As eCommerce continue to grow it share of retail sales, many brands are realizing that now is the time to re-visit their eCommerce strategy, and, in particular, how Amazon plays a role in that strategy.
In my talks with brands, I’m regularly asked whether it is better to become a vendor to Amazon (called First Party Selling, or 1P), or to simply sell on Amazon as a 3rd party (3P). Here I’ll share the differences, based on my own experience, research, and in talking with dozens of brands.
Becoming an Amazon Vendor (1P)
If you have popular products that sell well, at some point you will likely receive a call from the Amazon to ask you to become a vendor.
For many brands, receiving this call can be quite exciting; particularly because Amazon is going to tell you that they are going to place large orders, promote your products on the market place, etc…
While selling 1P may seem like a no brainer, for those that have gone down that road, the reality is that it is filled with potholes, curves, and various other surprises.
Before we get into the surprises, let’s take a quick look at what becoming a vendor to Amazon entails.
- Amazon will buy directly from you
- Amazon will tell you they want a large discount (15-25%)
- Amazon will not sign a MAP agreement
- Amazon’s payment terms are typically 60-90 days
- Amazon will handle promotion, sales, and fulfillment
Amazon states that when you become a vendor you benefit from the following:
- You’ll get your product in front of customers in just a few days
- Amazon takes care of promoting, selling, and shipping your product
- Fulfillment will be handled by Amazon’s world-class fulfillment centers
- Amazon will introduce your product to hundreds of millions of customers already shopping on Amazon
- Your products will become eligible for free 2-day shipping for Prime members
- Amazon will handle customer service and returns
- Amazon will handle pricing and sales forecasting
- Amazon will handle inventory management
All the points made are true when you become a vendor to Amazon…but what they fail to mention is that when you choose to work with a third party seller like Welch Products, you will receive all of the same benefits, and you will avoid the downsides of becoming an Amazon vendor.
The Downsides of Becoming an Amazon Vendor
In my discussions with dozens of brands who’ve sold to Amazon as a vendor, I’ve learned that most regret the decision – generally for the same few reasons.
Amazon talks a good talk about providing you with reasonable pricing, all the while negotiating you to provide excessive discounts. Then (even if they’ve mentioned no extra fees), you find that between chargebacks, marketing co-op dollars, early pay discounts, etc., you’re getting hit with 15-20+% additional off invoice charges.
Lack of Pricing Control (The Race to the Bottom)
The first (and generally biggest) reason most regret becoming a vendor is that when they agreed to do so, they didn’t realize that they were going to lose control of product pricing, and this turned out to be, in some cases, catastrophic for their business.
Here’s what you need to be aware of…if you have a Minimum Advertised Price (MAP) policy that you enforce with your brick & mortar customers, Amazon will invariably end up violating that MAP price.
When they do, your offline customers are not going to hesitate to tell you how much that is hurting their business…and, as was the case with one brand I spoke with, these offline retailers simply stopped buying products.
Depending on how much of your total volume is offline, this can be a pretty big deal with dramatic cash flow implications.
So how and why does Amazon ignore your MAP policy? Because they didn’t sign your MAP agreement (they won’t) – and they don’t really care about your company.
Amazon only cares about the consumer experience, and having low prices is a huge part of ensuring that consumers get the best experience possible.
Below is an example of this. As you can see, Amazon wants to own the buy box, so they ensure their price is always the lowest.
Now here’s an even better example of Amazon’s aggressive pricing strategies. Take a look at Amazon’s price of just $15.98. No other seller’s price is anywhere close to $15.98 (the one seller priced at $15.99 charges $6.93 for shipping), so why does Amazon need to go that low?
If Jack Links wants to be considered a premium brand among sellers of beef jerky, how is such a low price, relative to the other sellers, helping Jack Links to accomplish this goal?
Worse yet, if there were brick and mortar retailers selling this product at a MAP of $19.99, how do you think they would react?
Here’s one final example of how aggressive Amazon can be with the “race to the bottom”. Notice that on June 16th, the retail price for this bag of chips was $25. Just 3 months later, Amazon has driven the price down to $14.99. That is a 40% decrease in price!
When you sell to Amazon as a vendor, you have zero control over pricing.
Amazon is a very large company, and as a result, people are always moving around within the organization.
What this means for you is that you should expect a revolving door of account managers, or worse yet, you may go without an account manager for periods of time.
This can make communicating with Amazon very challenging….and lest you think that this poor communication would be the exception, I can assure you that it was very much the reality for quite a number of brands that I spoke with.
For example, one coffee brand that I’m in talks with right now is having a hell of a time just getting Amazon to update the images on their product listing to images consistent with their new branding.
Amazon’s terms are most often 90 days. Depending on the size of your company, this can be a large problem. As I’ll explain later, when you sell to a third party partner, you can often expect to be paid in advance.
Amazon vendors are subject to a wide variety of chargebacks. Some are related to customer payment disputes, while others are related to damaged goods, and a variety of other things.
While I have not been an Amazon vendor, two brands I spoke with at a recent trade show told me that chargebacks (as well as Amazon’s co-op & MDF fees, as well as seemingly endless other small fees) were so significant for them that it was pretty much killing any benefits of being a vendor to Amazon and they were planning to switch back to the the third party selling approach instead.
The Upsides of Becoming an Amazon Vendor
For the brands I spoke with, the reasons above were their major pain points to being an Amazon Vendor.
However, there are some advantages to selling directly to Amazon. Webretailer.com published an excellent article weighing the two options. Here are the highlights (their words, except where italicized):
- Control over brand. Advantage: EVEN
(I would disagree with this, per my conversation with the coffee company who were struggling to update brand imaging. Amazon is also at liberty to rewrite your listings if they see fit.)
