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Amazon operates a two-tier system that differentiates between the businesses that Amazon are supplied by, called Vendors (typically brand owners), and what they call Sellers (typically resellers and retailers) that sell on Amazon Marketplace. In a nutshell, Vendors sell wholesale to Amazon who then retails on the Amazon websites. On the other hand, Sellers sell under their own name in Amazon Marketplace.
In the Seller programme, it’s all your responsibility. From setting up your listings, to delivery, shipping and marketing… you have to do everything. You pay a small monthly subscription and commissions of around 15% (depending on product category). The other opportunity is to give shipping responsibility to Amazon and join the Fulfilment by Amazon programme. Essentially Amazon holds your products in its warehouse and manages the distribution for you. There are, of course, fees for this (albeit very competitive).
In the Vendor programme (which is invite-only), your brand sells to Amazon on wholesale terms. Amazon issues Purchase Orders (PO) based on market demand (on Amazon websites), your business fulfils the Purchase orders, and Amazon handles the rest, from delivery and shipping to customer service and (sometimes) even building your product pages. The Vendor programme also gives you access to certain exclusive tools to strengthen your listings and brand on the platform, including ‘A+ Pages’ (media-rich product descriptions), Enhanced Brand Content, Storefronts (brand and product category landing pages) and additional options when using Amazon’s advertising platform. Payment terms are 60 days, unlike on the Seller platform where funds can be withdrawn within days of an order being fulfilled.
As I mentioned earlier Amazon have historically seemed, and I emphasise seemed, to favour the Seller programme.
Currently, over 50% of Amazon sales are via the Seller programme, Amazon calls this 3P, short for third party (whilst Vendor is referred to as 1P), and although Amazon says they are agnostic about this there is considerable financial upside for them:
• There is no cost of sales on Amazon’s balance sheet. This makes their return on capital deployed look much better.
• More often than not the seller warehouses and distributes their own products (Although FBA uptake is increasing year-on-year).
• To maintain their ‘keep sale prices as low as possible’ proposition Amazon often matches the lowest price for Vendor products, which can be close to cost. This is expensive because they’ve purchased the goods and are discounting their own products.
It seems the logic of favouring Amazon Vendor over Seller is that although the margin is lower they want the big brands, generally vendors, so that they can control prices, supply, and distribution. It’s interesting to note that out of over 500 million SKU’s, only around 6 million are vendor supplied.
Conversely, the Seller programme with its third party structure would seem a more modern approach (subscription models are becoming increasingly popular), and easier to manage for Amazon.
It may seem prescient to think this considering what we’re going to be discussing further down the page but there are real rumblings, and some significant action to pre-suppose that this is Amazon’s next big drive.
At the beginning of last week, March 4th 2019, some significant Amazon vendors didn’t get the purchase orders they were expecting from their Amazon channel manager. Instead, they got a terse note telling them that they were no longer placing orders and in some instances, their vendor accounts were being shut down.
Some vendors were told that Amazon wouldn’t be placing its weekly orders for their products like it normally does. Others vendors were instructed by Amazon that if they wanted to keep selling their products on the platform, they should set up a “seller account” where they could sell goods directly to Amazon customers, rather than to the company itself.
The only response from Amazon so far is a very corporate:
“We regularly review our selling partner relationships and may make changes when we see an opportunity to provide customers with improved selection, value, and convenience.”
There’s a smell of big changes afoot about this imperative, bearing in mind what we said earlier about Amazon marketplace (sellers) being a more modern, commercially pragmatic and profitable approach. It devolves the majority of responsibility for the day to day logistics of the existing Vendor relationship to the Seller. In fact, if you look closely, and ask the question “where does Amazon feature in the seller relationship?” It looks like they just want to sit in the middle.
The Vendor business model has always been top-heavy in terms of investment (the warehouse, the people) and it’s surprising that this change hasn’t happened before. If you add into the mix the subscription/commission model that’s been so successful for Amazon, it seems like a logical step towards rationalisation of their retail offerings.
As author Tien Tzuo says about the growth and effectiveness of a subscription model:
“Today’s consumers prefer the advantages of access over the hassles of maintenance, from transportation (Uber, Surf Air), to clothing (Stitch Fix, Eleven James), to razor blades and makeup (Dollar Shave Club, Birchbox). Companies are similarly demanding easier, long-term solutions, trading their server rooms for cloud storage solutions like Box. Simply put, the world is shifting from products to services.”
This model is just as effective for businesses like Amazon in it’s application to supply chain.
Some brands would appear to be secure for the time being as not so long ago Amazon was telling larger brands that they didn’t want them selling on Amazon Marketplace. It would seem that they want to maintain more control over pricing for larger operators.
As news site Recode says:
“Amazon is telling these brands that they can no longer sell directly to customers as an independent seller on the Amazon platform for third-party merchants known as the Amazon Marketplace, The advantages to selling on the Marketplace include the ability to control the sale price of the goods, run price promotions, and get more data about how products are performing and who’s buying them.”
It seems unlikely that the Vendor programme will shut down completely in the short to medium term, but long term we’re not so sure.
These are challenging times for retailers and brands trying to develop their online strategy and inevitably coming up against the brute force of an Amazon decision that can have huge implications for their business model.
A lot of larger brands and retailers think that their size gives them some protection, but this recent development shows that no-one is safe. It is important to develop a multi-pronged approach to Amazon to ensure against situations like this and the most obvious of these is a hybrid Vendor/Seller approach.
All this information is coming out of the US operation and to date, we have no news about Amazon UK, but you can be sure that this is a worldwide imperative and will travel across the Atlantic at the speed of the, well, the Internet.
But like all things tech this could change next month, next week, or even tomorrow, things move so fast.