Amazon 1P vs. 3P - Should You Shift Your Approach?
Manufacturers and Brands have multiple choices in how they sell on Amazon (at least for the time being) - your decision now either surrenders control or allows you to take control, and may have long term implications
Whether your business sells products to consumers or businesses, 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% of manufacturers). However, the path a company choses 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 and brands 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, chargebacks, and other items (which can average out to between 15-25% of wholesale revenue, depending on the product and category).
The other model for selling on Amazon is known as Seller Central, Marketplace Selling, or 3P (“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 (or 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.
In addition to these two selling methods, brands often find multiple resellers of their products operating 3P accounts and selling their products on Amazon, frequently without the manufacturer's knowledge or permission. Some brands will authorize specific resellers to sell their products on Amazon. This has the advantage of outsourcing the management of the Amazon account but does little to build the Company’s own brand presence on the marketplace and the vendor receives only the wholesale (not full retail) price. More on this later.
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. The 3P approach requires a seller to think and act differently. 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 approach should you choose?
Many manufacturers and brands begin by selling on Amazon through the 1P model. This approach can be easier for sellers to act on, as it mostly follows established wholesale processes. Sellers taking this path can build a substantial source of revenue with methods and costs similar to the efforts associated with supporting a large wholesale customer. Limited additional resourcing is required from a manufacturer to launch and manage a 1P program.
However, easier doesn't necessarily mean better. With the 3P approach, manufacturers and brands have a number of distinct advantages, including:
Retail Price Control. With a brand-owned 3P account, companies sell their products at a retail price, instead of negotiating with Amazon over a wholesale price. In other words, sellers set their own retail price versus handing control of their retail prices to Amazon or to other 3P resellers on the marketplace.
Higher Profitability. With a well-managed 3P program, I have seen sellers increase operating profit on Amazon sales by 2 – 3x versus the same companies’ earlier 1P or reseller programs. This is because with 3P selling, the seller receives the full retail price for the product (less Amazon commissions and other fees). In my experience, 3P selling is almost always significantly more profitable than 1P. For example, the same $10 Million in Amazon sales could generate $3 - $5 Million in operating profit with 3P, while 1P may yield $1.5 - $2 Million (of course this range very much depends on your gross margin structure). To achieve this, however, a 3P effort must be managed by experienced resources with the appropriate tools to carefully monitor inventory levels and ensure your products gain visibility on Amazon. Without these resources, higher profits are less likely.
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. 3P also gives you flexibility to launch and test new products quickly on the massive Amazon marketplace.
Greater control over channel conflict. As mentioned above, in 1P selling, 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. Case in point: recently, a client of mine was selling on Amazon with the 1P model, and also had their products listed on other marketplaces. Due to a systems glitch, one of the other marketplaces accidentally marked the retail price of a $100 product down to $20, causing Amazon’s algorithm to react and automatically follow suit. Within a few hours, my client was receiving very angry calls from multiple large brick and mortar retail customers, complaining about his Amazon pricing strategy. With greater price control on Amazon, this situation could have been avoided.
While 3P has a number of advantages, there are also a host of things to think about if you are considering implementing this approach.
Key considerations for 3P selling
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. As I’ve mentioned, with 1P, Amazon has greater control over the retail price of your products. If you are a substantial 1P seller (e.g. greater than $10 million in retail sales per year), Amazon's buying team will likely be paying attention to your account. Amazon retains a right of first refusal to buy products at wholesale (via 1P) that you may wish to offer via a 3P account, so you may be limited in what you can offer in your 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. In fact, there are some advantages to Amazon’s 1P team if you employ a blended 1P / 3P approach, and they sometimes encourage companies to employ both selling methods. A blended 1P / 3P program is possible, and many companies have also shifted fully over to 3P selling without any complaints from Amazon (particularly if the account is less than $10 MM in retail revenue), so many options are available to you.
Amazon is adjusting its focus away from strict 1P and 3P definitions and moving to more of a single “supplier” approach. In the coming years, I believe that vendors will not have a choice in how they sell to Amazon. Amazon will tell them. But this day is not here yet, so your time to act is now.
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. Some manufacturers will authorize certain of their resellers to sell on Amazon, while others seek to take full control of Amazon for themselves and be the only seller of their products (for the reasons I highlighted above). At minimum, it is critical to understand who these resellers are, how they obtained your products, and proactively manage and monitor this channel.
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. Your team members in traditional sales roles are likely have their compensation tied to wholesale revenue volume through Amazon, and will not embrace the prospect of lost commissions. It is important that firms thinking about a transition to 3P or a blended 1P / 3P program consider the impact their decision will have on the sales team and realign compensation and roles accordingly.
The bottom line on 3P selling
The main question you have to ask is how much control you want to have over your brand’s destiny on the #1 product search engine on planet earth. Today, over 65% of U.S. consumers and an increasing number of business buyers are starting their product searches on Amazon. Failing to manage your presence on this channel is risking your very relevance to buyers of all types.
3P selling with your own account is the best 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. Enceiba, offers this help to brands and manufacturers. Enceiba 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, contact us for more information!