July 18th, 2018
Brand Manufacturers: Here’s How to Choose Between Selling 1P & 3P on Amazon
Today, marketplaces (like Amazon, eBay, Jet and more) account for over 30% of global eCommerce sales, a number that is steadily climbing. The most dominant marketplace of all? Amazon.
Meeting the modern consumer’s need for speed, personalization, and quality, Amazon’s customer-centric approach is single-handedly reshaping distribution strategy across the world. In 2016, the online retailer was responsible for 37% of all US eCommerce sales and a shocking 66% of eCommerce growth. After recently being recognized as the most innovative company in the world and completing its largest acquisition to date, this eCommerce giant shows no signs of slowing down.
What Does Amazon’s Dominance Mean for Brand Manufacturers?
In response to this uprising, many brands are turning to Amazon to capture additional market demand for their products. But before brands can start selling on this distribution channel, they must make a choice: should we sell TO Amazon or ON Amazon?
Enter 1P & 3P: Choosing Your Amazon Distribution Strategy
- Sell your products wholesale to Amazon
- Work directly through Amazon Retail
- Use the Vendor Central interface
- Sell directly to consumers as a third party on the Amazon marketplace
- Sell at retail prices
- Use the Seller Central interface
Put simply, 1P is similar to a wholesale relationship for a manufacturer, and 3P is a more typical direct to consumer route.
So which option is best? Every brand’s distribution strategy is unique, and each of these options comes with a unique set of challenges and opportunities. To help you make your decision for your brand, we’re breaking down the pros and cons of each.
1P: Vendor Central
In this scenario, Amazon is a retailer of your products, placing purchase orders through the Vendor Central platform. Amazon stores your inventory and tackles everything from pricing and shipping to customer services and returns.
Amazon’s tagline for Vendor Central says a lot: You make it. We sell it. Your business grows. But what happens when the honeymoon phase is over, you’re hooked on the increased demand and Amazon continues to lower pricing (and your margins)?
- Listing priority and increased conversion – Amazon promotes its own items, of course
- ‘Sold and Fulfilled by Amazon’ badge – and the peace of mind from knowing you don’t have to manage fulfillment
- Potential for significantly higher sales volume – with Amazon’s preferential treatment, demand will likely increase
- Access to premium marketing tools – you can use AMS (Amazon Marketing Services) for advertising, A+ Content for increased conversions — and Amazon Vine for new product reviews
- A developed selling strategy from Amazon – including Amazon Media Group’s ad spend
- Customer service managed directly by Amazon
- No control over MAP enforcement, leading to price erosion – reducing margins due to wholesale pricing
- Lower control over inventory – as you must give in to Amazon’s demands
- Longer payment terms
- Increased reliance on Amazon
- No access to the inventory for multi-channel fulfillment
- Limited to the North American marketplaces
- Difficulty launching new products – Amazon simply doesn’t want to take on risk
- Confusing fees – which can even change throughout your Amazon relationship
- Powerlessness over products sold to Amazon – Amazon can demand more and more of your product catalog
3P: Seller Central
As a third-party seller, manufacturers retain the power to sell products directly to Amazon’s customers. Products are sold at a retail or list price and manufacturers pay Amazon for use of their online storefront. As an independent seller, you’ll have more control, but you’ll also have the burden of doing most of the heavy lifting.
Though you have an increased level of control, you’re also an equal with anyone else selling your product. You can opt to pay for Fulfilled by Amazon or manage a seller-fulfilled approach.
- Control over the number of units you list on Amazon – without the fear that Amazon will demand more
- Access to Enhanced Brand Content
- 100% control over retail & MAP pricing – increasing your profit margins
- Faster payment terms
- Ability to quickly adjust pricing – allowing for discounts and promotions
- Access to customer data – this includes delivery addresses and phone numbers
- Low monthly storefront cost
- Clearer fee percentages
- Option to list as Prime seller with seller-fulfilled Prime
- High referral fees from Amazon (ranging from 6% to to 20%)
- Requires active customer service – managing complaints and negative reviews (knowing that Amazon’s strict rules put you at risk of suspension)
- FBA (Fulfillment By Amazon) shipping fees (unless you choose to handle fulfillment yourself to offset these costs)
Not Sure Which Option Is Best for Your Business? Want the Best of Both?
The Amazon marketplace is complex and constantly changing. Your decision to sell your product as as third party seller (3P) and/or establish a wholesale relationship with Amazon Retail (1P) is an important one to get right. If you have questions on this, or want to learn more about how to take advantage of a multi-channel approach, contact the team at Ally Commerce today.