Take Advantage of Consumer Demand on Amazon Without Losing Control, Part 1
Amazon.com, it’s the force keeping brand manufacturers up at night. The online retail giant now accounts for over 49 percent of all U.S. e-commerce sales — a number that shows no signs of plateauing. Amazon’s e-commerce sales in the United States alone are expected to reach $258 billion this year, up nearly 30 percent from a year ago.
Looking to capture additional market demand for their products, many brands are trying to navigate both the angst and opportunity that Amazon represents. Adapting to and capitalizing on Amazon’s dominance isn’t simple. It starts with one important question: Should we sell “to” or “on” Amazon?
There are two main options: 1P or 3P. Simply put, 1P is similar to a wholesale relationship, and 3P is a more typical direct-to-consumer model.
Let’s break down the pros and cons for each.
1P: Vendor Central
In this scenario, Amazon is a retailer of your products, placing purchase orders through the Vendor Central platform. Amazon stores your inventory and handles everything from pricing and shipping to customer services and returns. Amazon’s tagline for Vendor Central says a lot: You make it. We sell it. Your business grows.
But what happens when the honeymoon phase is over, you’re hooked on the increased demand and Amazon continues to lower pricing (and your margins)?
- Listing priority and increased conversion. Amazon promotes its own items, of course.
- "Sold and Fulfilled by Amazon" badge, and the peace of mind knowing you don’t have to manage fulfillment.
- Potential for significantly higher sales volume. With Amazon’s preferential treatment, demand will likely increase.
- Access to premium marketing tools. You can use AMS (Amazon Marketing Services) for advertising, A+ Content for increased conversions, and Amazon Vine for new product reviews.
- A developed selling strategy from Amazon, including Amazon Media Group’s ad spend.
- Customer service managed directly by Amazon.
- No control over minimum advertised price (MAP) enforcement, leading to price erosion and reduced margins due to wholesale pricing.
- Less control over inventory as you must give in to Amazon’s demands.
- Longer payment terms.
- Increased reliance on Amazon.
- No access to the inventory for multichannel fulfillment.
- Limited to the North American marketplaces.
- Difficulty launching new products; Amazon simply doesn’t want to take on risk.
- Confusing fees, which can even change throughout your Amazon relationship.
- Powerlessness over products sold to Amazon. Amazon can demand more and more of your product catalog.
3P: Seller Central
As a third-party seller, manufacturers retain the power to sell products directly to Amazon’s customers. Products are sold at a retail or list price, and manufacturers pay Amazon for use of its online storefront. As an independent seller you’ll have more control, but you’ll also have the burden of doing most of the heavy lifting.
Though you have an increased level of control, you’re also an equal with anyone else selling your product. You can opt to pay for Fulfilled by Amazon or manage a seller-fulfilled approach.
- Control over the number of units you list on Amazon without fear that Amazon will demand more.
- Access to enhanced brand content.
- One-hundred percent control over retail and MAP pricing, helping to increase your profit margins.
- Faster payment terms.
- Ability to quickly adjust pricing, allowing for discounts and promotions.
- Access to customer data, including delivery addresses and phone numbers.
- Low monthly storefront cost.
- Clearer fee percentages.
- Option to list as Prime seller with seller-fulfilled Prime.
- High referral fees from Amazon (ranging from 6 percent to 20 percent).
- Requires active customer service, including managing complaints and negative reviews. Amazon’s strict rules put you at risk for suspension from the marketplace.
- FBA (Fulfillment by Amazon) shipping fees (unless you choose to handle fulfillment yourself).
Let’s Talk About Prime
Adding another level of complexity to Amazon is the decision to pursue Seller Fulfilled Prime. The majority of online sellers understand the role that a solid presence on Amazon plays in increasing sales, but many have yet to discover the importance of gaining visibility with the Amazon Prime badge through Seller Fulfilled Prime.
Consumers love the guaranteed delivery dates, trackable shipments, free shipping and other benefits that come from Prime membership. To make the most of their investment, Amazon Prime members are actively searching for products with Prime badges.
What is Seller Fulfilled Prime?
In 2015, Amazon released a fulfillment program to serve as an alternative to Fulfilled by Amazon called Seller Fulfilled Prime. It allows sellers to display the Prime badge on product listings and deliver directly to Amazon Prime members from their own warehouses. Most importantly, it can offer massive exposure for sellers opting in for the program. It’s an excellent fit for multichannel sellers with their own warehouses and inventory, as well as brands selling products that aren't eligible for Fulfilled by Amazon or those looking to avoid the high shipping and storage rates that come with it.
What Are the Benefits of Seller Fulfilled Prime?
First and foremost, Amazon predicts a 30 percent to 40 percent jump in sales for sellers that join the Seller Fulfilled Prime program. In addition to increased sales, here are a few other benefits:
- increased brand visibility to Amazon Prime customers;
- increased brand validation with display of the Prime badge;
- sellers can receive returns directly to their own warehouses;
- many Amazon Prime members will filter for Prime products in search results;
- a higher chance of winning the Buy Box (giving sellers the chance to compete with FBA sellers and other Amazon products); and
- the ability to determine where you offer the Prime badge to optimize on shipping costs.
So, how can your brand qualify for SFP? The value of the Prime badge is undeniable, but achieving it is extremely challenging. First, you must opt in for Premium Shipping (often referred to as a stepping stone to Seller Fulfilled Prime), which includes same-day delivery, one-day shipping and/or two-day shipping in the US. (Note: you must have been selling on Amazon for at least 90 days to be eligible for a Premium Shipping offering). You then enter into a high-stakes, 30-day trial period requiring:
- on-time shipment rate of at least 99 percent for Prime trial orders;
- Prime trial orders are shipped on the same day the order is received, as long as the customer places the order before the seller’s cut-off time;
- use of Buy Shipping Services for at least 95 percent of Prime trial orders; and
- a cancellation rate of no more than 1 percent of Prime trial orders.
After the 30 days are up, you’re then eligible to submit products to be labeled with the Prime seal of approval.
Most brands can’t reach Seller Fulfilled Prime status on their own. And even if they can, the shipping costs to deliver in two days will kill them. This is where many brands turn to a strategic partner with intelligent shipping technology and experience navigating the complexities of Amazon. In part two of this series, I’ll share some of the newest trends brands should evaluate when considering selling on or to Amazon.
Craig Haynor is the vice president of account management and operations at Ally Commerce, a provider of direct-to-consumer e-commerce as a service.
Craig Haynor is the vice president of account management and operations at Ally Commerce, a provider of direct to consumer e-commerce as a service. Ally partners with brand manufacturers to drive their direct to consumer business, combining eCommerce expertise, technology and operational services.