Amazon 1P to 3P: Why, When and How to Make the Move
Amazon’s market share continues to grow at the expense of traditional brick-and-mortar channels. Smartphone technology – and free two-day shipping – has forever changed how and where consumers shop. To reach Amazon’s hundreds of millions of customers, many brands and manufacturers begin by selling their products directly to, instead of on, Amazon. Often the formation of these first-party (1P) relationships, where brands and manufacturers act as the vendor or wholesaler and Amazon acts as the seller or retailer, are initiated by Amazon. But while Amazon 1P is the entry point to ecommerce for many organizations, some are evolving their online strategy to take advantage of the opportunities only a third-party (3P) relationship with Amazon provides. This article lays out the reasons why brands and manufacturers may want to consider stopping selling to Amazon and start selling on Amazon. It also suggests when and how to transition from being a first-party vendor to a third-party seller.
Why Shift From Amazon 1P to 3P?
Many brands and manufacturers don’t know how to fit the Amazon channel into their business model. Shipping few large wholesale orders to distributors every week is how they are used to operating, as opposed to shipping many small retail orders to customers every day. So, brands and manufacturers often take the path of least resistance and become first-party vendors. This prevents them from having to change how they distribute products in the short run. But will it allow them to leverage the Amazon channel to its fullest potential in the long run? What future problems may arise? What future opportunities may be missed?
- Pricing: When forming first-party relationships with vendors, Amazon will agree to not resell products below Minimum Advertised Price (MAP). But if any reseller – authorized or not – is selling below MAP on any channel, Amazon can lower its prices to match. This can divert demand from MAP compliant resellers and create channel conflict.
- Product Content: To list products for sale, Amazon requires its vendors to provide content such as titles, descriptions and images. However, Amazon dictates any future content changes – not vendors. If brands want to adjust how their products are presented on the marketplace, Amazon can deny their requests.
- Inventory Selection: Amazon will typically carry its vendor’s entire product line or catalog initially. But once Amazon finds out what sells and what doesn’t sell, they may stop offering and buying slow-selling products. For some brands and businesses, this can mean the majority of their products won’t get seen or sold. Amazon can also run out of best-selling products because purchase orders aren’t placed in time. Since Amazon is doing the buying, they control which and how many products are sold and when.
Deciding When to Move From Amazon 1P to 3P
The decision to stop selling to Amazon and start selling on Amazon is difficult for many brands and manufacturers. Foregoing large purchase orders from Amazon on a regular basis may seem outlandish. But the long-term benefits are likely to outweigh any short-term drawbacks. Profit margins will increase. Products are sold at retail prices to customers – not at wholesale prices to Amazon. Control of pricing, product content and inventory selection will be restored as well. This means brands and manufacturers can offer their entire product line, or at least as many products as they want.
But how will this move affect total sales volume and net profit? When does it make the most financial sense? There is no one-size-fits-all answer. Some brands drive the most volume as first-party vendors; others drive the most volume as third-party sellers; while still others drive the most volume as both. Much also depends on wholesale and retail profit margins. Will potentially making more sales at wholesale prices be more profitable than potentially making fewer sales at retail prices? It’s up to you to make educated projections. There are too many unique variables and costs to predict with certainty the differences in profitability between the two models. However, best- and worst-case estimates can be made across your entire product line.
Needless to say, the decision to go from being a vendor to being a seller must be financially justified. Whether or not you even have the choice – or the operational capabilities – to make the move are factors that will also come into play when determining optimal timing.
Before ending a first-party relationship and beginning a third-party relationship, review your 1P agreement with your legal team first. Amazon often includes a first right of refusal that prevents vendors from becoming sellers without their express approval. I’ve found that transparency with Amazon is the best policy. And since it is ultimately in Amazon’s best interest, Amazon is often willing to open the 3P door for brands and manufacturers.
Why More Brands Don’t Pull the 3P Trigger
The challenge, however, is that many brands and businesses don’t know where to start. They don’t have a strategic plan for selling on Amazon. They don’t have a data-driven understanding of the third-party marketplace dynamics. The rules of the game and roles of the players aren’t familiar or well-established. The operational capabilities brands and businesses will need to win in the future are different from the capabilities they’ve valued in the past. Transaction life cycles are much shorter than brands and manufacturers are used to. Managing high volumes of single line orders is something they’ve never done before. For-sale quantities must be updated across all listings when inventory is sold and bought. Product content must be configured to meet Amazon’s requirements. Product prices must be raised or lowered when costs or competitors’ prices rise or fall. If brands and manufacturers aren’t operating efficiently, they’ll have difficulty meeting customer expectations and Amazon’s requirements.
