Asha Bhalsod
Hi, everyone, and welcome to the MerchantSpring podcast. We're going to do something very different today. I'm sure some of you are expected to see Paul, but we're going to try something different where I am going to be interviewing Paul today. Paul, welcome on the show.
Paul Sonneveld
Great. I was going to say it's nice to be here, but I'm usually here. Yeah, it's quite different. Interesting to see how it goes. I'm looking forward to it. Yeah, for those of you who don't know me, my name is Paul. I am the co-founder here at MerchantSpring. We are a leading analytics solution, mainly for agencies and Amazon vendors. And I usually spend time behind the mic interviewing Amazon vendor experts and agency experts like Asha and many others. But today we have reversed roles. So, yeah, looking forward to it.
Asha Bhalsod
Thanks, Paul. And a very short intro to the listeners. I'm Asha. I'm the founder of Etopia Consultancy, we're a specialist Amazon agency. So Paul, you and I have been working together for quite a while. And I think one of our conversations that we had is we feel like this Amazon space, you know, is there's just lots of agencies. So I want to kind of kick it off and ask you a question, which is, as the Amazon agency space grows, do you feel like the market is reaching saturation? Or do you think there is still room for more agencies to enter and thrive?
Paul Sonneveld
That's a really good question. On one level, I would say, yes, there are lots of agencies and, you know, obviously depends by market. There's no shortage. And I think one of the things that we are seeing is we are seeing brands hop around from agency to agency, right? So, be interesting to see, say, agencies in the UK, like of all the new clients you acquire, how many, like, are you their first agency or are you their third agency? And I think for a lot of markets there, you're getting a lot of like, you're a second, you're a third or fourth agency.
So on one hand, it's saturated. But on the other hand, I would say the market's still super fragmented, right? And the barriers to entry are really low. So I am continually surprised with new agencies entering the market. right, or new agencies starting up. So on one hand, it's saturated. But I would say, there is room for agencies who do a bad, do a good job, right, or who can build, you know, come in here with some real strength or some slight differentiation. Because there's a long tail of agencies, and there's always an opportunity to do better than, say, the bottom quartile of the industry.
Asha Bhalsod
So, you know, you say, do a good job. And I just want to push you on that, right? And as a tool provider, you know, you get to see probably a lot more than even I, as an owner of an agency, I don't know what all my competitors are doing, but define a good job, Paul.
Paul Sonneveld
I think first and foremost, and you know, just for context, I'm, I'm using some of this here. I used to, we used to run our own full service agency as well. And on one level, I would say, good job to me means your clients are loyal and sticking with you, right? So what's the lifetime, I mean, it sounds so blase, but what is the lifetime value of your client, right? So, I mean, of course, I can talk about metrics in a sense, but the true measure of if you're doing a good job is, you know, your client, after three years, your client's still there. Right.
So one of the ways to look at agencies is, you know, what's the churn of retention within their portfolios? Do we see agencies that that are frequently disconnecting accounts and reconnecting accounts? Maybe the top line, maybe they're at 50, 50, 50 accounts or 50 clients, but the number is not really growing. But there's a lot of churn activity. They're sort of spinning a lot of wheels to go forward. And then there's those you look, you know, look at some of our client accounts to go out. I remember they had that client three years ago and they still have it now. And I can see the growth.
So for me, at a headline, is your client still with you? Because that's, before I talk about metrics, for me, that is the hardest thing. Because there's 2 things that go against you there is, one, you always have the risk of there's a, there's a new person on the client side that comes in, right? 3 years is a long time. I think a true measure of success is, can you retain the business even though your key stakeholders on the client side have all changed multiple times. That is, I guess, a good indicator of success.
And then, you know, sometimes you have factors that are beyond your control, right? So, clients may go, financial difficulties, can't pay your invoices anymore, or supply chain problems and all these things. There's many reasons why clients churn, and it's not always even due to the performance of the agency. So despite all that, if you can stick onto your clients, that to me is like, success, building long-term relationships and clients. And now I can go into metrics, but that's how I sort of look at it.
