Small and medium business selling on online retail marketplaces are concerned with fees payable, price setting, product prominence, sales data and customer data.
The Australian Competition & Consumer Commission (ACCC) has examined seller concerns and has issued a report: Interim report No. 4 – General online retail marketplaces, as part of its Digital platform services enquiry.
In the ACCC Media Release – Concerning issues for consumers and sellers on online marketplaces, ACCC Chair Gina Cass-Gottlieb said:
“Online marketplaces have an important role in connecting Australian consumers and sellers and make up a growing share of consumer sales. But we are concerned about their impact on both consumers and third-party sellers who rely on online marketplaces to reach their customers”
This is a summary of Section 3 of the report, which deals with the concerns of small and medium businesses selling online on online retail marketplaces.
Overview
Online marketplaces provide significant advantages for sellers. They provide access to a large number of consumers, particularly consumers who are actively looking to purchase goods.
Sellers on online retail marketplaces are diverse, consisting of individuals, small businesses, large marketplace-only sellers and well-known bricks and mortar retailers.
Amazon states that more than 50% of units sold globally in its online stores are by small and medium businesses. They display a broad range of products to consumers, such as books, toys, clothing, sporting goods and camping equipment. They provide services to sellers such as advertisements.
Online marketplaces are particularly attractive to small and medium businesses because they provide additional services such as warehousing and distribution. And they have much lower setup costs than reaching consumers directly through a seller’s own website, or via a traditional bricks and mortar store.
At the same time, online marketplaces derive value from having a large number of sellers because they are attractive to consumers due to the wide range and large number of products.
The ACCC report focusses on the four major online retail marketplaces in Australia, Amazon Australia, Catch, eBay Australia and Kogan. In 2020–21, they jointly had total of $8.4 billion in revenue, an increase of 21 per cent compared to 2019–20. See this bar chart:
How and why sellers select an online marketplace to sell on
While many sellers use only one marketplace, sellers with strong brand recognition and a large number of customers use multiple online marketplaces to reach different consumers (“multi-homing”). This is because online marketplaces have different characteristics and entry requirements and attract different consumer demographics.
Each marketplace sets fees payable in their terms and conditions for sellers to access the marketplace. The ACCC notes that while larger sellers may have some bargaining power to negotiate the terms of agreement with an online marketplace, smaller sellers typically do not have this level of bargaining power which may limit their ability to negotiate terms.
Some online marketplaces charge a monthly subscription or store fee. Sometimes a commission – a per-item sold fee is also taken. Sellers complain about the limited and delayed transparency with which online marketplaces set and change their fees. Specific concerns were raised in relation to online marketplaces managing payments and automatic deductions for fees and commissions.
While third-party sellers set the price of the products they sell, some online marketplaces impose restrictions on third-party sellers’ ability to set prices., such as price parity clauses.
The ACCC advises it will monitor the prevalence and effect of these restrictions.
Getting products before consumers
Product prominence – appearing in the highest listed products on search results or becoming the featured offer or ‘winning the buy box’ (on Amazon and Catch) is crucial to success.
The ACCC has found that online marketplaces are opaque and not transparent about how their algorithms operate to decide how products are displayed to consumers. Each marketplace has different policies and processes in relation to how products are displayed and provides different information to third-party sellers about how their products can achieve greater prominence on the marketplace.
The ACCC recognises that these online marketplaces, like other digital platforms, have legitimate incentives to maintain a degree of opacity over their search algorithms. Not only does opacity protect the significant investment and resources in developing the algorithms, but it prevents sellers and potential competitors from misusing, gaming or copying the algorithms to their benefit.
The ACCC’s concerns are that any changes to algorithms are communicated clearly and in a timely manner to sellers particularly where this relates to product visibility or charges. The ACCC is also concerned where an online marketplace’s favouring of its own products means that products from third-party sellers (which may be more relevant to the consumer’s search) are given less prominence without the consumer realising this is the case. It may also reduce the incentives to third-party sellers to participate on online marketplaces.
The ACCC looked at ‘Participating in Fulfilment by Amazon’ and found very strong incentives for using it compared with products offered by other competing fulfilment services, such as participation in lucrative Amazon sales events. The ACCC considers there may be risks to competition in fulfilment services should Amazon’s market position significantly increase.
Consumer data and control over the seller-consumer relationship
The online marketplace provides not only the platform for a consumer and seller to find each other, but also control over the transfer of money.
