Read the Sell Direct-to-Consumer or Through Amazon? case and complete the case analysis.1.Provide thorough and thoughtful analysis 2.Note: this case has a key decision to be mad

ARTICLE HBR CASE STUDY Sell Direct-to- Consumer or Through Amazon? An e-bike maker weighs the trade-offs. by Thales Teixeira

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This document is authorized for use only by Jia ye Li in MIS 441 Summer 2022 taught by Carlos Torres, Washington State University from May 2022 to Jun 2022.

It was filled with row after row of electric bikes, from expensive models to cheap knockoffs that seemed held together by spit and a prayer. Though they varied in style and price, the bikes did have one thing in common: where they were being sold. The website he was looking at, flush with options, was Amazon.

As the CMO of PedalSpark, a small maker of high-end electric bicycles, Mark was considering strategies for selling the company’s new ride. The market for electric bikes had exploded in the past few years,1 especially in China, and it showed no signs of slowing down. PedalSpark’s signature bike, a $4,000 luxury model available only through the company’s website, was selling well and had been named to a few “best e-bike” lists. Now PedalSpark was about to introduce a cheaper, entry-level model, which it hoped would have broader appeal. The bike was tar- geted at price-sensitive riders, people who were willing to trade higher battery life and motor power for a lower price tag.

Two years ago PedalSpark had hired Mark away from his marketing position at a children’s bicycle maker. That company had sold exclu- sively on its own site, and Mark’s expertise had served PedalSpark well with its first product. He was excited by the challenge of selling the new bike in an increasingly crowded market, but the question was how to do it.

His two direct reports were split. Gideon Bear, the sales manager, tended to favor aggressive approaches. He wanted to sell the new model on Amazon, which had, as he’d put it, “a few more customers than our site.” But Tamar Nourse, the product manager who’d recently come on board, was worried about whether the bike would stand out on Amazon. She thought that keeping the new model on PedalSpark’s site, where their team could control the entire sales process, would be better over the long term.

Bzzt. Mark glanced at his phone and saw a text from the CEO: Where are we on the online channel strategy? Looking forward to your presentation.

Sitting in his office, Mark Ellinas frowned at his computer screen.

THALES TEIXEIRA is the Lumry

Family Associate Professor at Harvard Business School and the author of Unlocking the Customer Value Chain: How Decoupling Drives Consumer Disruption (Currency, 2019).

HBR’s fictionalized case studies present problems faced by leaders in real companies and offer solutions from experts. This one is based on the HBS Case Study “Selling on Amazon at Tower Paddle Boards” (case no. 517047-HCC-ENG), by Thales S. Teixeira and David Lopez-Lengowski, which is available at HBR.org.

CASE STUDY SELL DIRECT-TO-CONSUMER OR THROUGH AMAZON? AN E-BIKE MAKER WEIGHS THE TRADE-OFFS. BY THALES TEIXEIRA

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2 Harvard Business ReviewMarch–April 2019

For the exclusive use of J. Li, 2022.

This document is authorized for use only by Jia ye Li in MIS 441 Summer 2022 taught by Carlos Torres, Washington State University from May 2022 to Jun 2022.

The new model was almost ready, and the CEO wanted a decision soon. With the presentation scheduled in two days, Mark still had some time to think—but not much.

GIVING INFORMATION TO THE ENEMY Mark closed his laptop and walked down the hall to Tamar’s office. He knocked on the open door. “Hey, got a minute?”

Tamar looked up and adjusted her thick-rimmed glasses. “Hi, Mark. What’s up?”

He sat down across from her. “So, about the bike. In the meetings with Gideon it feels like you’ve been holding something back. We have to make a decision, so I need you to tell me what you aren’t telling me.”

She took a deep breath. “Mark, I’m still new here, and I don’t want to rock the boat. But I really think selling on Amazon would be a terrible move for us.”

“Why, though?” “The day we put the bike on sale,

Amazon will start vacuuming up information about our customers, our margins, and the market’s potential. If it ever decides to get into the e-bike business, we’ll have hand-delivered all the data it needs to squash us.”

