BECOMING AN AMAZON VENDOR
NAVIGATING THE TRADEOFFS OF 1P VS 3P
February 2016
© Mantaro Partners, LLC
OUR GOAL FOR THIS SESSION
Answer the two biggest questions:
Is 1P right for me?
How do I maximize my sales as a 1P?
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CONTENTS
01
02
03
Quick Facts
The Amazon opportunity in 30 seconds
Decision Points
The most important trade-offs to make first
The Virtuous Cycle
Your window into how Amazon thinks
04
05
06
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The Next Level of Trade-Offs
The details you need to know
1P Strategy
Crossing over and making millions
Case: Edsal
Virtuous cycle in practice
QUICK FACTS
AMAZON OPPORTUNITY
4
Global Net Revenue (2015)
$107 billion
Employees
230,800
Worldwide Active Customer Accounts
304 million
Unique Monthly Visitors
192 million
Year-over-year Revenue Growth
20%
Online User Reach in the United States
69%
Source: Statista.com
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AMAZON REVENUE HITS $107 BILLION
Source: Statista.com
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AMAZON HAS 304 MILLION ACTIVE CUSTOMERS
Source: Statista.com
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AMAZON IS DOMINATING GLOBALLY
Source: Statista.com
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DECISION POINTS
1P VS 3P TRADE OFFS
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DOES 1P MAKE SENSE FOR ME?
1P is worth considering if:
 You are a manufacturer of a brand
 You have a private label brand
 You are a sizeable wholesale distributor
 You have exclusive access to products
1P doesn’t make sense if:
 You are a retailer competing with Amazon
 You can’t guarantee reliable supply of inventory
 Selling directly to Amazon clearly threatens your other channels
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WHAT’S MOST IMPORTANT TO YOU?
 Control over market pricing
 Overall Brand presence, impressions
 Customer information
 Logistics & Inventory Management
 Cash Flow
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THE VIRTUOUS CYCLE
JEFF BEZOS’ SECRET WEAPON
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EVERY VENDOR MANAGER FOLLOWS THIS PLAYBOOK
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THE NEXT LEVEL OF TRADE OFFS
DIVING DEEP INTO THE DETAILS
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1P VS 3P CONSIDERATIONS
1P
Inventory
Management
Brand Image
FBA
MFN (Seller Fulfilled)
Amazon.com buys inventory from you. Amazon buys to a forecast
with generally no returns
Amazon stores inventory for a fee.
You forecast demand.
You handle your own inventory. You
forecast demand.
You control your brand image. Your content takes priority (product
descriptions, images, Darwin merges, videos, etc.)
You load the content that you want. Other vendors may load content as
well.
Product Selection
In general, Amazon.com wants to make your full selection available
for customers to choose what they want
- Buyers are incentivized to maximize ASIN count
- Items that don't sell well elsewhere have been found to sell on
You choose the products that you want to sell.
Amazon.com
- Customers are informed of all of the products that you have
available, not just products that fit on a store's shelf
Account Analytics
You have access to Amazon Retail Analytics Basic. You can pay for
additional analytics with ARA Premium. Vendor Central reporting is
focused on helping you better meet Amazon's needs. They are more
supply chain and sales focused, but do offer some customer
Seller Central analytics are focused on helping you become a better seller.
insights.
They are more comprehensive than Vendor Central regarding retail
metrics.
If your sales drop significantly or you are a callout in a weekly
business review, the buyer may review your account for blips, and
may contact you.
Customer Trust
"Ships and sold by Amazon.com" is a trust builder with customers
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"Fulfilled by Amazon" message is
better than sold by a third party
Many customers prefer to buy from
Amazon.com or an FBA seller.
Customers see an element of risk in
buying MFN.
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1P VS 3P CONSIDERATIONS
1P
FBA
MFN (Seller Fulfilled)
A buyer may manage your account.
You manage all your sales
- Your account must be large enough
- Seller Central is generally thought of as providing better service than
- Small accounts receive few and slow responses
Vendor Central "Contact Us" staff
Service Level
- Vendor Central "Contact Us" is available to answer questions and - Category Merchant Managers do exist within Amazon, but are difficult to
resolve problems
access. Will usually only contact you when a severe problem occurs that
- Special programs exist for large vendors
negatively impacts Amazon.
Amazon.com independently sets the prices that its charges for your
products
You control your prices.
Control of Pricing - It prefers not to comply with MAP or other pricing policies
- Amazon prices based on internal and external competition, as well
as algorithmic rules
Amazon.com wins the buybox frequently and alters the variables
that impact "winning the buybox.“ Amazon gets a “home field
advantage.”
You control your pricing and can assess how Amazon.com is "winning the
Winning the buybox - Profitability
buybox.“ FBA gets an advantage over MFN.
- Shipping reliability
- Instock or not
- Lowest cost
to big/event marketing packages. Vendors can self-service
Access to Marketing Access
coupons. Vendors can participate in all deals, including Deals of the
& Promotions Day and Lightning Deals.
