Should you move your Amazon business from Vendor Central to Seller Central? This is one of the most common questions we receive as an agency that manages $250 million in annual GMV. The short answer is: it depends. Many people will tell you that the Amazon 3P model is a guaranteed path to more sales. However, higher sales do not necessarily mean higher profits. This article explores the most common reasons why brands want to transition from 1P to 3P, important factors to consider before you make the switch, and helpful strategies to ensure your brand transitions successfully.
Vendor Central (1P) vs. Seller Central (3P)
First, the basics. In the 1P model, you are the wholesaler, and Amazon is the retailer. 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 replenishment purchase orders. This business is run through the Vendor Central portal.
When you transition to 3P, you become the retailer. In this model, you sell your products directly to consumers. Sellers on Amazon have full brand authority and complete control over how their products are listed and marketed. Unlike 1P Vendors, 3P Sellers set their own pricing, determine which products to list and promote, and manage their own inventory. All of this requires more work than the 1P model, but if done correctly, it can (but not always) lead to higher profits.
Top Questions to Ask Before Moving from Vendor Central to Seller Central
1. Can you afford Amazon FBA fees?
Seller Central is more expensive than Vendor Central. If you enroll in Fulfillment by Amazon (which automatically makes your products Prime-eligible), Amazon will charge a fee for each unit sold based on dimensions and weight. Amazon also charges a referral fee for each item sold. This amount depends on the product category, but most referral fees are between 8% and 15%. FBA and referral fees can quickly eat into your margin. If your products are not priced accordingly, Seller Central might not be profitable for your brand.
2. Is the current assortment Amazon exclusive?
One of the advantages of Seller Central is having control over your prices. However, it’s important to understand that pricing flexibility is an option when Amazon is the only seller of the SKUs. If you transition to Seller Central and Amazon begins price-matching your products against retailers like Walmart and Target, you’ll face challenges like price suppressions, pricing errors, and Buy Box losses. If your current SKUs and assortments are not exclusive to Amazon, you might be more successful on Vendor Central.
3. Are you prepared to win the Buy Box?
To succeed on Seller Central, you’ll need to win the Buy Box. You don’t have to worry about this in Vendor Central since Amazon is the seller. However, in the 3P model, you’ll be competing with resellers. Before you transition to Seller Central, analyze your reseller landscape and what it will take to ensure you can win the Buy Box and enforce MAP policies. In some cases, it makes more sense to stay on Vendor Central and let Amazon worry about competitors.
4. Do you have enough cash flow?
Cash flow is a common challenge for brands that switch to Seller Central. When you shut off Vendor Central Purchase Orders, you’ll experience a decrease in immediate revenue. Instead of receiving money upfront for your inventory, you will need to ship it to Seller Central on consignment. In addition, 3P brands must maintain an account level reserve. This is a large sum of money held by Amazon to cover returns. The lack of Purchase Orders, upfront costs of sending inventory to Seller Central, and your account level reserve will make Seller Central much more expensive than Vendor Central in the beginning.
5. What is the average selling price of your top sellers?
Products priced under $10 are rarely profitable on Seller Central due to FBA and referral fees. If most of your top-selling products are under $10, you will be more profitable on Vendor Central. The only exception is if the products are under 3 lbs and qualify for the Small and Light program, which reduces your FBA fees. If you decide to transition to 3P with low-priced products, consider creating multipacks or bundles to increase the MSRP and improve profitability.
6. Do you know how to manage FBA logistics and storage?
Shipping inventory to Amazon is different for Seller Central and Vendor Central. If you enroll in FBA, you will have unlimited storage for the first 18 months. After that, Amazon will assign you an Inventory Performance Index (IPI) number. This measures how efficiently you manage your inventory on Amazon. Your IPI, along with your sales history, will determine your storage levels at fulfillment centers. Not managing your inventory properly in Seller Central can lead to decreased storage capacity, which will impact your sales potential.
7. Have you negotiated your Vendor Central terms?
If your brand is not profitable on Vendor Central, it might be due to your current terms with Amazon. Many brands are unsure how to negotiate their Vendor Central agreement. Instead, they simply accept Amazon’s initial offer. This is never the best option. Negotiating your terms with Amazon is a simple path to higher profits on Vendor Central.
Channel Key Takeaway
Switching from Vendor Central to Seller Central is a major decision. If you have a recognizable brand, deep pockets, and determination to play the long game, 3P is probably the best option. However, there is a lot to consider. Moving your brand from 1P to 3P is more challenging when you have limited cash flow and are unprepared for the new challenges you will face. Before you make any decisions, take the time to understand the differences between Vendor Central and Seller Central. They are two completely different models for selling on Amazon – each with its own set of pros and cons. Understanding them and how they relate to your business is the key to determining whether 1P or 3P will be more profitable for your brand.