Ecommerce has flourished in the past 30 years, with consumer spending on online purchases increasing steadily. With a hefty 42 percent of an almost $600 billion U.S. ecommerce market, Amazon is undoubtedly the top dog. As a result, more brands than ever are looking to cash in on the millions of shoppers and plentiful opportunities on the platform.
But, as an Amazon seller, one of the first steps toward success is understanding the difference between Amazon 1P and 3P sales models. It’s the only way to make informed decisions that will support your business goals. Knowing how First-Party and Third-Party selling works on the world’s leading ecommerce platform and the advantages and disadvantages of each is crucial to putting your brand in a position to maximize profits and grow.
What is Amazon 1P (First-Party)?
Unique from a traditional Amazon seller account, Amazon’s Vendor Central platform is the interface brands use to sell products directly to Amazon rather than to the consumers shopping in the marketplace. Amazon is then responsible for listing, selling and shipping the products. The Vendor Central model, commonly referred to as first-party or 1P selling, is an opportunity for companies to establish a relationship with Amazon and sell its products at wholesale prices. However, this model is an invite-only program and is usually limited to larger brands with $10M or more in revenue on the Amazon marketplace.
For the few businesses eligible to become Amazon vendors, the 1P option has some attractive advantages. First, it’s easy to understand. Since it’s similar to any other relationship between a vendor and retailer, a brand does not need internal Amazon expertise. It’s also purchase-order based, so the brand receives large purchase orders from Amazon, which then pays for the inventory. Also, as a retailer, Amazon will often accept lower profitability than direct-sales brands as they compete with Walmart and other retailers on price.
However, it’s also clear that Amazon provides little guidance to its vendors. For example, the platform does not assist in overall strategy, brand positioning, merchandising, or provide technical support. Instead, Amazon simply buys the products. The retailer can be very aggressive at negotiating lower costs from their 1P suppliers by tacking on co-op advertising fees, return fees and chargebacks. And it’s not unusual for Amazon to disregard Minimum Advertised Pricing (MAP) guidelines to sell products for less than a supplier expects
What is Amazon 3P (Third-Party)?
The most common Amazon partnership, of course, is via a seller relationship with the retail platform. With more than 300 million shoppers worldwide and tens of millions of products, the Amazon marketplace is integral to ecommerce in the United States.
In the Seller Central (3P) model, a brand sells its product directly to the end customer through an Amazon Seller Central account. By avoiding a retailer, brands can realize increased profitability, gain more control over the customer experience, and enjoy increased visibility into data and sales trends. Brands that sell directly in this way typically add a clause to any retailer agreements prohibiting the product from being sold on Amazon by other distributors.
Unfortunately, many brands do not have the internal skills or resources to manage selling on Amazon. In addition, it can be viewed as competition for other retail partners, and a brand may face more risk by having to own inventory until it is sold to the end consumer.
In most cases, brands with experience selling directly to consumers and with high-margin products can benefit from opting for this model. These companies can use the valuable data to refine their strategy and will maintain control over their customer-facing interactions. On the other hand, businesses without appropriate margins or the resources to dedicate to Amazon optimization may not be well-served by a 3P model.
Amazon 1P and 3P offer vastly different pricing structures
Within the 1P selling model, businesses sell a product to Amazon as a wholesaler. Amazon is the retailer of those items and is responsible for setting the price and managing inventory. It is often a good fit for low-priced and highly competitive Consumer Packaged Goods (CPG). It can also work well for heavy products with high shipping costs, brands that sell through many distribution channels, and brands that do not attempt to enforce a MAP program.
For other brands, the downside of operating with a 1P model can make it a less appealing option than the Amazon Seller Central route. By selling to a retail intermediary, a seller is giving up margin, making 1P far less profitable for premium quality brands in many cases.
On the other hand, with 3P, or third-party selling, the seller sets the price and manages their own inventory. They also enjoy improved control of branding and the customer experience on the Amazon platform while having more access to data, customers and information. This fundamental distinction gives sellers more control over their pricing strategy. Still, it also means they may have to compete with other sellers offering the same product at a lower price. While 3P sellers can maximize their margins and avoid retailer costs, they may find that success in this model requires an experienced team that understands Amazon optimization.
1P and 3P require unique approaches to inventory and fulfillment
Keeping products in stock is vital for both vendors to Amazon and the sellers utilizing the platform to reach consumers directly. As a 1P Vendor, brands are invited to supply products to Amazon that the company subsequently sells in its marketplace. In this scenario, Amazon manages the inventory in its fulfillment warehouses and places orders to its 1P partners via a purchase order when it wishes to re-stock. While this may seem more straightforward than the responsibilities of a 3P Amazon seller, it does come with some drawbacks to keep in mind.
