What’s the Best Amazon Strategy for Brands and Manufacturers – 3P, 1P or Hybrid? UPDATED

The only constant with Amazon is change.  Which is why we felt it appropriate to update our view of the ever-present strategy question of: “should I execute an Amazon Vendor, Seller or Hybrid business strategy?”   

Right out of the gate, Amazon has consolidated it’s various ad units (AMS, Sponsored Brands, etc.) into a single program called Amazon Advertising.  The move streamlines and provides more consistency/clarity to its ad offerings.

Now, let’s dig back into the basics……..

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 either ship your product to Amazon when sent weekly replenishment PO’s or through a Direct Fulfillment model.  This business is run through the Vendor Central portal.

Pros

• AMS – Amazon Vendors get access to Amazon Marketing Services (AMS). This provides additional marketing levers like Sponsored Brands, Sponsored Products, and Product Display Ads, – which can help drive traffic and conversions to your listings.  (Rumors are that some of the AMS offerings may be available to 3rd party sellers soon, see below)
• Cash Flow – Generally you can turn your inventory into cash faster in this model as compared to 3P
• Prime – When Amazon carries your inventory you get immediate access to Amazon fulfillment. This creates operational efficiencies in that you don’t have to ship direct-to-consumer while giving your assortment the coveted Prime badge.

Cons

• 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 unless your distribution is clean.
• 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 channel.
• Content Control – Once Amazon acquires your inventory, all future content changes to your Amazon Detail Page will have to be approved by the Amazon Retail team.

Update

• Amazon deprecated the Strategic Vendor Services (SVS) program and absorbed it into the Amazon Vendor Services (AVS) group.  With this, there’s been a shift from Amazon moving more towards a self-service model for management of vendors. We’ve seen this model apply with vendors that represent the bottom 90-95% of vendors in a given category.  So if you are in the majority, good luck!
• Amazon has deprecated the confusing AMS workaround for 3P sellers, Vendor Express.  All Vendor Express vendors had to either hope they received a Vendor Central invitation or were forced to move to Seller Central.       
• Amazon has recently launched a new set of A+ Premium modules that now include many additional features.  These include A+ Premium Content Video Loops, Hover and Click Interactive, Content Slider Galleries and Premium Content Video.  We see the trend of Amazon adding more video real estate to detail pages on desktop and mobile continuing, especially in advertising.

Amazon 3rd Party (3P)

In this model, you set up your own Amazon storefront and choose to sell your assortment direct-to-consumer becoming the Retailer.   This business is managed through a portal called Seller Central.

Pros

• 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 in the 1P model.
• Prime – Access to the Prime shopper and badge via the Fulfillment by Amazon (FBA) or Seller Fulfilled Prime (SFP) program.
• 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 – As the seller, you set and control your retail price points.

Cons

• 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 it may be coming soon…
• Management – From our experience, selling in the 3P model requires more active management.  You must monitor inventory levels and decide when to replenish your FBA inventory, manage your customer service and manage cash flow.

Update

• Amazon has rolled out the Product Detail Page thumbnail video option to most Brand Registered sellers.  This provides much better merchandising opportunities above the fold.
• Brand Stores on Seller Central have now become an invaluable lever; providing brands with the ability to drive inbound social media traffic via custom social tags to Brand Store pages.  The reporting feature for Brand Stores has also become very robust and provides solid insights data.
• Sponsored Brands – formerly called Headline Search Ads – have been officially rolled out to Brand Registered sellers
• Finally, Amazon has released a Beta within Sponsored Product Ads that allows for additional targeting options around product categories, individual products and/or specific brands.  Although similar, these are not to be confused with Product Display Ads that are still only available to 1P Amazon Vendors.

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 and you manage the assortment you sell direct-to-consumer on your Seller Central account.  

Pros

• Access to AMS for your 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

Cons

• Must manage 2 different Amazon interfaces
• Must manage 2 different inventory strategies
• May need to implement a re-pricer that pegs your 3P pricing to your 1P pricing

Update

• We’re hearing rumors that sometime in the first half of 2019 Amazon will combine Vendor and Seller Central into a single UI.
• Amazon merged its Marketplace and Retail teams under the direction of a single executive.  Previously there was resistance to collaborate between the 2 groups but the standardization signals their further embracing of 3P sellers.
• Amazon’s unclear MOA policy has received an update that provides continued ambiguity.  They’ve added language that specifically prohibits sellers from having offers for products Amazon carries and have extended the reach of the policy to include

“to prevent customer confusion, if any of the Brand’s products are sold by Amazon, the Brand may not also sell those products as a seller in the Amazon store.”

“This policy applies to Brands and manufacturers, as well as their agents, licensees, and other representatives selling on their behalf in the Amazon store.”

Still, in conclusion, what’s best ultimately depends on how you want to display your products and what level of control you seek.  If you care more about driving top line sales and less about your retail price points, then the 1P model may be right for you. If you have a large assortment and want to better control your retail price points, then the 3P model may be right.  If you want the best of both worlds, then the Hybrid model could be your fit. There are many other implications to consider but in general, this is a good starting point. Happy Selling!