Asha Bhalsod
Great. No, I fully respect and understand why you're saying it in exactly that way, Paul. But we talked about differentiation a little while ago. You mentioned, agencies when they come in and they can become, create a point of difference. How important is industry specialisation, in your opinion? Like agencies that can only, well I don't mean only, but that are really specialised in one category, like toys or electronics, do you think that they're more successful?
Paul Sonneveld
Well, I wouldn't recommend any agency just to service electronics brands, in general, that's the low margin business, it's tough, lots of product compliance issues, too, depending on what segment, but it is interesting. When I look at who are the most successful agencies in terms of growth and particularly in terms of profitability. So, I mean, we have very open conversation with all of our clients and of course, I'm not going to go into anyone specifically, but what I can say is those agencies that focus on beauty, premium beauty and almost solely on that, on that category, um, are very successful and very profitable, both in Europe as well as in North America.
So to me, that suggests specialization is helpful, particularly in certain categories. I think, of course, then there's always this overlap of around, you know, the more, if you can pick a category that has more in-bank profitability, like for me, if you can pick a category that has inherent profitability, either because you have really high margin products or you're operating gated or because there's a purchase frequency over time, like lifetime value and all that, I think you can set yourself really up for success. So yeah, I think there's benefit of specialization, particularly in category lines. The thing that has always amazed me, that I have not, it has never come up, right? But this idea about, if you're an agency, say you work in the beauty space, how comfortable am I with you also doing the same work for my competitor, right?
Asha Bhalsod
Exactly.
Paul Sonneveld
Intuitively, I would have thought that's a stumbling block or an issue, and perhaps it is at sort of lower-level conversations, but I'm yet to really encounter that. Maybe that's not, I'm not close enough, but maybe because the market is so fragmented and, you know, there's lots of beauty clients and there's lots of beauty agencies as one industry example there.
Asha Bhalsod
And I do find that fascinating, actually, talking to you about how these brands don't have non-competes in there. I know we have clients outside of the beauty category that put non-competes in there. It's super interesting. Now, we talk about specialization from a category perspective. What's your opinion on specialization between vendor and seller?
Paul Sonneveld
Vendor for me is a completely different business model, a different way of, there's lots of, I mean, obviously advertising, even advertising strategies can differ.
Asha Bhalsod
That’s true.
Paul Sonneveld
Servicing a vendor really, really well requires a completely different skill set in my view. And that starts even with things like, and it depends what you mean, full service in the context of a vendor, right? Because I think this is not completely defined yet, but even just getting like things like purchase orders and delivering goods into an Amazon warehouse and avoiding all the chargebacks and things like that, there's a whole piece of optimization, avoiding issues that, that kind of look and smell very different in the seller space.
There's different challenges, obviously, with FBA and all of that. But from a vendor, that's very different. Of course, then you've got the whole annual negotiation cycle, right? That is a whole, how do you prepare for that? Some agents take a very active role in supporting and coaching and helping their clients through that process. Now, that is a whole, that's like a commercial skill set, right? Very, very different.
And then, you know, there's the bit around, you know, how do you the whole retail analytics, sourcing, manufacturing, all of that. Now, I think that's probably the easiest bit to get your head around because it's just analytics. You have to sort of understand it a little bit. But they're all quite distinctly different, you know, and I'm not even touching on like, how does the finance flows work and the remittances and all of that. It's a whole bits. Right.
So I do see the skills as very, very different, very, very different. It's one thing to be a 3P agency, take on a vendor with a view of transitioning them to 3P over a six month period, or, you know, doing a little bit of a hybrid piece. It's another thing to really say, look, we're serving vendor clients here, and we're doing full service. I think it's a different ballgame. Yeah, hope that makes sense.
Asha Bhalsod
Yeah, it very much does. So You know, we talked about where clients sometimes switch. And, you know, sometimes it's just the nature of the beast in the agency space, right? What do you think are the most common reasons for why clients are switching between agencies?
Paul Sonneveld
Look at the top, I would say, change of personnel. There's a new head of e-commerce that comes in or head of Amazon, they've got a wonderful relationship with another agency, they've worked with them for years, you're out and the other agency is in. I think that's one of the most common reasons that I see and it's really hard to fight that. I think the best thing you can do is build strong relationships with every person you work with. And as soon as your context change companies, you try and do the reverse, right?
