For nearly a half century, Black Friday has been known as the biggest shopping day of the year in the United States.i Falling on the day after Thanksgiving, it is the unofficial start of the Christmas shopping season and has long been a critical sales day for brick and mortar retailers.
As online shopping has gained prominence over the past two decades, however, there has been a dramatic expansion of this traditional sales event. For one thing, the singular retail holiday – Black Friday – has been replaced with what industry analysts refer to as “Turkey 5.”ii As the name implies, Turkey 5 is a five-day shopping marathon that begins on Thanksgiving and ends the Monday following that holiday. The period includes four distinct opportunities for retailers to offer products to consumers at heavily discounted prices: (a) Thanksgiving; (b) Black Friday; (c) Small Business Saturday; and (d) Cyber Monday.
Over time, these online sales events have gained phenomenal traction. For example, on Thanksgiving Day 2017, online sales neared $3 billion.iii Black Friday online sales topped $5 billion.iv Meanwhile, Amazon boasted that consumers purchased 140 million products from small businesses that weekend.v And, perhaps most impressively, Cyber Monday 2017 was the biggest shopping day Amazon had ever experienced, with sales eclipsing even those of Prime Day (Amazon’s ubiquitous one-day sales event that generated $2.4 billion in 2017 and $4.1 billion in 2018).vi
Among the most popular products to move during Turkey 5 are electronics, home gadgets, and toys.vii Nonetheless, any heavily discounted product has a good chance of moving if it is offered in a popular online marketplace.
Amazon, of course, is the pinnacle of online sales venues. Indeed, it is estimated that the company currently enjoys just under 50% of all online retail sales.viii On Black Friday 2017, Amazon upped that percentage, enjoying a solid 55% of online sales.ix Thus, how Amazon competes for these holiday dollars is highly significant to every player in the durable goods market.
Unfortunately, the Amazon platform is rife with conditions that can harm manufacturers and brands. This paper examines one condition that poses perhaps the single biggest threat to brands – unauthorized third party retailers (“TPRs”) that peddle products far below manufacturers’ minimum advertised price (“MAP”). Part I will address the unauthorized TPR problem on Amazon and explain how these TPRs create massive problems during sales events like Black Friday. Part II focuses on what brands can do to gain control over TPRs – and why they should begin that process before the Turkey 5 sales events come to pass.
Part I: Amazon’s TPR Model
Anyone who follows business news at all knows that since the mid-1990s, Amazon has built a vast empire.To do this, the company has focused on a few core principles. One of those is to offer greater product variety than anyone else. Given that there are currently 600 million different products offered for sale on Amazon.com, it is safe to say this goal has been achieved.x Importantly, consumers seem to be responding – the website is visited by some 2 billion people each month who flock to the site to purchase everything from computers to cowbells.xi
Another core principle, however, is to offer all of those products at the lowest possible price. To achieve this goal, Amazon has largely delegated its role of a product retailer to third party sellers who it allows to create virtual storefronts in its vast online marketplace. Those TPRs compete amongst themselves to offer products at the lowest prices. In doing this, they often erode their own margins in an effort to make a sale. Meanwhile, Amazon collects monthly fees from them and, in most cases, earns a small commission each time a TPR moves a product.
This TPR program is phenomenally successful for Amazon. Presently, between 50 to 75% of the products sold on its website are sold by TPRs.xii In fact, the company currently has over 2 million TPRs selling products on its sitexiii and it has been reported that some 3,000 new sellers apply to become TPRs every single day.xiv
The problem lies with unauthorized sellers
Given this level of success, it is hard to fathom how the TPR program could be a menace for brands. With so many TPRs selling so many products, it seems manufacturers would be clamoring to reap the rewards of this vast sales network. Unfortunately, many brands are doing the exact opposite. The problem lies with the army of unauthorized TPRs that operate through Amazon.
Day to day, most consumers have no idea that authorized and unauthorized retailers even exist. Manufacturers and brands, on the other hand, have utilized authorized sales networks for decades. The appeal of these networks is easy to understand.
In an authorized network, a manufacturer grants chosen retailers the exclusive or semi-exclusive right to sell the brand’s products.In exchange for those rights, retailers in the network agree to adhere to certain rules and conditions imposed by the brand. Undoubtedly, one of the most important covenants an authorized retailer can make is not to advertise the brand’s products below a minimum advertised price (“MAP”). Other promises might include things like storing products at a certain temperature or handling customer returns in a specified manner.
Before online sales venues like Amazon came to be, authorized retail networks worked very well for brands. Indeed, due to the initial investment required to start a brick and mortar retail presence, unauthorized retailers were almost non-existent. If an unauthorized person did get a hold of a lot of goods, those goods would mainly be sold at flea markets or swap meets. Consumers knew to be leery of such purchases.
Online marketplaces like Amazon have changed the game entirely. Now,an unauthorized seller can gain exposure to billions of consumers with a very low barrier to entry. So long as that person has $40 and products to sell, he can become an Amazon TPR in a matter of hours.
