Amazon brands maintain a high level of control over their brand's development and growth when adopting a Third Party Selling (3P) business model. Under a 3P business model, the Amazon brand is a Direct to Consumer (D2C) seller.
There aren't any middlemen involved. You maintain much greater operational and logistical control over your business than if you go the 1P vs 3P route. The platforms with whom you're working control that activity (i.e., Amazon, Walmart.)
Given this level of autonomy - and the profits that can come from it if executed correctly - the 3P marketplace is highly competitive. With the onset of COVID and many brick-and-mortar retailers' turn to a more substantial online presence, this is more true than ever before.
1. Why Third-Party Selling is So Popular
One of the primary reasons people sell online is to control their destiny after years of working in a corporate environment and the desire to escape it. In some instances, it's a part of serial entrepreneurship where people have a bunch of different irons in the fire at once.
Having complete control is a massive benefit of being a 3P seller. As a 3P, you can control inventory. There’s a difference between vendor vs seller. As a seller, you control inventory, not just pass it along to a vendor to resell. And the look, feel and reputation of your brand without passing this work along to another platform. And hoping they will care as much as you will to build it in the right way.
Hint: They won't.
This statement isn't to suggest 1P is entirely worthless. When you're considering a 1p vs. 3p model in a complex market or one with a low price point, 1P can make sense. It allows you to save money by going the Fulfillment by Amazon (FBA) route and letting Amazon handle the higher volume that a low price point or perishable product requires.
Before we get into why 3P selling is so attractive given the current market, let's see why people's effort in building a 3P brand is worth it.
2. How 3P Sellers Are Winning
3P sellers don't only make money on products they turn over. Far from it! Over the past ten years or so, there's been a new type of entity pop-up that's making 3P sellers rich: rollup firms.
In the same way, angel investors or venture capitalists invest in promising tech startups, rollup firms invest in powerful Amazon 3P brands. Their goal is to purchase as many successful third-party selling brands as possible and house them under one roof as a robust portfolio of investments. If you play your cards right and build a business with a strong backbone, you can get as much as four times to six times your company's value from a roll-up firm as an acquisition cost!
Pretty incredible, huh? And their profit is even more remarkable, standing to earn 15X to 25X what they paid to bring you into the fold. The economics of it all is pretty staggering.
To get there, though, you have to crawl before you walk. And follow best practices and fundamentals that have withstood the test of time and the challenges Amazon's ever-changing ecosystem has brought about.
3. The Benefits of an Amazon 3P Strategy
The benefits of an Amazon 3P strategy are many. It doesn't just end with control and autonomy; there's much more to it than that. Third-party sellers on Amazon can change pricing structures - raising and lowering prices as they wish - to react quickly to market forces.
Under a 1P model, you depend on Amazon to take care of this for you and are dependent on their algorithms to make the right "calls" on when to revise your product lines' pricing structures to stay competitive.
Because you have this level of control, it's also much easier to control margins. Your margins can quickly go up in smoke as a 1P if you're selling larger items vulnerable to market forces. This vulnerability is why most 1P sellers are most successful in pushing low-cost or perishable items.
It's necessary to occasionally incentivize your one-time customers to come back again to buy something else to build momentum. Or buy a product at a discount that isn't moving as quickly as you would like.
As an Amazon 3P seller, you can make these calls without answering anyone first. Under 1P, it's more challenging to get loyalty programs installed or make quick tweaks to pricing to drive greater volume.
In simplest terms, the most significant benefit of an Amazon 3P strategy is autonomy. Your brand grows with the work you put into it and your success in executing strategic initiatives that keep the momentum building. You're not dependent on anyone else to hold up "their side of the bargain" to ensure things keep running smoothly.
Beware: This will mean some long hours and sleepless nights, but the payoff is worth it in the end.
The best Amazon 3P strategy is dynamic. There are so many forces at play that you have to be ready, willing, and able to shift when necessary to stay on top of things.
4. How to Revise Your Amazon Business Strategy
To know what's working well and what isn't with an Amazon business strategy, you first need to have some established Key Performance Indicators (KPIs) that you measure. These KPIs can be different for businesses depending on the products they're selling or short versus long-term goals. But there are some standard KPIs everyone uses.