Second piece, I would say, is expectations management, right? Promised, I mean, I still, I'm carrying some scars, personally, you know, from when we were an agency, promising the client or setting their expectations that they're going to 5X their sales and you only hit 3.5 and for some reason there's an emotional response and 3.5 is not good enough. So poor expectation management. know, and there might be reasons, of course, in our case, you know, it was always, you know, the client's fault wasn't our fault, right? No inventory and the like. I'm saying that tongue in cheek, by the way. So that's, expectation management is one as well.
For the larger agencies, a lot of times what I've hear is kind of there's this mismatch between the retainer, I'm seeing this in the US, a lot where the retainers tend to be a lot higher. High retainer used to get a lot of focus and energy and effort from the agency, maybe there's a particular account manager they really like working with, that account manager either has moved on, or they're now, you know, you know, looked after by perhaps a more junior person, they feel they're not getting the value, they're not getting that same focus, time to change. They feel like the value for money relationship has drifted somewhat.
And then last but not least is cost pressure. There is a lot of brands out there who are really feeling the cost. They're feeling internal like cost pressures around their own cost of goods and supply chain, struggling to really realize the price increase on Amazon. All the Amazon fees are going up and sometimes just they love working with their agency, but there's just not enough left over to pay for it. And which, you know, sadly is the case. And then they may go from like a full service agency with everyone being onshore to an agency where, you know, it's like 20% onshore and 80% offshore that have a much lower cost model.
Asha Bhalsod
Yeah, I absolutely agree. And it's tough, right? You're faced with so many of these challenges. I think there's also a, you know, we're not really touching on it, but there is this whole belief almost that an agency has got something like a Midas touch that they'll come in and they'll just poof magically, you know, make everything in the Amazon ecosystem better. But there's so much root cause analysis that needs to happen, right? So much that needs to happen from changing even my internal mindsets and making sure from a vendor perspective that Amazon's allocated the right amount of stock, which, you know, might not have historically been.
But yes, I fully respect and again, understand why you're saying some of these things. With that in mind, though, there is large agencies, and we won't name them, but we know who we're talking about, right? There's the beauty agencies. I won't even call them small. Let's say they're specialists, right? There's also the rise of freelancers. Then there's the option of in-house. How do businesses make decisions then on who they want to have large, medium, boutique, freelancers, in-house, and you see the chopping and changing that happens, right? Do you see the chopping and changing happening between large agencies to medium-sized agencies, et cetera?
Paul Sonneveld
I see a lot of the chopping and changing happening between the medium-sized agencies. They're all sort of similar in size and scale. The small agencies, typically the way they start out is they have a series of relationships and that sort of generates their first set of clients a lot of the times.
A lot of them will start out like you know, an advisory or a consultancy or maybe even as a freelancer and then they're doing that for two or three clients and they find there's another client that is interested and it's a bit of word of mouth and all of a sudden they find themselves with five clients and they're like, okay, well now we've just woken up on the Monday morning and go, actually we're an agency now, we've moved on.
I'm seeing a lot of the, I mean, if I think about the absolute big end of town, a lot of times they are tech media companies that do a much larger piece of work. So either, you know, either they do the whole digital strategy for a particular brand, or, you know, all of the Google advertising, whatever that looks like. So they're pretty tied in, like, sort of the Amazon business might be just one of the business streams. So it's, it's kind of hard, much harder to extract, you know, you're talking RFPs, you're talking longer lead times.
You're also talking like the bigger enterprise brands, you know, like harder to long lead time to sign lots of hurdles. But once you're in pretty inert in terms of changing out there. So and then of course, then you have the same and this is particularly true in the US where you have a lot of what I call full service retail brokers. So the guys that traditionally represent brands, you know, in front of the buyers and bricks and mortar stores. A lot of them now have e-commerce arms. You know, again, there's quite a bit of overlap in terms of the overall service.
So I think most of the churn I'm seeing in that, in that sort of, that middle band, particularly when it comes to sort of Amazon native, native brands, you know, Amazon is their prime business. They're always evaluating, should we take in in house? Should we get another agency? How do we do better? Just because it's, Amazon is not, the third or fourth channel, it's like their only channel, or maybe 80%, another 20% is, I don't know, a bit of Walmart and Shopify. So yeah, it's that middle band.