To make matters worse, Amazon allows its unauthorized TPRs to hide behind the dark cloak of internet anonymity. Sellers are not required to identify themselves to consumers or anyone else. Rather, they use fictitious business names that are wholly unconnected to their true identities. This can make communication with these sellers nearly impossible.
Lamentably, Amazon itself does virtually nothing to police the unauthorized TPRs that plague its site. If anything, the company has recently made it harder to initiate cease and desist efforts against these offenders. In the past, manufacturers could at least reach the anonymous sellers through a communications portal Amazon offered for its TPRs to communicate with consumers. However, those portals automatically block any efforts at cease and desist communications.
The danger of unauthorized TPRs as Black Friday approaches
People who have never operated within the sales channel might look at unauthorized TPRs and wonder what the problem is. Manufacturers, distributors, and brands, on the other hand, know that unauthorized sellers can cause a host of problems. Many of those problems – like brand dilution and damaged authorized networks – are beyond the scope of this paper. One problem, however, can strike hard and fast during the holiday season. That problem is price erosion. Price erosion due to unauthorized TPRs on Amazon can occur at an alarming rate. Here’s how it happens.
Every day, hundreds of TPRs may be offering the same product for sale through the Amazon platform. Indeed, Amazon itself might also be selling that same product. The geniuses at Amazon know, however, that consumers do not want to sift through hundreds of product listings on a single item. Consequently, they designed a sales incentive program that rewards TPRs for offering the lowest prices and other consumer conveniences.
The ultimate prize within Amazon’s sales incentive program is known as “winning the Buy Box.” Anyone who has ever purchased an item on Amazon is familiar with the Buy Box. It is the “Add to Cart” button that appears in the upper right-hand corner of every product page. Though most consumers don’t notice it, when they click the “Add to Cart” button, they are directly linked to a unique seller. It might be Amazon or it might be an unauthorized TPR. It depends on a whole host of variables, including offering the lowest price or having the highest customer satisfaction reviews. Though there are many variables at play, offering the lowest price is believed to be the greatest factor in determining who wins the Buy Box on any given day.
The Buy Box is incredibly valuable to TPRs. Only one retailer can win the Buy Box per day, regardless of how many them are offering that product for sale. Studies reveal that up to 90% of all purchases made on Amazon are initiated via the Buy Box.xv Simply put, if you want sales, you have to win that Buy Box.
Given the importance of offering the lowest price, TPRs (and an entire industry of professionals who cater to them) have developed sophisticated computer programs that detect price drops made by competitors. The program responds by lowering its TPR’s pricing by a nominal amount (usually two cents or less). When a consumer visits Amazon to purchase that particular product, the seller with the lowest price on that day is most likely to win the sale.
Problematically, these programs are used by thousands of TPRs, as well as Amazon itself. As more and more retailers lower prices in an effort to win the Buy Box, product pricing is driven further and further downward. This leads to exponential price erosion that has come to be known as “the race to the bottom.”
Unfortunately, this race can proceed alarmingly fast. This is particularly true during events like Black Friday or Cyber Monday – when TPRs know they will have exposure to more consumers than ever. Indeed, TPRs will begin dropping prices in the days and weeks leading up to Black Friday – all in an attempt to win the coveted Buy Box when the big day rolls around.
The impact on authorized retailers
While this price dropping frenzy occurs among unauthorized TPRs, authorized retailers pay the price. This is because unauthorized sellers are under no contractual obligation to adhere to the manufacturer’s MAP. They can drop prices as far as they want to go with virtually no consequences.
Authorized sellers, meanwhile, are left with a Hobson’s choice. They can either: (a) choose to violate MAP themselves, putting their authorized seller status at risk; or (b) lose sales to unauthorized TPRs operating on Amazon. Consequently, they will often put pressure on the manufacturer to lower wholesale pricing. Of course, this process can only proceed for so long before profit margins have been completely decimated for the manufacturer and the authorized retailer.
Obviously, the best course is to put a stop to unauthorized TPRs on Amazon before they have a drastic impact on your organization. Unfortunately, many companies don’t have the knowledge or the horsepower to handle these efforts in-house. That’s where E-Enforce™ comes in.
Part II: Stopping Unauthorized TPRs Now
Along with its parent company, Cyber Investigation Services™, E-Enforce™ has been stopping unauthorized sellers and counterfeiters since 2010. From the outset, we were determined to build a multi-disciplined team that could handle the many facets of E-Commerce enforcement with speed and efficiency.
Today, our team consists of computer programmers and engineers, former federal law enforcement investigators, and licensed, in-house cyber investigators. Day in and day out, we remain laser-focused on tackling even the most sophisticated unauthorized TPRs and counterfeiters.
Perhaps at no time is an E-Enforcement effort more urgent than heading into Black Friday. Here’s what to expect from a swift E-Enforcement operation:
Monitoring and analysis
Every E-Enforcement investigation begins with some level of monitoring. In fact, monitoring is a critical tool for assessing the extent of a brand’s unauthorized TPR problems. Our team uses proprietary software and pricing algorithms to root out unauthorized TPRs wherever they may operate. Among other things, these programs locate products sold far below MAP, flag bogus reviews, and search for other proprietary indicators of illicit sales.
