What’s the best Amazon Strategy for Brands and Manufacturers – 3P, 1P or Hybrid?
Amazon is on a tear with its Whole Foods acquisition and will continue to change the face of retail for the foreseeable future. There’s currently an estimated 80+million Prime members and 55% of all product searches are now originating on Amazon according to a 2016 poll conducted by BloomReach Inc.
What does this mean for Brand Owners and Manufacturers?
In short, you better get on the Amazon train and dial in the optimal Amazon strategy that fits your company’s goals and maximizes your opportunity. It’s not a one-size-fits-all proposition and you need to understand the implications with how you choose to engage on the Amazon Marketplace.
How do I define my optimal Amazon Strategy??
Great question, as there are multiple viable paths you can take to run a successful Amazon business. We at Channel Key are experts in Amazon Strategy and will distil down your options and the larger implications of each.
Amazon 1st Party (1P)
In this model, you choose to sell your assortment to Amazon at wholesale pricing and allow them to be your retailer on Amazon. This follows a traditional 2 tier distribution model where you negotiate pricing and terms with your Amazon buyer, sign a Vendor Agreement and ship your product to Amazon when sent weekly replenishment POs. This business is run either through the Vendor Central or Vendor Express portals depending on how Amazon chooses to engage.
- AMS – Amazon Vendors get access to Amazon Marketing Services (AMS), which provides additional marketing levers like Sponsored Product Ads, Headline Search Ads, and Product Display Ads, which can help drive traffic and conversions to your listings. (Rumors are that some of the AMS offerings may available to 3rd party sellers soon, see below)
- Cash Flow – Generally you can turn your inventory into cash faster in this model as compared 3P since Amazon is paying for your inventory when you fulfill a PO.
- Prime – When Amazon carries your inventory you get immediate access to Fulfillment by Amazon, which eliminates the process of you shipping directly to consumers while also giving your assortment the coveted Prime badge.
- Pricing Control – Your product retail price points will be set according to Amazon’s pricing algorithm so you will not be able to control whether your product will be sold at your desired MSRP or MAP.
- Assortment – The Amazon vendor team may choose not to buy your entire assortment forcing you to come up with an alternate option if you want the balance available on the Amazon Marketplace.
- Content Control – Once Amazon acquires your inventory, future content changes to your Amazon Detail Page will have to be approved by the Amazon Retail Team regardless of them selling the product or not.
Amazon 3rd Party (3P)
In this model, you set up your own Amazon storefront and choose to sell your assortment direct to consumers becoming the Retailer. This business is managed through the Seller Central portal.
- Go to Market – 3P gives you the ability to sell your entire assortment immediately as it doesn’t require an Amazon buyer to decide which products they want to sell like the 1P model.
- Prime – Access to the Prime shopper and badge via the Fulfillment by Amazon (FBA) or Seller Fulfilled Prime programs.
- Profitability – Generally the margin profile is more favorable as you’re making retail margins as opposed to wholesale. In lower price point items this isn’t always true as fixed FBA fees can eat into the margin.
- Pricing Control – You as the seller set and control your retail price points including the implementation of Sale Pricing.
- Cash Flow – The inverse is true in this model, as you don’t get paid until your inventory sells and Amazon disburses cash into your account. This happens generally every 2 weeks.
- AMS – No access to AMS tools at this point although Amazon has hinted that it may be coming soon…
- Management – From our experience, selling in the 3P model requires more active management on a day-to-day basis. You have to monitor inventory levels and decide when to replenish your FBA inventory, manage your customer service, and cash flow.
Hybrid – 1P and 3P
In this model, you smash together the 1P and 3P strategies and execute on both simultaneously. You manage your assortment that Amazon buys through Vendor Central or Vendor Express and you manage the assortment you sell directly to the consumer in your Seller Central account.
- Access to AMS for you entire assortment – both 1P and 3P
- Are compliant with the Product Availability Policy for Manufacturers that Amazon has in place
- All the pros of each individual strategy
- Have to manage 2 different Amazon interfaces
- Have to manage 2 different inventory strategies
- May have to implement a re-pricer that pegs your 3P pricing to your 1P pricing
In conclusion, the best Amazon brand strategy for your company ultimately depends on how you want your products to be displayed and what level of control you seek. If you care more about driving top line sales and less about your retail price points, maybe the 1P model is right for you. If you have a large assortment and want to better control your retail price points than maybe the 3P model is right. If you want access to AMS but Amazon won’t buy your entire assortment, then the Hybrid model could fit. There are many other implications to consider but in general, this is a good starting point.
If you’re interested in learning more about what Amazon brand strategy works best for you business, feel free to contact us for a free Marketplace Analysis and custom recommendations.