For example, payment for product orders can sometimes take longer, 60 to 90 days. In addition, access to vendor managers at Amazon can be inconsistent, making it more difficult to manage the relationship. In addition, since 1P vendors are fulfilling a bulk order from Amazon rather than a small order from the end user, the focus shifts to meeting the guidelines placed on vendors by the marketplace. The companies supplying Amazon with products must understand the labeling, packing and shipping requirements to avoid expensive chargebacks that can be hugely detrimental to profits.
In the case of 3P sellers, they retain complete control of their inventory management and have the flexibility to choose the best approach for their business. Many opt for the Fulfillment by Amazon (FBA) model and pay for space in Amazon’s warehouses to store their products, as well as paying fees to have the company ship to Amazon customers. Others keep their inventories stored elsewhere. Regardless, products have to be in stock to fulfill customer orders. Companies using FBA face steep fees for merchandise that sits in an Amazon warehouse for too long or can risk losing a hard-earned Buy Box if products are unavailable for purchase. This delicate balance makes inventory management one of the most important aspects of a successful Amazon 3P relationship.
Alternatively, 3P sellers that don’t take advantage of Amazon FBA must pay close attention to order fulfillment to ensure items arrive on time and that the packaging used keeps them in good condition during transit. If a company chooses to use Amazon Fulfillment Centers for Amazon orders and a traditional approach for sales that originate elsewhere, they will only need to be concerned with complying with Amazon’s FBA requirements, similar to 1P Vendors.
Your sales model determines your approach to customers
Customer service can make or break a brand in the highly-competitive world of ecommerce. While a positive customer experience can create loyalty and repeat buyers, something as simple as a negative review can have repercussions beyond the unhappy buyer.
Fortunately, a first-party relationship with Amazon can allow a company to minimize customer service duties since the role of fulfillment, contact and returns processing becomes the domain of Amazon. Still, a 1P seller should plan to monitor product reviews closely to catch product quality issues or other problems before the damage to the brand is too severe.
While 1P sellers have limited control of product marketing on Amazon, they are eligible to complete the Amazon Brand Registry process, giving them access to A+ Content to support their products on the platform. Vendors also have access to Amazon advertising, such as Product Display Ads, Sponsored Product Ads, and Sponsored Brand Ads to attract customers to their products. Beyond the in-platform content control and advertising options available to some brands, the marketing focus for 1P growth should be on developing the vendor relationship with Amazon and maximizing the wholesale orders.
Like many of the aspects covered here, 3P selling is more involved. Often, it means facing the daunting task of meeting customer expectations alone. While third-party retailers can share customer service via an Amazon FBA agreement, they will otherwise have to manage inquiries, refunds and returns independently. Regardless, creating the best possible customer experience should be a priority for brands seeking growth.
Third-party sellers are also responsible for the entirety of their marketing efforts. From product listing optimization and customer-facing efforts to pricing and Amazon Storefronts, there is a much more robust menu of options to ensure brand protection. While there’s greater potential to drive sales via a well-executed marketing strategy, doing so can be overwhelming for companies without the in-house expertise to design and implement a successful plan.
1P brands may face a more volatile future
Unfortunately, a vendor relationship with Amazon can be even more unpredictable than direct-consumer sales. Re-orders are often based on the company’s demand algorithm, which can change quickly. In a worst-case scenario, 1P brands could be dropped from the platform with little or no notice. Data on consumer sales through Amazon are also more limited for vendors than third-party sellers, and the availability of data reporting via Amazon Vendor Central has declined in recent years. In addition to the usual difficulties in forecasting what lies ahead for a brand, 1P suppliers may find these circumstances can create even more hurdles than other direct-to-consumer brands.
3P sellers with the capacity and capability to analyze it effectively have a wealth of data available to help them plan for the future. While the usual caveats that accompany the fast-moving ecommerce industry apply, it can be easier for third-party partners to access the resources necessary to identify and address threats to their sales. As mentioned, forecasting can also be critical to minimizing warehouse costs for FBA participants due to Amazon’s efforts to discourage slow-moving products. Similarly, understocking can lead to a loss of sales and optimization if a product is out of stock for prospective buyers.
Find your path to winning on Amazon
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Trust our results-oriented approach to Amazon growth and up-to-the-minute platform knowledge to outperform the competition and unlock your product’s full potential. Contact us today to learn more.