With the rise of eCommerce retail sales, many brands are starting to re-evaluate their eCommerce strategy, especially those selling on Amazon.
Whether you are a First Party (1P) or a Third-Party Seller (3P) in Amazon, there are significant differences you need to consider.
Becoming an Amazon Vendor (1P)
If you have a product that sells, you may one day expect a call from Amazon inviting you to become a vendor.
Here are some major expectations when you become an Amazon vendor, you will be entitled to the following benefits:
- 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
However, the above comes with some considerations;
- Amazon will buy directly from you
- Amazon’s payment terms are typically 60-90 days
- Amazon will handle promotion, sales, and fulfillment
- Amazon will tell you they want a large discount (15-25%)
- Amazon will not sign a MAP agreement
How about Third Party Selling on Amazon (3P)?
In a 3P relationship with Amazon, the brand is the retailer and manages a storefront on Amazon. The brand lists products and receives orders for those products. In this case, the brand uses the Amazon platform to sell directly to Amazon customers.
The interface used to do this on Amazon is Seller Central, though many companies use third party solutions to make the process easier. The brand is responsible for listing products, as well as fulfilling sales and providing customer service.
Items sold by 3P uses the seller’s name instead of Amazon.
A 3P relationship with Amazon is open to almost anyone, though certain product categories require pre-approval.
To initiate 3P selling, you first need an Amazon Seller Central account. Most companies should opt for a “Professional” Seller Central account. Although a third-party relationship doesn’t require an invitation, there are cases where successful 3P Amazon sellers were forced to move to a 1P relationship or stop selling on Amazon altogether.
For now, though, this doesn’t appear to be a widespread occurrence. But it’s something to look out for.
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.
The Downsides of Becoming an Amazon Vendor
Not everything is perfect, even on Amazon and there are downsides to consider.
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 policy.
When they do, your offline customers are not going to hesitate to tell you how much that is hurting their business.
Depending on how much total volume is offline this can be a big headache with cash flow implications.
So how and why does Amazon ignore your MAP policy? Because they didn’t sign your MAP agreement in the first place and would care less about your company.
Amazon only cares about consumer experience, and having low prices is a huge part of ensuring that consumers get the best experience possible.
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.
Amazon’s terms are most often 60-90 days. Depending on the size of your company, this can be a big problem.
Amazon vendors are subject to a wide variety of charge backs. Some are related to customer payment disputes, while others are related to damaged goods, and a variety of other things.
The Upsides of being an Amazon Vendor
However, there are some advantages to selling directly to Amazon.
- Control over brand. Advantage: EVEN
- Control over pricing. Advantage: 3P
- Reporting & Analytics. Advantage: EVEN
- Customer Service. Advantage: 1P
- Multi-Channel Fulfillment. Advantage: 3P
- Selling into Canada, Mexico, and EU Markets. Advantage: 3P
- Pay-Per-Click (PPC). Advantage: EVEN
- Cannibalization of Sales from Own Domain.Advantage: EVEN
- Sales velocity. Advantage: 3P
- Support from Amazon. Advantage: 3P
- Advantage: 3P
- Tax Nexus. Advantage: Varies but leans toward 1P
- Advantage: 3P
- 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
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
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.
- 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.
- 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.
Disadvantages of Having Multiple Sellers
Having too much sellers can be a pain in the neck. Here’s why;
- 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 handle inventory management
- Your partner will probably pay faster than Amazon does (TLK pays up front)
- Your partner will be easier to communicate with
- 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
Developing an effective Amazon strategy is a critical part of any brand’s eCommerce strategy.
If you have questions about this post, please get in touch with us directly.
We can Help
At Jim’s Whims, we have demonstrated experience spanning years assisting brands with Amazon.
Additionally, we can bring value to our brand partners by improving Amazon listings optimizations and Pay Per Click (PPC) Advertising campaigns at a very reasonable cost while building your brand with your image. We’re upbeat about the future, and would love to talk further, call us at (469) 487 8221.
About Jim’s Whims
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By: The Team @ Jim’s Whims