- Control over pricing. Advantage: 3P
- Sales velocity. Advantage: 3P
- Support from Amazon. Advantage: 3P
- Costs. Advantage: 3P
- Tax Nexus. Advantage: Varies (leans 1P)
- Margins. Advantage: 3P
- Promotions. Advantage: 1P
(Disclaimer: As Webretailer notes, a solid 3P marketing strategy has been shown to beat out Amazon’s promotional programs – such as Amazon Vine, which helps build initial reviews. There are additional 3P tools that can provide many of the promotional advantages that Amazon 1P can offer. In addition, Amazon’s promotional programs can come with additional – and sometimes hefty – fees.
Also, with Amazon’s hundreds of millions of product listings, you can expect that if you are not one of the top 10 or so “strategic brands within a major category,” Amazon is unlikely to pay much attention to you unless you spend significant amounts on promotions.)
- Staying in Stock. Advantage: 3P
- Day to Day Involvement. Advantage: Depends on Control Being Sought
- Getting Paid. Advantage: Clearly 3P
- Shipping and Accounting. Advantage: EVEN
- Reporting & Analytics. Advantage: EVEN
- Customer Service. Advantage: 1P
(If selling 3P, you will want to be sure your partner has solid customer service systems in place. If selling 1P, Amazon will provide solid, standardized customer service. You will not be able to customize your service, or surprise and delight your customers. Also, Amazon ‘owns’ your customer, and it is definitely more difficult to get feedback from your customers if you are selling 1P.)
- Multi-Channel Fulfillment. Advantage: 3P
- Selling into Canada, Mexico, and EU Markets. Advantage: 3P
- Pay-Per-Click (PPC). Advantage: EVEN
(I would qualify that this assumes you are using a single dedicated 3P seller, as it can be rather difficult to coordinate a PPC program with multiple sellers.)
- Cannibalization of Sales from Own Domain. Advantage: EVEN
While some of the 1P benefits may carry enough weight for a given brand to choose to sell direct to Amazon, the overall advantage is clear.
OVERALL ADVANTAGE: 3P
Third Party Selling on Amazon (3P)
As I mentioned earlier in the post, the second way to sell your products to Amazon’s customer base is using the 3rd party (3P) approach.
With 3P, the first thing you have to do is decide whether your want work with a dedicated partner like Welch Products, or simply let the forces of capitalism form your 3P strategy (or more accurately, lack a strategy).
Let me start by saying that if you have a MAP policy and keeping control of retail pricing is important to you, simply letting anyone and everyone sell your products on Amazon will definitely contribute to the pricing problems that I described in the section above and I do not recommend it!
Keep Control Of your Pricing
When it comes to 3P selling on Amazon, the best way to control pricing is to reduce the number of sellers on your product listings. As a matter of fact, I’ve previously written about how having fewer sellers can actually help you to increase sales.
3P vs 1P Benefits
Now let’s revisit the list of benefits that Amazon says are a part of becoming a vendor and see which ones apply if you prefer to go the 3P approach instead.
- You’ll get your product in front of customers in just a few days: This holds true for 3P sellers as well.
- Amazon takes care of promoting, selling, and shipping your product: Your 3P seller(s) will handle the promoting, and the Amazon backend will still handle the transaction of shipping.
- Fulfillment will be handled by Amazon’s world-class fulfillment centers: Same for 3P sellers.
- Amazon will introduce your product to hundreds of millions of customers already shopping on Amazon: Same for 3P sellers.
- Your products will become eligible for free 2-day shipping for Prime members: Same for 3P sellers.
- Amazon will handle customer service and returns: Your dedicated 3P partner will handle this. If you don’t have a dedicated partner, the 3P seller that received the order will have to handle customer service.
- Amazon will handle pricing and sales forecasting: Your dedicated 3P partner will handle this. If you don’t have a dedicated partner, no one will handle this.
- Amazon will handle inventory management: Your dedicated 3P partner will handle this. If you don’t have a dedicated partner, each of the 3P sellers will handle inventory management for their own account.
Disadvantages of Having Multiple Sellers
As I’ve written about here, there are a number of negatives that go hand in hand with letting anyone and everyone become a 3P seller for your products.
In a nutshell, the downside of this approach includes:
- These sellers will all use price as their primary lever to increase their share of the buy box, and this creates a ‘Race to the Bottom’
- Listings optimization will suffer from the lack of ‘listing ownership’ that having multiple sellers creates
- With multiple sellers, you will have zero control of you promotions
- With multiple sellers, you will have zero control of your customer service (brand experience)
Advantages of Working With a Dedicated Partner for 3P Sales
There are numerous advantages to working with a dedicated 3P partner and these advantages include:
- Your partner will sign a MAP agreement, and with just one seller on your product listings, there is no race to the bottom on price
- Your partner will help you combat un-authorized sellers
- Your partner will ensure your product listings are fully optimized
- Your partner will collaborate with you on the planning and execution of product promotions, new product launches, and PPC campaigns to help you significantly increase sales
- Your partner will handle customer service on your behalf in accordance with your jointly developed SOPs
- Your partner will handle inventory management
- Your partner will probably pay faster than Amazon does (Welch Products pays up front)
- Your partner will be easier to communicate with
Developing an effective Amazon strategy is a critical part of any brand’s eCommerce strategy. While long, this post was by no means exhaustive in its coverage of the facts.
Instead, my goal was to provide you with enough insight to allow you to ask meaningful questions in your conversations with Amazon and whichever 3P partner you talk to while you are determining the eCommerce strategy most suitable for your organization.
If you have questions about this post, please get in touch with us directly.