Following Amazon’s 3P Rules – and What Happens If You Don’t
Amazon is committed to delivering an exceptional customer experience. All of their third-party sellers are expected to meet the following performance targets:
- Order defect rate: < 1%
- Pre-fulfillment cancel rate: < 2.5%
- Late shipment rate: < 4%
Unfortunately it’s not only possible but it’s relatively easy to break these rules at every point in the selling process: when listing products, when publishing inventory for sale, and when processing and fulfilling orders.
- If product content is inaccurate and sales are made, orders must be cancelled so customers aren’t disappointed and negative feedback isn’t left.
- If inventory is sold when it is out of stock, orders must be cancelled since customers won’t receive them in full or on time.
- If orders aren’t processed immediately after they are received, and if a valid shipping confirmation and tracking number isn’t issued shortly thereafter, there’s a good chance shipments will arrive late.
Not only will these problems result in a poor customer experience, but they will also cause order defect rate (ODR), pre-fulfillment cancel rate, and late shipment rate to go up. This puts your Amazon seller account – and the majority of your online sales – at risk.
- ODR is calculated by dividing the number of orders with ‘defects’ (chargebacks, A-Z claims, or negative feedback) by the total number of orders from the same date range. If it’s greater than 1% account suspension or even closure is likely.
- Pre-fulfillment cancellation rate is calculated by dividing the number of orders that are cancelled before a valid shipping confirmation is issued, by the total number of delivered orders from the same date range. When calculating this metric, Amazon considers all order cancellations initiated by sellers for any reason.
- Late shipment rate is calculated by dividing number of shipments that aren’t confirmed by the expected ship rate, by the total number of delivered orders from the same date range.
The Wrong and Right Way to Sell on Amazon
In an attempt to avoid these problems, some brands and businesses utilize disparate legacy systems. But data must still be reconciled, consolidated, and transferred. This delays decision-making and clouds visibility to KPIs. Seeing how product lines, individual SKUs, channels and the organization as a whole are performing financially in real-time isn’t a realistic possibility. Inventory visibility throughout the supply chain is also limited. It’s difficult for brands to make and keep delivery promises or route orders to optimal fulfillment locations when they don’t know how much inventory is available and where it is located at all times.
The requirements for selling on Amazon are complex. However, complexity creates opportunity. If much of the work can be automated or eliminated so only exceptions need to be dealt with, a competitive advantage will be gained over those doing it the longer, slower way. To accomplish this, the front- and back-end of your organization must be connected. Sales channel to supply chain integration provides the data centralization and data integrity required for process automation.
Why a Single Source of Truth Matters
Many brands and businesses that went from selling to Amazon to selling on Amazon couldn’t have done it without first replacing their disparate legacy systems with a single source of truth. This allows product, inventory, pricing and order data to flow both ways through each area of their organizations. It ensures data integrity. It eliminates human error caused by constantly re-entering data and by using software applications that can’t communicate. It allows pre- and post-sale processes to be automated, so the right decisions are made at the right time, and so customer expectations and Amazon’s requirements are met.
Not only does selling on Amazon become possible with a single source of truth, but so does selling on eBay, Walmart and other online channels. Some of the most successful brands treat Amazon as one channel in their mix, instead of their entire online presence. They use Amazon to test the viability of new products, but also diversify their risk by expanding into new markets. This is a smart approach. Being at the mercy of only one sales channel or fulfillment method is dangerous. The brands and businesses with a single source of truth have the capability to change where they sell and how they ship so they can quickly pivot in any direction, at any time.
According to McKinsey, 93% of brands want to grow online sales, but only 22% have made any progress. With Amazon owning nearly half of the U.S. ecommerce market, the stakes are higher than ever for brands to figure out how to control – and capitalize on – this opportunity. Going from being a first-party vendor to being a third-party seller requires the operational efficiency only a single source of truth can provide.