I’m often asked about the best approaches to being an Amazon seller. One of the most common questions is, “should I and can I be an Amazon vendor, or should I not even try and stick with being a 3P seller?”
No doubt, Amazon.com is the must-have sales channel for most brands. Knowing and choosing how to sell on Amazon can be a challenge. The differences between these two Amazon sub-channels are significant. And for most brands, the choice is simple once those differences are understood.
What are you on Amazon now, 1P or 3P?
It’s likely that you’re a 3P seller vs. 1P vendor on Amazon, but let’s shake it out a bit:
The 1P seller: Being an Amazon “1P” seller means you are a member of the Amazon vendor program, which means you’re acting as a wholesale supplier to Amazon. It’s much the same way you would sell products to a brick-and-mortar retailer. Products from 1P sellers make up about one-third of retail sales on Amazon. Amazon chooses which items to offer from a vendor’s catalog of goods and submits purchase orders to the vendor. The items listed for sale show that they are “sold by” and “shipped by” Amazon.com. This makes Amazon the seller of record. Amazon also decides the pricing for these goods. Note this is an invitation-only program, but it’s also possible to wrangle an invite (with the right connections, that is).
The 3P seller: A 3P seller refers to third-party sellers on the Amazon Marketplace. These businesses are responsible for about two-thirds of retail sales on Amazon. They are the sellers of record for their items. Sellers operate independently of Amazon, choosing which products to sell on the platform and at what prices. Any brand that sells legal products can set up an Amazon seller account. The process does not require an application.
Pros and cons, being an Amazon seller (3P)
Amazon third-party sellers can choose between two fulfillment methods for their sales:
• Fulfilled by Amazon (FBA). 3P sellers ship their inventory to Amazon fulfillment centers, where orders are picked, packed and shipped by Amazon for a fee. This carries the added benefit of the Prime badge, since FBA items almost always qualify for free two-day shipping to Prime members.
• Fulfilled by Merchant (FBM). 3P sellers either ship the items themselves or use a third-party logistics firm to store and fulfill orders from Amazon customers.
Amazon third-party sellers have more power and control over their brand on the platform:
– They choose which products to offer and at what price.
– They can launch products on Amazon without needing approval.
– They can change pricing whenever they wish.
– They can offer products by FBA, FBM or both.
– They control their own advertising campaigns, coupons and other brand-building strategies.
– They control their listing detail pages and enhanced brand content, which can be beautifully built out to prompt more sales.
With the power and control, however, comes additional responsibility. For example, third-party sellers are expected to answer buyer messages. If orders are FBM, sellers must provide customer service including returns and refunds.
In addition, sellers must keep a close eye on their FBA inventory. Items in the Amazon Fulfillment Centers are regularly damaged or lost. Sellers have to file claims to be reimbursed for this inventory, or hire a service provider to do it for them. There are also significant fees associated with selling via FBA. Sellers must stay on top of these fees and understand how they affect bottom-line profitability.
Finally, sellers are subject to a much higher level of enforcement by Amazon’s risk management departments. Products or even seller accounts can be suspended based on buyer complaints or violations of the rules.
Pros and cons, being a 1P Amazon vendor
Many vendors ship their products to Amazon fulfillment centers, where Amazon takes possession of the inventory. In some cases, vendors act as drop-shippers for Amazon and fulfill orders themselves.
In either case, the vendor does not decide the offer price for their goods. Amazon does – and Amazon doesn’t honor MAP, or minimum advertised pricing programs. This can be problematic for brands trying to maintain integrity for their prices across sales platforms and stores. Other web sites or retailers can become angry when Amazon is undercutting them on price, which can lead to tricky negotiations for future purchase orders.
Amazon also may choose to stop offering products that are important to the vendor. Perhaps Amazon was not making a profit on a particular item, or their automated systems decided a new addition to the catalog didn’t make sense. This can be painful to a vendor, which may have been counting on revenue from new product launches or past best-sellers that Amazon no longer wants to offer.
Amazon truly has all the power over vendors. It also can play hardball when negotiating purchase prices, and it automatically rejects many requests for price increases from vendors – even when those price increases are the result of inflation.
In addition, as part of its vendor agreement, Amazon pushes for hefty fees and allowances. These include a marketing co-op, returns allowance, overstock allowance, damage allowance and freight allowance. These can really add up, making the bottom line less healthy than expected.
Where does the vendor program make sense? Brands with large, heavy items usually end up better off financially as Amazon vendor, thanks to very high fees for large, heavy items on the 3P seller side. Vendors also sidestep many of the hassles of online selling, since Amazon handles customer service issues including returns, refunds, buyer messaging and more.
In addition, vendors benefit from higher sales velocity that comes with the Amazon Prime badge, as well as Amazon’s more favorable algorithmic treatment of its own products in search results.
Ready to choose?
For the vast majority of sellers, 3P selling offers better brand control and opportunities for revenue growth on Amazon than as a 1P vendor. This does require additional infrastructure and personnel, as well as skills around inventory management, optimization and advertising. If the goal is to control the ultimate destiny of the brand, leverage the strength and ubiquity of the Amazon platform – without being dependent on Amazon for purchase orders.
In the end, there is greater flexibility and control when operating as a 3P seller vs. 1P vendor on Amazon. But for the limited few, 1P is simpler, more centralized and can exponentially increase sales volume.
What’s the best strategy for you? Need a deeper dive into considerations and concerns? Let us know. We can talk you through the decision-making process.