News and industry discussions are swirling around the rumor that Amazon is shaking things up with smaller suppliers and planning to cut all 1P (Vendor Central) manufacturers under $10M in annual sales. If you’re selling products on Amazon and read the Bloomberg article, you might be concerned. However, with the right preparation and information, you’ll realize you don’t need to worry.
Here’s the gist of why you shouldn’t worry: First, there have been no confirmed timelines associated with this change – so it’s possible you’ll never be affected. Second, there are tremendous advantages to a being third-party (3P) seller on Amazon, and the Ideoclick team can readily help you get set-up. If you already have a hybrid 1P/3P arrangement, we can help you optimize your Seller Central account and product assortment as a precaution to best mitigate risk.
First, it’s helpful to understand what’s likely driving Amazon’s motivations behind the rumored transition:
Having lots of smaller suppliers introduces risk to Amazon
For Amazon, holding and managing inventory for smaller suppliers with less predictable product movement represents a financial risk. Also, it’s difficult to properly vet, police and remove (when necessary) the smaller suppliers who may be selling counterfeit or otherwise unauthorized product. Similarly, smaller manufacturers who may not have met certain safety or testing standards can clearly become problematic for Amazon.
First-party vendors are more high-maintenance for Amazon
As with any business, a company must consider how employees’ time spent generates revenue and constantly evaluate the value of each employee. Considering the time involved in onboarding and managing first-party platform vendors and items (even with scaling and automation efforts), Amazon finds that the arrangement comes at a high cost to serve compared to the realized revenue.
Amazon’s investment into one-day shipping means they must find ways to shift to more profitability elsewhere. Third-party vendors create “easier” profit for Amazon, and better selection for customers
- Without the maintenance mentioned above, Amazon still earns commission on every sale through the 3P platform – so it’s guaranteed earnings at a lower cost to serve.
- Having a large stable of 3P sellers allows Amazon to offer their customers a larger selection, without the heavy burden of directly managing them.
- With Amazon’s “hands off the wheel” price matching algorithm for 1P vendor items, the items and even entire brands may become exposed to a CRaP out situation (Amazon’s term for “Can’t Realize any Profit”), which presents a loss for Amazon as well as vendors. Vendors moving to 3P gain the control to price their products more sustainably – creating a win/win for vendors and Amazon.
Here are some advantages of the third-party seller central account:
A seller central account gives you the ability to set your own retail prices (avoid CRaP status), manage your own inventory and marketing. And because you manage your own data, you have access to superior reporting.
There’s a tremendous community of experienced Amazon third-party seller forums that share best practices and help others troubleshoot. You will be amazed at the plethora of resources available.
What you should do
We can help you create and manage a strategic pricing strategy. Note that in your Seller account, you will have to manage sales tax remittance in all states.
You will find the Seller community a very welcoming place and the third-party arrangement an incredible opportunity to continue growing your business.
Andrea Leigh is the VP of Strategy at Ideoclick. She is a 10-year former senior executive at Amazon, where she led over 15 product categories, worked on the launch of Amazon’s automated pricing system and CRaP programs, and ran Amazon Prime for Amazon Canada.
Andrea is frequently quoted on the topic of Amazon and eCommerce in the media. She is also a speaker at national eCommerce, retail and digital marketing conferences, a contributing writer and podcast interviewee for educational forums and media.
To learn more information, head to IdeoClick’s website.