The monitoring process involves scanning online marketplaces like Amazon for defined SKUs/ASINs. We compare any identifying information about the sellers to our in-house database of nearly 100,000 known offenders. This provides us with a real-time snapshot of how each product is being sold online and gives us an idea of the sophistication of the sellers we’re dealing with. Realistically, initial reports often reveal dozens of unauthorized TPRs ranging from the smallest of “Mom & Pop” sellers to the largest of professional sellers.
This is where the enforcement analysis kicks in. It starts with a report on the overall unauthorized seller landscape. For example, while a brand may have 62 unauthorized TPRs selling 16 different products, there may be three or four sellers doing the greatest level of damage to the brand.
In those scenarios (which are very common), our clients typically choose to have our automated systems attempt to scare off the smaller sellers, while more focused enforcement efforts are levied against professionals.
Personal identification of unauthorized TPRs
All the monitoring in the world won’t do you any good if you can’t identify the actual human beings operating behind the anonymous Amazon storefronts. At E-Enforce, our seller identification capabilities are the lynchpin of our success. We’re never deterred by online sellers operating under fictitious names. Nor does it bother us that they might shut down one online storefront just to pop up somewhere else later. We have automated systems in place to track all that.
More importantly, however, we have developed the ability to identify the real people behind those online sales. In fact, within a relatively short period of time, we can access their true names, addresses, email addresses, phone numbers, and social security numbers. From there, all enforcement efforts are deployed against the individuals. And, given our law enforcement and investigative background, those individuals are simply unable to hide from our enforcement efforts.
Escalated enforcement against individuals
With real identifying information in hand, E-Enforce™ quickly escalates its enforcement efforts. For example, we arrange to have physical cease and desist demands sent directly to sellers in the physical location of their homes and businesses. Sometimes, we will also deliver cease and desist messages through email or text – just to cement in the offender’s mind that we know who they are and where they operate. Within all of these demands, sellers are notified that they have a very short window within which they must stop making unauthorized sales.
In some cases, we leverage these individuals for additional information about product sourcing. If, for example, they can identify a source of distributor leakage, we’ll leave them alone and take our enforcement efforts higher up the food chain.
Absent cooperation, these individuals are notified that they will be sued for, among other things, trademark infringement or unfair business practices. Working with our vast network of attorneys, the individuals are sent a final cease and desist letter that attaches a draft federal court complaint. Once again, sellers are given a short window for compliance.
Even among the most sophisticated sellers, there are very few individuals who have the resources or the desire to battle a popular brand in court. While the most dogged sellers will call a brand’s bluff up until the point of receiving the complaint, that draft complaint typically signals the end to their operations.
Importantly, these hardball tactics tend to have a cascading impact. Once a brand earns the reputation for seeking out real people behind illicit operations (and threatening to sue them), other retailers are less likely to attempt future unauthorized sales. Even for sophisticated operations, the hassle simply becomes greater than the reward.
Our track record proves that these strategies are highly effective. There’s no better time to get started than just before the Black Friday frenzy.
E-Enforce is a division of an internationally recognized investigation firm, Cyber Investigation Services, LLC. We have been providing litigation support and investigations for high profile cases and leading intellectual property law firms since 2010.
In 2012, we began combatting unauthorized sellers at the request of our client, Zo Skin Health. When we began that process, the company was overwhelmed with unauthorized retailers in online marketplaces. Today, they have virtually zero. Instead, they have the street credibility for aggressive E-Enforcement that keeps unauthorized sellers at bay. Unlike many companies that have suffered problems with unauthorized sellers, they have also enjoyed exponential growth in that time.
From 2010 to 2017, E-Enforce managed numerous corporate accounts. In fact, we were the exclusive E-Enforcement provider for a national IP law firm and several of its fortune 500 clients. In February 2017, we made our proprietary E-Enforcement system commercially available. It combines legal strategy, technology, and cyber investigation capabilities.
Today, E-Enforce™ employs a dedicated team of engineers, software developers, data analysts, product purchasing specialists, licensed cyber investigators, and seasoned former law enforcement officers. We dedicate our time and attention to helping our clients deal with this rapidly evolving problem of unauthorized sellers, counterfeiters, and grey market sellers. In addition to our in-house team, we regularly partner with legal professionals around the world who are specialized in the many aspects of fighting cyber-crime.
E-Enforce™ is committed to assisting clients with unauthorized sellers who are determined to erode our clients’ hard-earned margins and brand reputation.
We currently work with over 50 brands, including global companies, mid-sized operations, and small-but-growing manufacturers to thwart unauthorized sellers and counterfeiters alike. Our clients represent the following industries:
- Cosmetics& Hair Products
- Direct sales
- Paper products
- Home repair
- Women’s accessories
- Vitamins &Food supplements
- Pet products
- Sunglasses & accessories
- Consumer electronics
- Vacuum cleaners
- Purses and bags
- Radar detectors
- Skin care
- Health products