Lesley Hensell is cofounder of Riverbend Consulting, which solves challenging problems for Amazon sellers and vendors.
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Amazon can be a valuable sales channel for many brands. But there are two ways to sell on Amazon, and choosing between them can be a challenge.
The differences between these two Amazon sub-channels are significant. And for most brands, the choice is simple once those differences are understood.
Defining "1P" And "3P" On Amazon
On Amazon, “1P” refers to members of Amazon’s vendor program. These companies act as wholesale suppliers to Amazon, the same way they might sell products to a brick-and-mortar retailer. Amazon chooses which items to offer from a vendor’s catalog of goods and submits purchase orders to the vendor. The items listed for sale show that they are “sold by” and “shipped by” Amazon, making Amazon the seller of record. As one article in Forbes explained, Amazon decides the pricing for these goods, and not everyone can be a vendor on Amazon; the program is by invitation only. However, I’ve found that with the right connections, a new brand can wrangle an invite.
In contrast, “3P” refers to third-party sellers on the Amazon Marketplace. These businesses are responsible for about 60% of retail sales on Amazon, according to CNBC. They are the sellers of record for their items. Sellers operate independently of Amazon, which means they choose which products to sell on the platform and at what prices.
What’s it like being an Amazon seller (3P)?
Amazon third-party sellers can choose between two fulfillment methods for their sales.
• Fulfilled by Amazon (known as “FBA” ): 3P sellers ship their inventory to Amazon fulfillment centers, where orders are picked, packed and shipped by Amazon for a fee. This carries the added benefit of the Prime badge, as FBA items almost always qualify for free two-day shipping to Prime members.
• Fulfilled by merchant (known as “FBM” ): 3P sellers either ship the items themselves or use a third-party logistics firm to store and fulfill orders from Amazon customers.
In my experience working with Amazon sellers and vendors, Amazon third-party sellers have more power and control over their brand on the platform.
• They choose which products to offer and at what price and can change those prices when they see fit.
• They can launch products on Amazon without needing approval.
• They control their own advertising campaigns, coupons and other brand-building strategies.
• They control their listing detail pages and enhanced brand content, which can be built in a way that prompts sales.
With the power and control, however, comes additional responsibility. For example, third-party sellers will need to answer buyer messages. If orders are FBM, sellers must provide customer service, including returns and refunds. In addition, sellers must keep a close eye on their FBA inventory. There are also fees associated with selling via FBA to consider. Sellers must stay on top of these fees and understand how they might affect bottom-line profitability.
Finally, I’ve found that sellers are subject to enforcement by Amazon’s risk-management departments. Products or even seller accounts can be suspended based on buyer complaints or violations of the rules.
What are the pros and cons of the vendor program (1P)?
In my experience, many vendors ship their products to Amazon fulfillment centers, where Amazon takes possession of the inventory. In some cases, I’ve seen vendors act as dropshippers for Amazon and fulfill orders themselves.
In either case, the vendor does not decide the offer price for their goods; Amazon does. Some brands might see this as a challenge if they’re trying to maintain consistency in their prices across sales platforms and stores, as other websites or retailers might not be able to compete with Amazon’s pricing. This could lead to tricky negotiations for future purchase orders.
Amazon also has the option to choose to stop offering products. This can be painful to a vendor, which might have been counting on revenue from new product launches or past bestsellers that Amazon no longer wants to offer.
In addition, as part of its vendor agreement, Amazon offers a “consolidated fee structure,” as the aforementioned Forbes article also explained. These can affect bottom-line profitability as well.
Where does the vendor program make sense? Brands selling large, heavy items can often benefit from becoming an Amazon vendor, as I’ve seen fees can be high for large, heavy items on the 3P seller side. Vendors also sidestep many of the hassles of online selling, as Amazon handles customer service issues, including returns, refunds, buyer messaging and more.
In addition, I’ve found that vendors can benefit from the higher sales velocity that can come with the Amazon Prime badge, as well as Amazon’s more favorable algorithmic treatment of its own products in search results.
How can you choose between the options?
For many sellers, third-party selling offers better brand control and opportunities for revenue growth on Amazon. However, keep in mind this does require additional infrastructure and personnel, as well as skills in inventory management, optimization and advertising. If your goal is to control the ultimate destiny of your brand, you can consider leveraging the strength and ubiquity of the Amazon platform via third-party selling.
On the other hand, the 1P, vendor option might best fulfill the goals of sellers with large, heavy items. In addition, it provides a solution for those who prefer a “set it and forget it” kind of relationship that doesn’t require as much oversight and day-to-day operational work. Consider your goals to determine which option is best for you.
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