“I know that worrying is part of your job, but is it possible you’re being a little paranoid here?”2

“You should ask my B-school class- mate Marta.”

“Who is she?” “A few years ago she was the founder

and CEO of a successful start-up. She’d had an idea for a new kind of tablet stand. She spent a year developing a

prototype and finding a manufacturer in China that would work with her. Then she started selling on Amazon. Now she’s the former CEO of a company that doesn’t exist anymore.”

“Wow. What happened?” “For about a year the tablet stand got

great reviews and sold well at $40 each. During the back-to-school season, she was moving a few thousand a month. Then a bunch of copycat products started popping up. She had to fight them off as best she could. She complained to Amazon, but it didn’t do anything, of course. Then Amazon Basics debuted its new tablet stand.3 It was a lot like hers, though different enough to avoid a lawsuit. It was also half the price.”

“E-bikes are a lot more complex than tablet stands, though. What are the chances Amazon will make one of its own?”

Tamar’s lips curled into a small smile. “I don’t know, but if we went head-to-head against Jeff Bezos, would you put your money on us? Amazon’s private-label products are projected to hit $25 billion in sales by 2022.”

Mark shuddered. “A dark thought to have before lunch. How do you figure our chances against the existing competition?”

“We do have great bikes, but quality isn’t enough on Amazon. Whatever your product is, there’s always a cheaper version, and usually that’s the one people buy. It’s a never-ending, anything-goes price war there. I’m guessing that isn’t what we want people to associate with our brand.”4

Nodding slowly, the CMO rubbed his chin. “Good point, and I don’t disagree.

Gideon is pretty keen on the Amazon idea, though.”

Tamar adjusted her glasses again. “I get why—more customers and more visibility. That may help us sell bikes in the short term, but what about the long term?5 If people buy the new model on Amazon, will they be loyal to the maker or to where they bought it? We built the PedalSpark brand by selling the luxury bike on our website. Why try to fix what’s already working?”

TRYING SOMETHING NEW That afternoon, Mark asked Gideon to meet him in the cafeteria for coffee. The sales manager poured milk into his steaming cup and swirled it around with a straw. “Amazon, Mark. You know what I think. What are you thinking?”

“Undecided. There’s a lot of risk in selling the bike there, but a lot of upside, too.”

“Yes! I’m glad you see that. Amazon Prime has over 100 million members,6 and it’s growing. Imagine the sales if a fraction of them ordered the new bike—and imagine how many of them will if two-day delivery is available. Someone gets excited about e-bikes on a Wednesday, and by Friday she has one of her own to ride. The possibilities are endless.”

“It’s fun to daydream about, Gideon, but are we set up to handle higher volume and a shorter fulfillment window? Orders that come through our site have a shipping time of two weeks. I’m nervous about promising something we can’t deliver—and to a bunch of new customers, no less.”

CASE STUDY CLASSROOM NOTES

1. E-bike sales are projected to reach 40 million units by 2023; more than 34 million of those will be sold in China.

2. Amazon has a huge advantage over the merchants on its site. What else should Mark and PedalSpark’s leaders think about to improve their chances of succeeding?

3. Amazon has about 130 private labels so far, in areas ranging from simple electronics to clothing to pet food to furniture.

4. If PedalSpark has to compete on price, what might be the consequences for its brand image?

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3 Harvard Business ReviewMarch–April 2019

For the exclusive use of J. Li, 2022.

This document is authorized for use only by Jia ye Li in MIS 441 Summer 2022 taught by Carlos Torres, Washington State University from May 2022 to Jun 2022.

“But that’s the beauty of Amazon,” Gideon said, his voice rising in excite- ment. “We have options. I know I’m telling you your job right now, but we can sell product to Amazon for it to resell, or sell the bikes ourselves and let Amazon handle the warehousing and shipping, or list them on Amazon and ship them on our own. You’re always talking about the value of running small, controlled experiments, so let’s try one and see what happens. If it doesn’t work, we’ll switch tactics and adapt as we learn.” He grinned. “Everyone in this company agrees we have a great new product. All I want is to get it to as many people as possible.”

