There is little denying we are living in the age of Amazon. As I discuss in my forthcoming book, Billion Dollar B2B Ecommerce, Amazon now accounts for more than 60 percent of all online sales growth, and the Ecommerce juggernaut’s dominance continues to grow year over year. And this isn’t just with consumers. According to B2BecNews, almost eight out of 10 business buyers “use Amazon more than any other marketplace to research and buy products.” Amazon has worked steadily in recent years to increase the number of B2B businesses selling on its platform, and as a result surpassed a run rate of $10 billion in B2B revenue last year.
For many manufacturers and brand owners, Amazon can a good place to start in Ecommerce and build internal digital competencies, especially for firms that do not currently maintain transactional web sites (which still is the case for around 50 per cent of manufacturers). However, the way a company chooses to sell their products on the Amazon platform will drive the level of control they have over their brand on the marketplace. The approach to selling on Amazon is an important decision that many companies are wrestling with today. In some cases, companies don’t even realize they have choice in how they sell. Let’s take a closer look at the options manufacturers have, and how you can get the most out of this massive marketplace while also maintaining the greatest amount of control.
1P vs 3P selling
First, it is essential to understand that there are effectively two ways in which companies can sell their products on Amazon. The first approach is called Vendor Central, also known as 1P or first-party selling. In this model, vendors sell directly to Amazon in a traditional wholesale relationship. Amazon buys products in bulk via a purchase order, and the vendor ships its products to Amazon. Once the product is sold and ships, the products belong to Amazon—they store it, they sell it, and they ship it. In this model, vendors don’t have to worry about fulfillment other than sending products to Amazon in bulk, and the vendor receives a typical wholesale price for the products. In the 1P selling format, Amazon will also assess additional fees for advertising allowances, charge-backs, and other items (which can average out to between 10-20 per cent of wholesale revenue, depending on the product and category).
The other model for selling on Amazon is known as Seller Central, Marketplace Selling, 3P or third-party selling. In this model, the vendor sets up their own branded storefront on Amazon, lists its products, and sells “through” Amazon as a marketplace merchant. This approach provides the seller with control over product selection, presentation, and pricing. The seller also manages their own inventory levels. Amazon is simply an intermediary (i.e. a marketplace) where the seller conducts business. Vendors can choose to handle fulfillment themselves, called Fulfilled by Merchant (FBM, more on this below), or take advantage of the Fulfilled by Amazon (FBA) program, where Amazon warehouses stock on the sellers behalf, and handles picking, packing, shipping, returns, and customer service. The vendor receives the full retail price on sales made on the marketplace, less Amazon’s fees and a commission.
Many manufacturers that I speak with don’t realize that a company-owned 3P marketplace account is an option for selling on Amazon, often because this approach is different than traditional wholesale selling. However, the control and economics of 3P selling via a brand-owned account can be very compelling motivators for vendors to consider this strategy.
Which one should you choose?
Many manufacturers and brands start off selling on Amazon through the 1P model. This approach can be easier for sellers to act on, as it mostly follows established wholesale processes. However, easier doesn't necessarily make it better. With the 3P approach, manufacturers and brands have a number of distinct advantages, including:
1. Retail Price Control. With a vendor-owned 3P account, sellers set their own retail price versus handing control of their retail prices to Amazon or to other 3P resellers on the marketplace.
2. Higher Profitability. With a well-managed 3P program, I have seen sellers increase operating profit on Amazon sales by two to three times versus the same companies’ earlier programs. This is because with 3P selling, the seller receives the full retail price for the product (less Amazon commissions and other fees).
3. Improved brand control. 3P gives vendors more options in terms of brand presence, product portfolio and inventory, and product information. In 3P, vendors don’t rely on Amazon to buy the products from them, but create their own product and brand content, and control inventory levels inside of their storefronts on the marketplace.
4. Greater control over channel conflict. In 1P, Amazon has full control over the retail price of your products and sets prices using sophisticated algorithms. These automated tools have a goal of ensuring Amazon has the most competitive price on your product in the market at any time. Amazon will not follow manufacturers’ MAP (minimum advertised price) policies, but instead seeks to deliver the optimal value to its customers. As a result, channel conflict with other resellers and channel partners can arise rather easily with 1P selling.
Key considerations for 3P selling on Amazon
First, if your firm already has a 1P selling relationship with Amazon, there could be some limitations on your ability to shift to a 3P structure or create a blended 1P / 3P approach. Remember that Amazon first and foremost is driven by delivering value to its customers, and this includes price. With 1P, Amazon has greater control over the retail price of your products. If you are a substantial 1P seller (e.g. over $10 million in retail sales per year), Amazon will be paying attention to your account and retains a right of first refusal to buy products at wholesale (via 1P) that you may wish to offer via a 3P account. Note that you aren’t prohibited from launching and selling via 3P, but Amazon will always use the “what is best for the Amazon customer” lens in applying its policies.
Secondly, to obtain full control of your Amazon opportunity, it is important to understand and manage resellers who may be selling your products on the marketplace. These companies typically use a 3P model to sell. Some brands will have dozens of 3P sellers competing to sell the same exact product on the Amazon marketplace. This competition has the (intended by Amazon) effect of driving down the retail price on your products. There are approaches to managing these resellers. This starts with a solid, and legally-grounded Internet selling policy that is applied equally and fairly across your resale channels .
Lastly, for firms with existing 1P Amazon volume, it is also important to understand how your internal sales team might react to shifting from 1P to 3P. Staff members in traditional wholesale sales roles likely have their compensation tied to sales volume through Amazon 1P, and may not embrace the prospect of lost commissions. It is important that firms considering a transition to 3P consider the impacttheir decision will have on the sales team and realign compensation and roles accordingly.
The bottom line on 3P selling
3P selling with your own account is the optimal way to capture the greatest amount of control possible of your brand on Amazon. If you decide to pursue a 3P approach, it needs to be planned and executed strategically. Solid, experienced resources should be by your side to execute your program and avoid mistakes. I’m a Partner in a firm called Enceiba, where we offer this help to brands and manufacturers. We can help you determine the optimal way to move forward, minimize risks, of course, maximize your revenues and profits from Amazon sales.
If you’d like to learn more Amazon and the various ways to sell on the marketplace, feel free to reach out to me at email@example.com. I’d love to hear from you!
Brian Beck has more than two decades of experience in the ecommerce field, including seventeen years as a C-level executive driving digital transformation. He is a sought-after expert and trusted advisor, guiding executives at manufacturers, brands, distributors, and retailers in driving tremendous growth from digital commerce. He is the author of the first comprehensive book on B2B Ecommerce, Billion Dollar B2B Ecommerce.