Here are a few to consider:
1. Inventory - especially aging inventory
2. Promotional and advertising costs
3. Customer performance: returns vs. non-returns
4. Conversion rates, and
5. Ratings and reviews
When you mix these six metrics, it paints a picture of the overall health of your Amazon business. And also helps you to identify red flags that need addressing. Even if you're newer to the Amazon game, you'll start to recognize what is normal for your operations and where there are outliers.
If your inventory is aging too rapidly - or too much of it is aging - then you may need to tweak your product mix to avoid Amazon's long-term storage fees, which can get expensive quickly. Trust us; you would rather pay commissions to Amazon for popular items than long-term storage fees for things you aren't selling.
Promotional and advertising costs can become a monster if you don't stick to a tight budget.
Running promotions can be a significant part of tweaking a strategy, but some risks are inherent. You must watch how these promotions perform carefully! Number one, so you don't run out of inventory to fulfill what you promise. But also so the volume of hits to your profit margin isn't more than what you can absorb.
If the volume of returns you're experiencing has surpassed your comfort level, it could be time to revisit your products' quality and ensure that they are consistent. This high level of returns could also be a messaging issue.
Is there something wrong with your product descriptions leading people to believe they're getting one thing when they receive something else? Make sure there's a solid alignment here at all times, and tweak as necessary.
As you already know, conversion rates are a slippery slope. If people don't buy when they land on your product pages or abandon carts too often, Amazon won't feature your products as often.
Or make it more challenging for you to rise to the top of search rankings. This fluctuation makes a stable conversion rate hard to achieve. Given this, there's little more important than conversion rates. Part of tweaking your Amazon 3P strategy is making sure your conversion rates meet the industry standard no matter what.
It's up to you to fix it if too many negative reviews tarnish your brand reputation. Affecting it could mean aggressively pursuing positive reviews from your loyal customers. And reaching out to frustrated customers to see what went wrong with a transaction or why they were dissatisfied with a product—and doing everything you can to rectify that!
Your Amazon 3P strategy is a living, breathing thing. There's never room for complacency. Complacent Brands vs 3P powerhouses is not a competition. And Amazon Brands are run by some of the most competitive people in the modern business landscape.
5. How to Manage the Stiff Competition Among Third Party Sellers on Amazon
Many Amazon brands choose third-party selling for a reason. While the landscape is highly competitive, it can also be very lucrative with the proper systems and processes. There are six areas you can actively control to stay competitive and continue to work your way up the 3P ladder:
1. Buy Box & Channel Governance
2. Inventory Management
3. Brand Governance & Catalog Cleanup
4. Effectively Controlling the Implications of Sales Tax
5. Massaging the Supply Chain - Limiting promotions, catching counterfeiters and brand gating, and
6. Mastering Amazon product variations
Let's take a look at each of these in some detail.
Buy Box and Channel Governance
The Amazon 'Buy Box' is arguably the most critical virtual real estate piece on the entire platform. As you've seen, it's on the right-hand side of a product page and covered with buttons like 'add to cart or 'buy now.' Every Amazon 3P strategy worth its salt has won (at least a share) of the Buy Box as a significant priority. If you're going to scale as a 3P business, you have to land in the Buy Box and land there often.
Well, easier said than done, right? It's certainly not easy.
You're never going to win it outright, but it's reasonable to win shares and win those shares consistently. And when you do, the compounding effects are worth the effort. Like anything else that's worth winning on the internet, you have to "game" an algorithm to some degree to get results. In this case, the Buy Box algorithm rewards 3P brands with strong baseline metrics.
Suppose you're consistently getting good reviews from your customers. In that case, they're giving you solid star ratings. Shipping times are what you promise them to be. Your customer service standards are reliable. And returns are rare.
You've laid the foundation to land in the Buy Box at least on occasion. Taking that to the next level requires some more specific tactics.
To amplify what your foundation provides, competitive, dynamic pricing is a necessity. Staying on top of trends and developing an instinct regarding market shifts to inform decisions is vital.
Creativity doesn't just come from pricing, however. Knowing how to build product bundles that are attractive to your audience and creating the right kind of Pay Per Click ads (if you want to go that route) are also essential puzzle pieces. You can't just lean on the basics and depend on the algorithm to work in your favor.
The right Amazon inventory management strategy can be the difference between consistent profit margins, continual growth, and struggles and frustration. There are a handful of best practices to separate you from the competition that are worth considering.
The first and most obvious is understanding your turnover rate and how your supply chain operates. How quickly does your inventory sell on average? Once something sells, how quickly do your customers receive it?
