You’re ready to sell your fantastic new product on Amazon’s marketplace. Amazon provides two options to sell on their platform: 1P (first-party or Amazon Retail) or 3P (third-party relationship). Let’s review the pros and cons of each to determine the best path for you.
1P
In this model, you sell your inventory to Amazon at wholesale, and they act as the retailer. Amazon will place bulk product orders (POs), and you will sell your product to them at a wholesale price. Once you fulfill the POs, Amazon will officially own your product and control retail price. The brand owner will work with Amazon through its Vendor Central Platform to check on PO status, provide updated product information, and review merchandising, payment status, and advertising insights. With a 1P relationship, the Amazon Standard Identification Number (ASIN) will read “Ships and sold by Amazon.com” on the product details page.
1P BENEFITS:
- Amazon buys your product in bulk, immediately generating revenue and reducing inventory costs
- Amazon optimizes your product details pages
- Flat participation fee vs. variable marketplace fees for fulfillment and referrals
- Halo effect: Consumers believe if Amazon sells a product, then the product has an assumed higher level of quality
- Lower operational oversight may save headcount
- Operates as a partnership with Amazon, in terms of inventory risk management and sales planning
DISADVANTAGES:
- Loss of pricing control
- Risk of breaking MAP agreements
- Amazon is always going to sell your product for the lowest price on their marketplace. In the short term, this is beneficial because the lowest priced product will generate the most sales. However, in the long term, competitors will begin to compete with Amazon’s pricing. Downward pressure on retail price, over time, will erode the price: value relationship in the consumers’ mind. A lower price in this channel is a benefit for the consumer, but it can damage the overall brand integrity.
- If Amazon wants to increase profitability on your product(s), they can demand higher fees or lower costs of goods
- Increased margin pressure based on the aggressive wholesale price
- Hidden fees or chargeback costs if there is a problem with inventory levels, not fulfilling orders on time. These charges end up being an estimated 16-20% of gross sales.
- No control over copy and images – they need to be approved by Amazon’s team
- You are entirely reliant on Amazon’s POs to maintain your presence on Amazon
- When you sell through Vendor Central, Amazon’s POs are decided by bots that don’t factor in market conditions or seasonality, and they are frequently wrong
3P
When you choose the 3P selling module, you are the retailer selling products directly to consumers via Amazon’s marketplace. This option leaves you in control of your products and your pricing. 3P sellers use the Seller Central Platform to create and publish product detail pages, check orders, monitor inventory, etc. What was once a minority on Amazon, third-party sellers now account for half of the sales made on the marketplace.
With 3P, you have three shipping options:
Fulfillment by Amazon (FBA) – Amazon will take care of picking, packing, shipping, and returns.
Fulfillment by Merchant (FBM) – Seller controls shipping and handling processes.
Seller Fulfilled Prime (SFP) – Qualified Amazon sellers with professional seller accounts may display the Amazon Prime badge on orders fulfilled via their warehouse or third-party logistics providers.
3P BENEFITS:
- Control of the retail price on the platform
- Sell the full product line without cherry-picking SKUs
- Better control of your brand, including catalog, inventory levels, brand presence, and product details
- Complete control over your promotions, advertising efforts, listings, product launch capabilities, and number of units
- Ability to edit and update product details pages
- Higher retail margins instead of lower wholesale margins
- Receive payment upfront or net 15 or 30, not 60+ days
- Ship to one central warehouse instead of dozens of small shipments directly to consumers
DISADVANTAGES:
- Incremental internal bandwidth required to track sales, shipping, inventory levels, pricing, marketing, and customer service
- Responsible for optimizing page details, advertising, and promotions
- Subject to marketplace fees such as closing fees, referral fees, fulfillment and shipping fees
- Don’t have the benefit of Amazon’s 100% rating and backing, placing more emphasis on brand reputation management
- If Amazon realizes your product is being sold for less on another site, they can remove the buy box button
- To avoid this, brands can sell unique products on Amazon, so Amazon can’t compare pricing on other sites
Conclusion
Deciding on which Amazon sales model to use is a personal choice based on company goals. Both 1P and 3P provide benefits and disadvantages.
The noteworthy differences come down to two categories: pricing and control. In the 1P model, Amazon has complete control over your pricing, but they also take over your brand’s management as they become the owner of your products. They control the time and effort it takes to optimize listings, manage inventory levels, place POs, advertising efforts, and other burdensome tasks.
With 3P, you maintain control of your products’ pricing, but with that, you also retain control of the time-consuming tasks noted above.
Amazzia helps you avoid the risks of delving headfirst into Amazon’s complex eco-system. Let our team of experts help your business succeed on Amazon. We will take on all of these tasks discussed with insider knowledge and years of experience. (And we assist brands transitioning from 1P to 3P too!)