Asha Bhalsod
Great. And, you know, we talk about growth from like small agencies, and what you said resonates so much with me, right? Because that's how Etopia was founded. I started off as a freelancer, and we're a fully fledged agency all of a sudden. And I go back to that journey of how do you grow? And it's almost like you're looking, you just sometimes are faced with a number of clients and therefore you have to grow. What specific trends, though, have you noticed in terms of the agencies that are growing faster than the others? And what do you reckon is driving their success?
Paul Sonneveld
That's a really good question. I often wonder that because I can see, I mean, one of the things I do, we, you know, I look at every morning when I log on, I can see all the new connections that have been connected to our platform. And there are certain, certain agents, they are connecting new accounts all the time. And it does make you wonder, what is happening there? I would say, what is it there?
Think one, some agencies, particularly in the US, they are really good at marketing themselves, right? I don't want to get into names, but they've just established that sort of critical reputation, where they are known for educating other agencies in the marketplace. And there's a lot of the founders, they are literally just full-time PR person for those agencies. And they're definitely punching head and shoulders above the rest when it comes to presence, credibility and sort of positioning in the market. And I think that, that gives them a lot of lead flow. Also a lot of churn, because a lot of times the expectations don't match kind of the front. but that generates a lot of lead flow.
The other agencies where that I see kind of connect a lot is they've worked out sort of a left-field or an alternative approach for a client acquisition, right? So they're not in the kind of, let's do the standard thing. Let's hire a marketing agency. They're going to try and get us five bookings with Amazon. Let's just, let's get the Amazon seller list. Let's get the contact details. Let's, you know, let's look at their ASINs and provide some commentary around, you know, we can help you here. That's very much a standard approach. And that does work. But that doesn't generate the quickest acquisition.
You know, typically, what I see is, some agencies, they've managed to find alternative routes to market. Good examples would be, I'm thinking particularly of some agency in the US who've done partnerships and deals with, I don't know what the generic name is for these things, but you know, export-focused government departments in South America, right, where they are being referred like all brands in LATAM that now want to expand to Amazon US, they have positioned themselves as the go to point of contact, you know, they're the official government partner, right. There will be one example.
Another example is, think about an agency in the Netherlands, you know, they're very successful in, they're very focused on a particular industry. They've really partnered with an industry association. And whenever the industry gets together, whenever the industry has a conference or a ritual, like they are there, they are like the e-commerce representative. And it's a bit like a gated community, right? There's no one else there. They're running their own race.
It's those sorts of acquisition strategies that I see that seem to work disproportionately well. You know, and it's all about how do you crowd out competition, right? How do you get your exclusive access to a series of leads? So it's not competitive. Plus, they're super warm because it comes with a big endorsement from a more formal body as well.
Asha Bhalsod
Yeah, yeah. Thank you, Paul. That was actually insightful. And it's making me think about also how we need to do some things differently. So in the agency landscape, we know that it's evolving. We've got large, small agencies formulating all the time. Do you think it will consolidate? Do you think that the expansion and the ever-expanding agencies will almost merge together.
And I think we saw a little bit of that, right? We saw a little bit of aggregators buying businesses. We saw bigger agencies buying smaller agencies. We've seen acquisitions of larger, really well-known agencies being brought out. One quite recently, actually, as well. What does the landscape look like over the next couple of years, in your opinion?
Paul Sonneveld
It's, well, I would say consolidation is definitely happening, but at a relatively minor scale compared to the size of the market. I still see more agencies starting and popping up than I see being agencies consolidated. So I think the net number of agencies out there isn't necessarily shrinking, right? I do see consolidation around, you know, if you think about the big, um, The holding companies, a lot of them have bought e-commerce or Amazon agencies. A lot of, again, the retail service brokers, they've bought agencies.
Right now, as I'm talking to both my customers on both sides of the Atlantic, there's a lot of interest from established US agencies to buy agencies in Europe. They're like, we've tried to expand organically. It's just failed. We need expertise on the ground. So there is a bit of a movement, some movement happening there as well. I see a couple of agencies. I mean, in German market, we've seen quite a bit of a consolidation, really big vendor-focused agencies going well. We really need to get like a bit more of a 3P focus as well. You know, as well as the acquisition play around, you know, I'm servicing a certain type of client, different ICP, but I need maybe like a lower cost multiple as well. So I can, you know, service everyone.