Everything else you do in inventory management stems from answers to these two questions. So it's something you must understand intimately.
As your brand experiences sales changes based on seasons, it'll get increasingly easy to start to predict how seasonality affects your business.
For example, you may have a hectic summer season, but things tend to be slower in the winter. You'll want to offload as much inventory as you can by running sales at the end of the summer. And you are keeping the warehouses pretty bare during the fall months in preparation to run lean during the slow season.
These patterns will become second nature as you experience cycles.
The intended role of brand governance on Amazon was to ensure brands played by the same rules. These rules included how brands presented themselves and their values, what they offer, and what about their unique value proposition (UVP) makes them stand out from the competition.
The problem is brand managers and product managers responsible for maintaining consistency in this brand "voice" exist in organizational silos. And have challenges in working together toward a common goal.
For brand governance to be more cohesive, the UVP must be crystal clear. And the vision for how to communicate that UVP through marketing materials, social media, packaging, and content is uniform.
This cohesion carries over to the way products are manufactured and the look and feel they communicate to your customer base. To protect your brand, and govern it effectively, bake this cohesive, holistic approach into your marketing efforts early on! Or, pay the price later.
Effectively Controlling the Implications of Sales Tax
At one point in time - let's say, before 2018 - the responsibility of adding sales tax to your products and tracking that for tax purposes fell squarely on the shoulders of the Amazon seller. As Marketplace Facilitator Legislation took hold in many of the 50 states, responsibility shifted from Amazon 3P sellers to Amazon.
Only five states do not have this legislation: Oregon, Montana, Kansas, Missouri, and Florida. If you live in one of those states, understanding the implications of sales tax on your bottom line and adjusting your pricing and inventory as necessary is your responsibility. Otherwise, the sales tax add-on is up to Amazon.
It doesn't mean you're off the hook for sales tax. It means you have to know when you're going to be responsible for it and when Amazon will come calling to collect.
Make sure you understand what the annual sales barrier is in your state so if you hit that barrier, you can prepare for sales taxes to be collected.
Massaging the Supply Chain
A smoothly-running supply chain is a dream for any Amazon 3P Seller, but getting there is a long road full of challenges along the way. And you can rest assured your competitors are pressing to get there faster.
In particular, there are three areas to consider: limitation of promotions, catching counterfeiters, and brand gating. If you can nip each of these in the bud, things become much more manageable.
The best way to keep promotions from getting out of hand - and codes shared among the consumer community - create single-use Amazon promotional codes.
These single-use codes are generated within Amazon Seller Central and all but eliminate the fraud that can run rampant when codes don't expire quickly enough and can be shared. It also prevents revenue loss when multi-use codes are shared to popular deal-sharing sites or on "coupon mom" sites across social media and the Internet.
Identifying counterfeit versions of your products isn't always easy, but the effort is well worth it.
While you can't prevent counterfeit versions of your products from being manufactured by less scrupulous factories, you can determine who those factories are through the use of Amazon's Transparency program.
The Transparency program allows you to create serial numbers for all of the products in your Amazon warehouses. Amazon destroys any products which are similar to yours when they do not include your registered serial numbers.
You can also go the good old-fashioned route of reaching out to the counterfeiter directly once you suss them out, but don't expect a positive response too often.
These people's morals aren't exactly sterling, to begin with!
Check this fantastic article from our Blog on more ways to proactively prevent counterfeiting.
Mastering Amazon Product Variations
We all want more choices when shopping online. Well, of course, we do. And this is precisely what Amazon product variations allow for your customer. If you have someone shopping for a shirt, you'd much rather they be able to choose from black, red, blue, and green than only be able to select black and be out of luck if black sells out.
However, it's essential to determine if product variations are suitable for your product first. And if they are to make sure to find a sweet spot. If you provide too many options, you could paralyze your potential customer into inaction. Causing them to move to a competitor where the choice is simpler to make.
Increasing your product variations can naturally lead to more visibility, increased conversion rates, and greater sales volume. Just make sure to do your due diligence before you rush ahead and provide several options for customers that they don't expect.
6. In Conclusion
It’s not easy to compete in the Amazon 3P seller landscape, but it’s absolutely possible! It’s going to require due diligence, consistent execution and determination, but if you put your resources and existing knowledge of Amazon to work your brand can become a powerhouse that will help you see a return on investment like you couldn’t imagine.