data enabling to improve products further.

Warby Parker

Every brand today wants to be Warby Parker.

But “If someone today tries to pitch the Warby Parker for belts, I’d hope they’ll be asked to leave” said Loose Threads founder Richie Siegel. The direct-to-consumer environment is full of hype that hasn’t yet lived up to reality. Despite what appears to be the perfect way to build a brand few of them have grown to the size of Warby Parker. There are inherent difficulties in reaching scale and big part of that is customer acquisition.

By replacing retail and going direct-to-consumer brands have to find the consumer first. Retail stores serve a purpose in the value chain by attracting consumers. Once removed the consumer has to discover the scattered direct-to-consumer brands. This has meant that for digital-native brands Google’s search engine and social networks like Facebook and Instagram are the gatekeepers. While initially they provided access to consumers for free, it’s been long since this has a cost. These channels are increasingly getting more saturated and expensive as more brands get created.

“Comcast’s Gulati has a phrase for this phenomenon: “CAC is the new rent.” In other words, for companies reliant on paid marketing, their digital customer acquisition cost (CAC) is a lot like paying for brick-and-mortar stores in the old model, or selling wholesale. Essentially, this undermines one of the most basic precepts of the DTC movement, that these companies are cutting out the middleman and therefore can afford to charge much less for higher-quality goods.”

Tom Foster, Editor-at-large, Inc.

The benefits of direct-to-consumer, the ability to reach customers and capture data, are still very much relevant. But while there is no more middlemen in the retail transaction, the role Google and Facebook play is the new form of middlemen. They control the customer acquisition, which is ultimately the key to unlock a brand’s success.

Amazon in all of this is the largest retail middlemen of them all. Instead of paying rent to a landlord or letting a third-party retailer mark up the price brands have to pay Amazon to be on the marketplace. Paying Amazon is the new rent. Amazon captures the cost of warehousing, listing, shipping, returns, and most recently advertising. For years products sold on Amazon driven by external recognition, today brands are investing into Amazon advertising to reach the same customer. Thus the rent covers not only the display of products and retail infrastructure costs, but the creation of demand.

There are of course Amazon-native brands being built to achieve the same affordances of the direct-to-consumer brands. They are direct-to-consumer exclusively on Amazon, but as a result the Amazon rent often reaches 50% or more of the product price when all fees are accounted for. The basic premise of those brands - that they don’t have middlemen and thus have a cost structure allowing to charge less for higher-quality goods - is not as simple.

There hasn’t been a time in retail history like it is now. There are more brands launched every year than the year before because the mechanics of retail have changed. It got easier, cheaper and faster to make physical products and thus more companies are doing so. But today brands are also experimenting with customer acquisition channels, because despite the explosion of brands they are all fighting for the same pool of customers. This means brands of the future are ever-focused on their own customer, compared to the far reaching traditional brands of the past.

The decision to sell or not to sell on Amazon boils down to the realization that fifty percent of the US online retail is spent on Amazon.com. A brand can either try to build their own path to a consumer powered by digital marketing, or get access to the tens of millions of consumers on Amazon already. But just like selling in retail stores, selling online or through Amazon is not free - for one there is a rent to pay to run retail stores, for the other the rent is all of the fees. Retail in its new form looks awfully familiar.

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Juozas "Joe" Kaziuk─Śnas

Founder of Marketplace Pulse, Joe wears multiple hats in the management of Marketplace Pulse, including writing most of the articles. Based in New York City. Advisor to other startups and entrepreneurs. Occasional speaker at conferences.

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