So we're seeing lots of activity. I probably would say I'm seeing more agency owners that are keen to sell. We're getting to the stage now where a lot of agency owners have been doing this for, I don't know, four to eight years. A lot of them are going, right, it's time to exit. I want to do something else. There's a lot of agency owners that will pull me aside and say, hey, Paul, just so you know, I'm going to look to sell my business in the next two years. you know, let me know if you know anyone who's acquiring, let me know. And, you know, we'll try and do introductions and all that.
I don't see the buying side is not as strong yet. You know, I'm we're on really good terms with a couple of not aggregators for brands, but aggregators that buy agencies and they have not made many acquisitions, they would have loved to do more, but they're, I think they're really looking for that premium quality agency. And, you know, there is a pretty big mix out there. So I think we'll see more, but I'm actually surprised that it hasn't gone quicker.
I feel like it's being done around the edges, or actually, sorry, just another point that I'm saying, I'm seeing other agencies being acquired. But it's not a, what I would say, genuine acquisition. You know, is it really an acquisition or is it, you know, you're acquiring agency is one or two-person agency. They were just tired and it's a way for them to, you know, exit. It's a really low value. You know, no one's walking away millions of dollars. It's just take over the client, make sure that's a smooth transition from them. You know, sort of exit gracefully. But you know, not like true M&A for strategic reasons, I'd say.
Asha Bhalsod
The airport, just this one question, we could sit for another hour and talk about this, right? But it's interesting for me because I look at the big agencies that have been bought out and how they've almost naturally bowed out of the market because that personnel and skill set that was driving the success of that business has made their money and fundamentally left. I also think that those agencies that are building to sell versus the ones that are building to genuinely serve a client and enjoy the journey that they're on is a real differentiation between the ones that are successful and aren't. What's your opinion on that?
Paul Sonneveld
Do you mind repeating the question again? I just want to make sure I got the last bit there.
Asha Bhalsod
Sure. Agencies that are building to sell versus agencies that are just wanting to go and enjoy the journey that they're on. Who is more successful then?
Paul Sonneveld
I think that's a really hard question to answer because a lot of people, I just don't, being a business owner myself, I guess I just don't, people go like, I want to be in this, you know, I'm here for fun. I'm just doing this. I'm not looking to exit. To me, it's like, well, I know what it's like to run a business and how draining it could be. And also the space we're operating in is moving pretty quickly. So, you know, what does this look like 10 years from now? Are you really going to be there? Right.
So I'm a little skeptical about people who say that, but I will say, I will give you one anecdote, which is my, this is one of my favorite anecdote. And if this client is listening, he will know who I'm, that I'm talking about him. I really respect him. Right. So this, it's a one man agency, has been one man, one person operation since the beginning, and he's very clear, he's not looking to employ anyone, right? His whole mission is, how do I make, how do I build the most profitable cash generating agency. And actually, this is much more about cash flow generation.
There's no real exit potential there because it's 100% focused on this person. But he's very clear. He's got 10 clients. His focus is, how do I serve, how do I give them the best possible service with the lowest possible cost? And I say that not, I'm talking about efficiency here. He's the most efficient guy when it comes to process structure, dealing with them. And then his game is, you know, how do I look at my 10 clients every year? I don't want to take on more clients, but how do I replace the client that I'm only charging $5,000 as a retainer a month with someone who I can charge $10,000, right? So it's all about, how do I serve 10 clients well, and how do I keep growing them? And how do I extract a lot of cash out of that?
Now it's a completely different model, completely different model. He will struggle to sell because there's nothing to sell. Like, unless he's prepared to have an earn out of 50 years, you know, it's kind of hard. But it is a completely different model. I know I'm not answering specifically your question, but I think the audience might find that kind of interesting.
There is a different way, right? Because if you think about it, agencies are a people business, right? Overheads are generally low other than people. It should be a reasonably profitable business. In fact, it should be very profitable, particularly in the age where everyone's remote, you're not paying for expensive prime real estate.
