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Manufacturers and Brands: Is Your Amazon 3P Program Profitable?

Updated: Sep 26, 2023



Your selling approach and tight management are key to maximizing profitability in the Amazon marketplace.



In our travels across the Ecommerce landscape, we repeatedly run across brands and manufacturers that are reticent to sell their products on Amazon. An objection we often hear: profit margins are too small or nonexistent.


In many cases, these businesses are only comfortable selling as wholesale (also known as Vendor Central or “1P”) sellers. Or they may have even tried direct selling on Amazon as a third-party seller (also known as Seller Central or “3P”) and found it to be too difficult with the margins too narrow. When coupled with the perceived threat of creating channel conflict, some manufacturers end up staying away from Amazon altogether.


However, these companies are missing a large—and very profitable—opportunity that can be addressed with a more diligent and strategic approach to Amazon’s Seller Central program.


For a definition and discussion of Amazon selling approaches, check out our managing partner’s article: Amazon 1P vs. 3P.


Most manufacturers have a long history of selling strictly via wholesale channels, e.g. selling in bulk to distributors, retailers, and other resellers. The concept of obtaining the full retail price on a product is foreign to these firms.


However, this is exactly what manufacturers earn when selling via an Amazon 3P program. And given the typically large difference between costs to manufacture and the retail price, brands in almost all categories maintain significant margins that can create highly profitable 3P programs. This provides a great starting point to earn large, incremental profits from Amazon selling. The 3P approach also gives the product manufacturer more control over the retail price on Amazon, which allows the brand to manage channel conflict with other selling channels related to price.


So, where does the perceived lack of profitability of 3P programs come from? From what I have seen, in most cases this comes from two areas:

  1. A lack of understanding of the true operating cost components of a 3P program and/or

  2. A lack of careful and competent management of the Amazon program itself.

How do you go about ensuring your Amazon program is profitable? To understand this, you need to ask yourself two questions:

  1. What are the costs associated with managing my Amazon program?

  2. What should I expect my profit margin to be?

Let’s dive into each of these questions.


Understanding the Costs of Running an Amazon 3P Program


There are essentially five cost categories associated with running an Amazon 3P program. Some of these costs (the Amazon-specific fees, in particular) are inevitable and cannot be negotiated. Some of them, however, you can optimize to boost profitability.


These cost centers are:

  1. Amazon’s Commission: Amazon takes a portion of your revenues from each sale. The level of fees is largely driven by product category and type. Note that this commission percentage has nothing to do with the seller’s sales volume. Instead, the percentage varies by product category, generally from 8—20 percent. In many product categories, the commission is 15 percent. You can check out Amazon’s Selling Fee Schedule page for information on products in your category.

  2. Fulfillment Costs: These costs typically include warehouse storage, picking, packing, shipping, and managing customer service and returns. With Amazon 3P programs, the seller is responsible for shipping the product to the buyer. To make this process easier, Amazon offers its “Fulfilled by Amazon” service (FBA), where sellers ship products to Amazon to handle the entire fulfillment process. Nothing is free, of course, and Amazon charges a fee based on your product’s size and weight. This can range from $3—$50+ per item, depending on the the product specifications; storage fees can also apply. You can check these costs for your product with Amazon’s FBA calculator, found here: https://sellercentral.amazon.com/fba/profitabilitycalculator/index?lang=en_US. You may opt not to use FBA; you can manage fulfillment yourself or through another 3rd party logistics company (these firms are generally called “3PLs”). Keep in mind that while this might save you money in the short run, in the long run, it might end up being more costly, particularly if you fail to fulfill or deliver orders on time, which can get you banned from Amazon altogether. We generally recommend using FBA if your company does not have expertise in fulfilling small orders or drop shipping (such as is the case with many traditional product manufacturers, who are used to shipping in bulk to distributors or retailers).

  3. Product Cost: This is your cost to source or make the product. This is something most manufacturers and brand owners already have a good sense of, but you also need to account for additional costs to make sure it’s ready to go for Amazon, such as shipping products to the Amazon fulfillment center.

  4. Advertising: Amazon provides paid advertising tools to help you drive attention to your listings among the almost 600 million products on the marketplace. This is especially important if you are new to Amazon. We usually recommend budgeting five percent of total revenue (total 3P sales) for advertising, particularly through Amazon’s Sponsored Products ads. Now, you might not need to spend this amount all at once. You might start spending more (up to 20-25% of total revenue) at first to create visibility on Amazon for your products, then cutting back over time as your product listings gain more buyers and traction.

  5. Resources: You are going to need resources—internal, external, or both—to help you manage Amazon. With Amazon 3P, you are the retailer and merchant, and this requires managing content, merchandising, marketing, and operations (e.g. inventory management and fulfillment). This requires expertise and people. Amazon 3P isn’t a “set it and forget it” platform. It’s more like a garden that needs tending, which requires time and energy to grow. Whether you hire someone to manage it internally or turn to an agency (like Enceiba) to handle it for you is up to you. Either way, we recommend budgeting about ten percent of your Amazon revenue for this activity. You will achieve some efficiencies as you scale, so this percentage will likely decline a bit as you grow your Amazon 3P program.

Your Amazon 3P Profits: What to Expect


Of course, to figure out what your profit margins will be, you also need to know what your revenues will be. And to get that figure, you need to consider the retail pricing of your products on Amazon.


As mentioned above, many brands and manufacturers fail to price their products appropriately on Amazon, especially if they only have experience with wholesaling. To get a sense of what you should be charging on Amazon, it is essential to do some research. This includes looking for what your products are being sold for via other channels (and even on Amazon itself). You also want to look at how competitive products are priced to help you understand what price the market will bear for your items.


Many companies dipping their toes into Amazon think they need to approach the channel as a discounter and mark everything down from the start. This is far from the truth. There are many instances where sellers can command a higher price on Amazon than through other channels. Why? Amazon is so deeply ingrained into buyers’ shopping habits that they often assume Amazon offers competitive pricing. Additionally, the combination of convenience, speed, and ease of use offered by Amazon is enough to outweigh the price for today’s time-pressed buyers.


We often recommend that, when setting their Amazon 3P retail pricing, manufacturers and brands respect and follow the retail pricing approaches of their resellers. In other words, marking retail prices at a level that helps support all of your channels and does not degrade the overall retail pricing on your products. Remember that Amazon is now the starting point for almost 70% of product searches in the United States, so your pricing approach should be carefully thought out. Coming to market with lower retail pricing can negatively impact profit margins and create channel conflict (for a more in-depth discussion on channel conflict and how to address it, check out our whitepaper Conquering Channel Conflict).


So, when you get all of this worked out, if your product cost is in the range of 20 to 30 percent of your retail price (70-80 percent gross margin), we typically see net (fully loaded) operating profits of 20 to 30 percent from Amazon 3P programs. Not bad, right? Note that this profitability is against RETAIL prices (NOT wholesale prices), so your absolute contribution margin dollars should be at least twice those you receive in selling through wholesale channels (including Amazon 1P selling). This is important to understand, as manufacturers usually get confused by these percentages. Look at the absolute dollars (not only the percentages).


If you aren’t hitting these types of profitability numbers with Amazon 3P, you need to take a close look at how you are managing your inventory inside of Amazon’s FBA program, what the cost of goods is on your product you are selling through the channel, and how tightly you are managing your Amazon Advertising program. These are the major risk areas for your profitability in a 3P program, and if they are not well managed, they can sink your margins.


If you need more help in figuring out how to sell on Amazon, Enceiba is here for you. Email us at sales@enceiba.com and let’s talk Amazon strategy!




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