Amazon offers two sales strategies to companies present on its platform – first-party Vendor (1P) or third-party Seller (3P). In a nutshell, Vendors operate as suppliers of Amazon Retail, selling their products to Amazon in bulk; Sellers, instead, sell products directly to consumers through the Amazon Marketplace.
This article is aimed at providing an overview of the Vendor and Seller models to help brands understand which strategy is best tailored to their needs.
1) Pricing strategy
When selecting a pricing strategy, Brands selling on Amazon should be aware of the mechanisms regulating the Buybox. The winner of the Buybox for a product is the Seller or Vendor which provides the best offer for that product, with respect to price, delivery cost and time.
The winning offer is the one shown in the product page: customers adding products to their cart are in fact purchasing from the winner of the Buybox.
Sellers can modify their selling price for a product at any time. However, their pricing strategy must be consistent with that of other sellers of the same product to ensure winning of the Buybox and generating sales. Their Amazon strategy should therefore be informed by their overall distribution network strategy to be price-competitive.
On the other hand, Vendors can only negotiate the price of bulk goods sold to Amazon. As a retailer, Amazon retains the final decision over pricing and strives to provide the best offer available to end customers online.
Amazon organizes shipping orders for 1P Vendors based on its estimates, in order to avoid out-of-stock. Vendors only have to fulfill B2B orders to Amazon warehouses, while Amazon takes care of the delivery to final customers.
Through this channel, customers can order products with the Amazon Prime program (benefitting from free shipping and short delivery time), and the Vendor may also access Prime Now, Pantry, Subscribe & Save and other programs such as Dash.
3P Sellers have two options for logistics management. They can either decide to autonomously manage the shipping process for each individual customer, or to rely on Amazon FBA (Fulfillment By Amazon).
Differently from the Vendor model, in the FBA program Sellers do not receive orders from Amazon, but have to keep inventory levels monitored and autonomously ship products to Amazon warehouses when required, in order to ensure offer availability. Amazon Seller Central, the platform available to Sellers for channel management, supports them by providing an estimate of inventory stock duration and recommends replenishment quantities.
While brands with solid distribution capabilities may decide to ship products autonomously, the FBA program is extremely reliable from a logistic point of view and makes products eligible for shipping with Amazon Prime. This last element has been shown to enhance customer experience, conversion and product sales, thanks to the short delivery times managed by Amazon’s trusted brand.
3) Brand Image and Marketing
Both Vendors and Sellers can enhance their control over the brand image on Amazon beyond simple product listings.
First, they can create personalized Brand Stores, similar to e-commerce websites, where they can build landing pages for product selections enriched by visual content and give more focus to specific listings.
Both Vendors and Sellers can also benefit from Amazon Marketing Services (AMS), the pay-per-click (PPC) advertising program which allows brands to increase awareness and sales volume through paid campaigns – Sponsored Products, Headline Search and Product Display Ads.
Given the power and complexity of Amazon advertising tools, structurally different from traditional ones, the few brands who are able to master them can gain a significant competitive edge over competitors within their category. For this reason, brands are increasingly resorting to specialized Amazon digital agencies to maximise their advertising performance on the platform.
Additional services on Amazon are Enhanced Brand Content and A+ Detail Pages, available for Sellers and Vendors respectively, which help brands enrich their product pages with premium content, such as galleries and additional visual content (e.g. videos).
In addition, Vendors can request customer feedback through the Vine Program, a paid feature to entice qualified feedback from trusted reviewers.
An example of Brand Store from the iconic 3M brand Post-it
4) Post sales: Customer service and product returns
Customer service is typically managed by Amazon for both Vendors and FBA Sellers, with the exception of product and billing information requests, which have to be handled autonomously by Sellers. Differently, Sellers operating outside the FBA program are fully responsible for the Customer Care in the customer’s local language.
Product returns for Vendors are usually handled by Amazon. However, contract terms may vary depending on the specific Vendor and Amazon needs. For Sellers in the FBA program, Amazon can also manage customer returns until the delivery of returned product to Amazon warehouses. Sellers not adhering to FBA program, instead, have to deal with the whole return process autonomously.
5) Economics: Payment terms, cost of the service and profit margins
For Vendors, Amazon’s payment terms usually resemble those of the large-scale retail distribution. For Sellers, Amazon operates as a payment intermediary: the platform collects customers’ money, retains the fees related to the product sold, and periodically settles the sales amount. Generally, Sellers can negotiate with Amazon more flexible payment terms compared to Vendors and have a shorter cash settlement period.
The main costs for Amazon Sellers include:
- A Fixed fee of 39.99$ per month;
- A Referral fee of 5% to 20% of the final price of each product sold, depending on the category;
- Fulfilment and Storage fees for Sellers using the Amazon FBA program (or separate logistics costs if they decide to fulfill order autonomously).
Vendors instead have a different cost structure, as they must negotiate with Amazon a wholesale price for their goods and other contributions.
Depending on product category, negotiation power and distribution strategy, brands can achieve higher margins from either model. However, a holistic strategy should not overlook the competitive landscape and sales volume potential driven by the two models in order to assess overall channel profitability.