If you're struggling to make really good margins as an agency, you're probably doing something or you're missing something, right? That sounds probably a little bit harsh. But, you know, just, we ran our agency for about 4 years. And this is how we funded most of the development of our platform in the early stages, because it was just a cash generating machine.
Asha Bhalsod
I've got so many more questions to ask you, but I'm conscious that we're running out of time. We do have one question from David. So, Paul, do you often see brands switching between models, for example, moving from a big agency to in-house or hiring a freelancer after being disappointed with the agency experience? Really good question.
Paul Sonneveld
Yeah. I see brands trying to approach agency staff and then do it in-house. I definitely see that.
Asha Bhalsod
Oh, yes.
Paul Sonneveld
I think one of the, this is the thing I never kind of completely solved, right? A lot of agencies will have sort of a base fee plus commission, right? Which, you're probably thinking, where's he going with this, but just hear me out. You're thinking, well, that makes sense, you know, because it's, you're structuring for the win-win, right? If the sales go up and the profits go up, you get a greater, greater share. That's great.
But how do you deal with a scenario where a client goes to a certain size and actually they're, you know, they might be paying, I don't know, a hundred thousand dollars US or 150,000, whatever the number is. They get to the stage and you go, well, actually I can hire a full-time person for that, an expert, and I can start doing that myself. And then know, there's an opportunity here to basically lock in a cost as opposed to have this ongoing variable element here.
So I think there's a, there's a strong temptation there. And I don't really have a good answer yet in my head around how agencies go against that, right? Yes, we can lock people into contracts, or you can sort of step down things, or you can try to convince them of your expertise. But that's the hard one. So I think that is a natural question that when a brand gets to a certain size, they will ask themselves. The hedge against that for me is how do you drive the more complexity?
So if they're just a one-channel operation, that becomes easier. But if they're now operating Walmart or TikTok shop or doing all these other ones, then moving away from the agency becomes harder. Right. So I guess I'm starting to answer some of my own question around, you know, the lock in and the loyalty around the agency piece. But yeah, if it's just say Amazon in the UK, 3P, they're now getting to a stage where they're paying so much in commission to the agency that maybe there's a better way of getting economy out of that, then they'll do that. So it's, it's usually that way. But then, you know, sometimes it goes and swings around, if that's true.
Asha Bhalsod
Totally agree. And, you know, David's point of hearing, my agency didn't deliver at all. So the, so all agencies must be terrible. It's something we all experience, right? It's something that as an agency owner, we, you know, I often hear, Well, actually, my freelancer didn't do a good enough job, or my in-house people can do this job better. That's unfortunately the nature of what we do in the Amazon space. And sometimes, one bad experience can leave a sour taste in an individual's mouth, and they decide to go in-house. But also, the grass isn't always greener. So yeah.
Paul Sonneveld
Yeah, that's true.
Asha Bhalsod
Paul, I really enjoyed this. Thank you so much.
Paul Sonneveld
Yeah, that was quite interesting, actually. You shared the questions too. I never really get to… get to think much about this. But I think I'm probably, I mean, we at Merchantspring are kind of in a fortunate position where we do get to talk to a lot of agencies globally on a weekly basis. You know, including actually, I see David here, I just look at his surname, and I think he and I had a great catch-up in Germany a couple of, about a month and a half ago. So yeah, no, it's great. It's a fantastic community. And yeah, It's an interesting perspective. So yeah. But thank you so much for hosting.
Asha Bhalsod
No, thank you for being the guest on your own show. I just want to wrap up almost and say actually, listening to you and actually having been in this space for five years, the Amazon agency space was fragmented. It's actually a really friendly agency space and It reminds me a little bit about the toy industry, which I was previously connected to. It doesn't matter whether you're competitors or not. We're all kind of friends, and it's nice to kind of have these kinds of open conversations with you. So thank you.
Paul Sonneveld
You're most welcome, Asha. It was fantastic. Enjoyed it. Thank you for the challenge.
Asha Bhalsod
See you very soon.
Paul Sonneveld
All right. Thanks, everyone.
Asha Bhalsod
Bye-bye.