July 13, 2020

E-commerce Channels: Diversifying for Success

Steven Toews

A healthy mix of e-commerce channels is vital for every online business. Diversifying your online sales channels allows you to reduce volatility and risk while maximizing profit. You’ll need to watch out for over-diversification, however, as that can reduce efficiency and eat into profit margins.

Continue reading below to find out the best reasons to diversify your e-commerce channels and the pitfalls you’ll need to avoid.

What is E-commerce Channel Diversification?

E-commerce channel diversification refers to the practice of selling your e-commerce products through more than one platform or retailer. For example, a seller of widgets might do 50% of their business through Amazon, 30% through their own website, and 20% through Facebook.

Note that we’re not talking about product diversification. In other words, we’re concerned with the avenue through which the product is sold, rather than the product itself. 

The Benefits of E-commerce Channel Diversification

The upsides to e-commerce channel diversification are innumerable. From reducing risk to increasing profit, you’ll maximize the amount of money you earn in any given month by ensuring that you don’t put all your digital eggs into one basket.

Reduces volatility

Every e-commerce website owner faces significant sales volatility. Sales volatility refers to the tendency of one’s monthly (or weekly or annual) sales volume to fluctuate substantially between periods. While there may be some long-term trends that affect your business, it’s not unusual for e-commerce companies to see their sales double or halve between consecutive months.

This tendency is especially marked among firms that rely on a single e-commerce channel to move their products. This is due to a number of factors, like:

  • All of their sales being affected by any changes made in the channel’s platform
  • All of their sales being affected by a movement in the popularity of their chosen channel

The key takeaway is that any material change in circumstance of their chosen e-commerce channel will affect 100% of an undiversified company’s sales.

When, however, a business uses more than one e-commerce channel, changes to one channel only affect a single portion of their own sales.

For example, say Company A sells 50% of its widgets on Amazon and 50% on their own website. Amazon introduces an algorithmic update that negatively affects Company A’s ranking on the platform. While the change will hurt Company A’s sales, it will only hurt that proportion of sales (in this case, 50%) that occur on Amazon’s platform.

Reduces risk

Closely related but distinct from the concept of volatility is risk. Selling products via any online channel involves risk, and those risks are multiplied when an e-commerce firm fails to diversify itself. We’ll address a few different kinds of risks.

  • Demonetization risk

Every platform has a complex set of rules that determine who may and who may not sell products on their channel. It’s not unusual for e-commerce companies to accidentally run afoul of these rules and have their accounts banned, suspended, flagged, demonetized, or otherwise negatively affected.

The more concentrated your sales are in a channel that takes action against you, the more damaging that action can be. For example, if Company A sells all of its products on Amazon, and Amazon suspends its seller account for a violation of their terms of service, Company A has just lost all of its revenue.

It’s crucial that e-commerce companies make every effort to read, understand, and comply with the terms of service posted by each of their channels. But, beyond that, it’s necessary to recognize that selling platforms will sometimes mistakenly take action against innocent e-commerce firms.

It can take time and energy to unwind these actions and, in the meantime, you won’t be allowed to make sales on that platform. For this reason, amongst others, you would be wise to diversify your e-commerce channels to prevent your entire revenue stream from being decimated by a single error or violation.

  • Counterfeiters

Some platforms, particularly Amazon, contain counterfeiters who prey on successful e-commerce companies. These counterfeiters will piggyback on your marketing and sell look-alike products that can seriously damage the goodwill you’ve created with your customers.

Customers victimized by these counterfeiters will frequently leave negative reviews on the accounts of the legitimate seller, damaging their reputation even further. One too many of these kinds of reviews can spell disaster for your firm, especially if all of your business moves through that platform.

Maintains brand visibility

By making your product visible and available through more than one channel you communicate to the buying public that, while some of these e-commerce channels might help you move your products, the ultimate source of these products is your company.

For example, if the only way John Smith can buy your product is to go to Amazon and buy an Amazon-branded item that’s shipped to his home by Amazon, your brand may not have much of an impact. But if he can also go to Facebook and buy your product there or, even better, go to your own website and get the product from there, the influence of your brand is much clearer.

Your brand becomes the link between these different channels and it becomes clear that your brand is the driving force behind the product.

Increases reach

While Amazon’s ability to reach consumers is truly astounding, not everyone buys from Amazon. There are significant numbers of people who, because of habit, principle, or experience, refrain from using Amazon.

Similarly, while Facebook might count its monthly users by the billion, not all of those people use Facebook Shops to buy goods.

Our point is simple. Every e-commerce channel you make use of will increase your ability to reach more and more consumers. And the more you can grow your base of potential customers, the more money you can make.

The Drawbacks of E-commerce Channel Diversification

While the benefits of e-commerce channel diversification are more than worth the drawbacks, you should still be aware of the downsides.

Inefficiency

The fewer e-commerce channels you have operating at any given time, the more efficient you’ll be. Similarly, increasing the number of e-commerce channels you use will decrease your level of efficiency.

This is just the nature of the beast. Every time you add a channel to your operations, you need to figure out a new set of rules, strategies, procedures, and tricks of the trade to deal with that channel.

If you add too many, you and your people might be overwhelmed by all of the different policies and methods you need to follow.

You can address some of the inefficiencies inherent in diversification by ensuring that some of your employees are highly skilled in the area of operations. Consider appointing a Chief Operations Officer (COO) with experience and education in operations management, if possible.

Technical Barriers

Each new e-commerce channel you use will bring with it new technical and digital requirements. For example, Amazon’s Seller Central APIs will not function in the same way that Facebook Shops’ APIs do. Etsy will have different digital requirements than eBay does.

You, or someone on your team, will need to be knowledgeable in the technical requirements of every e-commerce channel you use.

A Quick Note

While we’ve noted a couple of the drawbacks of diversifying your e-commerce channels, please don’t understand us to mean that you should forego this practice. Channel diversification is overwhelmingly worth it. The few headaches you’ll put up with as a result of selling through more channels are well worth the decreased risk and increased profitability you’ll enjoy.

This is especially true for those companies who have not over-diversified. If you’ve made use of just enough e-commerce channels to mitigate risk and enjoy the benefits of diversification, but haven’t employed so many channels that the drawbacks become material, you’ll have realized a huge benefit without much of a downside.

Final Thoughts

Diversifying your e-commerce channels is a necessary part of safeguarding your future revenues and managing risk in your organization. Relying entirely on a single third-party for all of your business has never been a good idea, and the advent of e-commerce hasn’t changed that fact.

How much you want to diversify and the e-commerce channels you ultimately choose will depend on your unique circumstances. Remember that your aim is to reduce your exposure to volatility and risk while increasing your reach, brand visibility, and profitability.

At the same time, you don’t want to diversify so much that you become inefficient or unable to deal with the technical requirements of each channel.

If you put the effort in, you’ll find a balance between these two extremes over time.

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