Marketplace Margins: Understanding the True Cost of Multichannel Selling

January 13, 2025

As the cost dynamics of selling on third-party marketplaces evolve, harnessing ecommerce accounting software becomes all the more important.

Key Takeaways for Ecommerce Brands:
  1. The direct-to-consumer (DTC) model has lost its dominance, with brands shifting to a multichannel strategy that leverages multiple marketplaces. 
  2. Marketplace selling presents both opportunities and challenges. While offering benefits like expanded consumer reach and reduced risk through diversification, it also introduces complex cost structures and margin pressures.
  3. Success in this new environment requires utilizing ecommerce accounting software to track variable costs, develop effective pricing strategies, and make informed, data-driven decisions.

Technology has always driven change, but the pace of change in business – dictated by the digital revolution – has been particularly breathless.

Take the ecommerce space, for example. Five years ago, the DTC model was all the rage, celebrated for yielding higher margins and deeper engagement with consumers. Wholesale brands were racing to sell directly to customers through websites and apps, with some even reaching unicorn status.  

Fast forward to the end of 2024. The DTC unicorns have tumbled back to earth or disappeared. The rising cost of running a DTC brand – especially customer acquisition costs – have increased sharply, eroding business profitability. And prominent industry publications are declaring that “the era of the DTC brand as we know it is over.” 

While this statement should be taken as a bit of hyperbole, the appeal of selling exclusively via one direct-to-consumer channel significantly diminished. The pendulum began to swing toward third-party marketplaces. A good illustration of this shift is Color Wow, a haircare brand that enjoyed moderate success as a pure DTC company but blew up on TikTok Shop in 2023.

The Four-Marketplace Formula

Today, most brands opt for a multichannel strategy, combining a DTC online store built on an ecommerce platform like Shopify or Magento with selling on marketplaces such as Amazon, Walmart, and TikTok Shop. According to a new report by Rithum, a solution that helps deliver third-party experiences, brands use four marketplaces on average, mainly to expand their consumer base and reach customers on channels where they currently shop.

Additional findings include:

  • In the last 12 months, 68% of brands saw their revenue from marketplaces increase.
  • 70% of brands report that up to half of their revenue comes from marketplaces, with 29% saying third-party selling generates more than 50% of their total revenue.
  • Three out of five brands plan to increase the use of marketplaces over the next 12 months.
  • 82% of brands take advantage of the integrations marketplaces offer with platforms such as TikTok and Instagram to sell products on social media. 

“Brands are embracing the flexibility that third party commerce provides to thrive during turbulent times,” said Philip Hall, Managing Director of Rithum Europe. “With online shopping more fragmented than ever and margins becoming tighter, having a presence across multiple marketplaces is becoming a virtual necessity for most brands.”

Balancing the Risks and Rewards of Diversification

Multichannel selling offers many advantages. From enhanced sales to greater brand visibility and reduced risk through diversification, listing the same products across several platforms is an excellent strategy for optimizing a business's potential. However, it also presents certain challenges, particularly in the areas of ecommerce accounting and bookkeeping.

It starts with costs. “When selling on marketplaces,” said Alex Avramenko, Head of Commerce Growth at GoDaddy, an internet domain registry that offers various services for online businesses, “you need to understand all the costs – overt and hidden – to ensure you’re not actually losing money.”

One of the first things you have to look at are referral fees. Amazon, for example, imposes a referral fee of 8%-15% of the product's price, though it may exceed that range based on the item. Etsy charges 6.5% of the total order amount plus payment processing fees. However, noted Avramenko, “these fees can change on a whim and impact your business profitability, making it difficult to predict income and compete on price.”

Referral fees are part of a brand's variable costs. Unlike fixed costs – expenses that remain constant regardless of sales volume – variable costs fluctuate based on the number of orders or transactions, including:

  • Cost of goods sold (COGS)
  • Credit card fees 
  • Sales commission (referral fees)
  • Promotions
  • Shipping costs

“Besides marketplace fees,” said Avramenko, “you also need to factor in rising shipping costs based on the types of products you sell. Things can add up fast. You should put together an overall pricing strategy and carefully consider how the different fees will impact your bottom line before committing to an online marketplace.”

Data-Driven Decisions: The Financial Blueprint for Ecommerce Success

The key to building a pricing strategy is understanding the true cost of sales. This means taking into account all your variable costs on a per-unit (SKU) basis, which requires two things:

  1. In-depth knowledge of ecommerce unit economics.
  2. An ecommerce accounting software.

The second point is critical. An ecommerce accounting software not only provides accurate, detailed, and reconciled financials (i.e., P&L, balance sheet, and cash flow statement) – but also keeps track of key metrics in ecommerce accounting, such as shipping and fulfillment costs, to help brand operators better understand their unit economics.

Understanding unit economics could be the difference between seeing your business make money or being in the red for the foreseeable future. Knowing how much each sale costs allows you to calculate gross margins and break-even points, determine the best price for your product, forecast profits, and optimize your product offerings. 

As the cost dynamics of selling on third-party marketplaces evolve, harnessing ecommerce accounting software becomes all the more important. Those who embrace the tools necessary for financial clarity and prioritize data-driven decisions will not only thrive – but also future-proof their operations in an increasingly competitive ecosystem.

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