Online marketplaces control the data or insights available to sellers, and do not provide the full extent of consumer data collected. Even where sellers are provided with consumer contact details on a per-order basis, sellers may be prohibited from contacting consumers directly in an attempt to prevent off-platform transactions from occurring.
The ACCC sees complexities in sharing consumer data with sellers, such as ‘ownership’ of the consumer relationship, the prevalence of multichannel listing software and reservations consumers may have about marketplaces sharing their data with sellers particularly for direct marketing purposes.
The ACCC notes that digital pricing algorithms have significant advantages over manual application of pricing rules by reducing labour costs to better compete on price.
The ACCC notes that dynamic pricing algorithms can be sourced from a variety of places: the seller developing their own, the seller selecting an in-built pricing algorithm on an online marketplace or using a third-party provider.
Collusion
The ACCC considers that these risks are associated with the use of dynamic pricing algorithms, namely: algorithmic-assisted collusion, price gouging and the application of personalised pricing.
‘Algorithmic collusion’ can involve competitors agreeing to work together and engage in illegal price fixing cartel conduct, with the purpose, effect or likely effect of substantially lessening competition in a market.
‘Price gouging’ can involve charging significantly inflated or unfair prices where demand outweighs supply. The ACCC notes that this may breach the Australian Consumer Law of deceptive or misleading conduct about prices.
‘Personalised pricing’ may have the effect of making consumers better off if they are charged lower prices, but disadvantage consumers by making them less willing to seek better offers from alternative suppliers.
When things go wrong
Sellers dissatisfied with the transaction or issues relating to the marketplace are reliant on the policies and practices that each marketplace has in mind.
Misleading reviews (fake reviews in particular) can harm sellers. The ACCC has taken action on fake reviews. The ACCC notes that some online marketplaces have processes in place to combat fake reviews and to provide ways for sellers to report customers to revise inaccurate or unfair feedback.
There are concerns about marketplace specific guarantees which are imposed on sellers by a marketplace in addition to the consumer guarantees under the Australian Consumer Law being geared towards the consumer’s favour.
Marketplaces may also penalise sellers for their lack of adherence to performance metrics such as cancellation rate, late shipment rates, and response to consumer queries.
The ACCC considers that dispute resolution mechanisms should be available to sellers to challenge, or amend, decisions, in the same way as straightforward and fair mechanisms are available to consumers. The ACCC also considers that some unfair contract terms should be made illegal, not just voidable, to assist small business sellers, as well as consumer concerns in their interaction with online marketplaces.
For information about seller compliance with the Australian Consumer Law see my article
Marketing Commentary by Michael Field What is the Secret Sauce to Selling Successfully on Online Marketplaces?
According to the Australia Post 2022 Inside Australia Online Shopping Ecommerce Industry report, Australian shoppers spent $62.3 billion online for physical goods in 2021 - an increase of 23.4 per cent over the previous year.
Online commerce represents approximately 19 per cent of all retail trade in the Australian market. 5.4 million households buy online each month – an increase of 39 per cent from 2019.
The market dominance of online marketplaces such as Amazon, Catch, eBay and Kogan creates a paradox for sellers. If the seller decides to not sell their products on third party online marketplaces, they will miss out on the opportunity to reach millions of potential customers.
If they decide to sell their products on online marketplaces, they are bound by the constraints, contractual requirements, and potential risks of each platform. This can include loss of access to, and control of customer data, and the very real risk of the platform using the customer and sales data to develop their own similar products, and then offering those products to customers at a lower price.
The issue is compounded when the seller does not have control over how and where their product may be promoted. The platform can potentially manipulate the algorithm to preference their own ‘home brand’ product. The ACCC has its eye on this behaviour, as detailed in the ACCC Digital Platform Services Inquiry report.
Sellers should develop their own secret sauce to counter this behaviour including:
- Building and maintaining a high-profile brand that occupies a unique position in the mind of the customer
- Creating direct communication channels and engagement with customers through apps, custom platforms, social media, and special events
- Investing in product R&D and innovation including proprietary ingredients and protected properties such as brand and trademarks
- Investing in digital and online marketing and developing expertise in Search Engine Optimisation (SEO) and Search Engine Marketing (SEM) to both attract and defend market share online
- Curate the range of products available on online marketplaces and retain selected products for distribution through owned channels, including direct-to-consumer
- Monitor online marketplaces for counterfeit products and ‘home brand’ products being offered by the platform