“There are three options, yes, but they don’t give us a lot of wiggle room if things go badly. We may be able to play with the bike’s price a bit, but we can’t lower it that much or we won’t make any money—and it could make us look cheap, too. I do think a higher price point is fair for the bike we’re selling. Even luxury brands that sell on Amazon today hesitated about it for a long time, and it would be a good idea for us to think about why that is. The jury is still out on whether they benefit by being on Amazon.”

“You know who sells on Amazon? Apple. Versace. Rolex. Jimmy Choo, Mark—Jimmy Choo. And more will follow. Whichever companies don’t will be on the wrong side of retail history.”

“We aren’t Versace, Gideon. Besides, a lot of those brands sell a very small subset of their products on Amazon—and usually not their flagship ones. They save those for their own sites or stores, where they can control the buying experience. We’re trying to raise our profile as a high-end brand,

right? How would we look if we were one of dozens of e-bikes in Amazon’s listings?” 7

“Sure, but we already have the luxury bike selling well on our site. I agree, we shouldn’t change anything there. But the new bike is for everyone. And everyone is on Amazon.”8

Mark took a sip of coffee, thinking. “Look, I get it, you have some

concerns,” Gideon continued, “so let’s talk numbers. Based on what our competition is doing, I figure if we put the new bike on Amazon, we can reasonably expect to sell 10,000 units a year.”

“At what price point?” “$899. That’s a little higher than we’ve

been talking about, but it gives us some room to go lower if we need to.”

“And what are the latest numbers for luxury bike sales on our site?”

“Last year we sold 2,000 units at $4,000 apiece. Remember, the new bike won’t be only on Amazon. We’ll sell it on our site, too.”

Mark scratched his head. “What we really need is a way to quantify the risk that Amazon will enter the e-bike market. It would make this so much easier.”

“That’s the big mystery. Amazon will have all the consumer data, and we’ll have very little of it. But look at it this way—there are already a lot of e-bikes on Amazon, so they’re already watching the market. Even if they do make their own bike, that could be years away. We might as well find new customers while we can. People can’t buy our bikes if they don’t know about them.” Mark stared at Gideon for a long moment. “Let me ask you something. How are you so sure about all this?”

Gideon laughed. “In my moments of doubt, I think of Instant Pot. It’s a quality appliance—not quite luxury, but good—that has a cult following and that made its name on Amazon. At one point, 90% of its sales were from there. Do you know how many Instant Pots were sold on Prime Day this year?”

“No, but I’m a little surprised you do.” “I cook a lot. The number, Mark, is

300,000. In just 36 hours. I think we could be the Instant Pot of e-bikes.”

The CMO stirred his coffee. “You may be excitable, but I’ll admit it’s kind of contagious. I just can’t shake the feeling that once we open the door to Amazon, there will be no closing it.”

Gideon held up his coffee for a toast. “To opening the door—just a crack—and seeing what’s behind it.”

SEARCHING FOR ANSWERS Back in his office at the end of the day, Mark was staring at his computer again. Tamar and Gideon seemed so sure of what to do, but the CMO was struggling to make up his mind.

The screen of his laptop still showed the Amazon site, with its rows of e-bikes. Sighing, Mark opened Google and typed “What are the dangers of selling on Amazon?” into the search bar. The query returned almost 250 million results.

“Hard to tell whether there are more horror stories or more success stories,” he muttered. “Well, this bike isn’t going to sell itself. I have to decide something, one way or another.”

Reprint Case only R1902X

SHOULD PEDALSPARK SELL ITS NEW, LOWER-COST BIKE THROUGH AMAZON?

6. Of the U.S. consumers who make $150,000 or more, 70% are Amazon Prime members.

7. How might selling on Amazon help—or hurt—PedalSpark’s image as a high-end brand?

8. When looking for a product online, more than half of consumers (54%) start with Amazon.

5. As the e-bike market continues to grow and mature, what factors will determine which companies succeed and which don’t?

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Harvard Business Review March–April 2019 4

For the exclusive use of J. Li, 2022.

This document is authorized for use only by Jia ye Li in MIS 441 Summer 2022 taught by Carlos Torres, Washington State University from May 2022 to Jun 2022.