Cost
Payment terms and COOP agreement. Terms are negotiable
depending on the category.
Commons terms are:
Payment terms - 2%, 90, 91 Net
Marketing Accrual 10%
Freight Allowance 2%
Damage Allowance 2%
VIRs…
Only select sellers can participate in Amazon marketing packages and
deals.
Amazon referral fees vary by category, between 8% and 45% of the sale.
FBA has an additional fee schedule.
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1P VS 3P CONSIDERATIONS
FBA
1P
Data on customers
Chargebacks
Rich Media
Multi-channel
fulfillment
MFN (Seller Fulfilled)
Amazon.com doesn't share customer data with you
You know who your customers are: names, addresses, phone numbers
Amazon is frequently adding new chargebacks. Chargebacks are
poorly understand and commonly wrong. Support from
Amazon.com to fix issues is weak and slow.
Some chargebacks.
Avoids Retail chargebacks
Much easier to include product videos and pdfs. A+ detail pages are
Limited ability to add rich media content
available for a fee.
Not applicable. Inventory is available for Amazon Retail only
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You can support sales from any store
or location with the inventory that
you have stored in Amazon
Fulfillment Centers.
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1P STRATEGY
HOW TO GET BIG WITH AMAZON RETAIL
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THE VENDOR VIRTUOUS CYCLE
Assortment
Relationship Management
Customer Experience
Amazon
Growth
Traffic
Optimization
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Revenue
CROSSING THE CHASM
Start-up
Accelerating
Crossing the Chasm
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Sustaining
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CASE STUDY
BUILDING A $10 MILLION BRAND IN 18 MONTHS
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HOW EDSAL GREW TO $10 MILLION IN 18 MONTHS
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Edsal UR185L-BLK Black Steel Heavy Duty 5-Shelf Shelving Unit
Before
During
Revenue
Price (Revenue)
Contra-COGS %
Contra-COGS
Total Revenue
$89.99
8%
$4.72
$94.71
Revenue
Price (Revenue)
Contra-COGS %
Contra-COGS
Total Revenue
Costs
COGS
Inbound Shipping Cost
Outbound Shipping Cost
Variable Costs
Total Cost
$59.00
$12.00
$21.00
$3.50
$96
Costs
COGS
Inbound Shipping Cost
Outbound Shipping Cost
Variable Costs
Total Cost
Net Margin
Net Margin %
($0.79)
-0.8%
Net Margin
Net Margin %
Units Sold per Week
8
Weekly Revenue
$720
Yearly Revenue Run-rate $37,436
Yearly Profit Run-rate
-$329
After
Actions:
$49.99
8%
$4.72
$54.71
$59.00
$12.00
$21.00
$3.50
$96
($40.79)
-74.6%
Units Sold per Week
350
Weekly Revenue
$17,497
Yearly Revenue Run-rate $909,818
Yearly Profit Run-rate
-$742,378
Customer Experience, Lower Prices,
Traffic:
• Fixed packaging issue
• Fixed QA issue, reduced defects
• Improved product detail page
• Lowered price
• Email, Site Placements, Retargets
Lower Cost Structure:
• Negotiated lower COGS
• Full truck orders
• Increased Contra-COGS
• Increased payment days (30 to 60)
• Inventory allocation throughout
network – reduced long-zone
shipping
• Pallet builds for faster receive;
reduced variable FC costs
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Revenue
Price (Revenue)
Contra-COGS %
Contra-COGS
Total Revenue
$64.95
9%
$4.32
$69.27
Costs
COGS
Inbound Shipping Cost
Outbound Shipping Cost
Variable Costs
Total Cost
$48.00
$4.00
$8.00
$2.00
$62
Net Margin
Net Margin %
$7.27
10.5%
Units Sold per Week
800
Weekly Revenue
$51,960
Yearly Revenue Run-rate $2,701,920
Yearly Profit Run-rate
$302,432
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Questions?
Contact Mantaro Partners
www.mantaropartners.com
[email protected]
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APPENDIX
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ASSORTMENT CONSIDERATIONS
Amazonians in both the 1P and 3P organizations have goals around adding selection
to the website. They believe that “More is better!”
Crucial Question: When is more not better?
Amazon Retail Vendor
Third Party
MFN
FBA
Heavy/Bulky
Hazmat
Tend to be “CRAP” ASINs
Hard to set shipping cost
Usually too expensive
Limited to a small number of FC’s,
must ship ground
Must Ship Ground
Hazmat is gated to FBA
Liquid
Fragile
Heavy (cost), subject to damage/leak during shipping (free replacements, customer complaints)
No barcodes
Multiple Pack
Sizes/Bundles
Multi-Box
Barcode required
Restricted
See list of restricted products in seller central (tobacco, guns, ammo, etc.)
Usually requires prep or specially designed packaging (cost), subject to damage (free replacements,
customer complaints, bad reviews, bad seller ratings)
Not required but preferred
Barcode required
Amazon requires unique ASIN for each Opportunity for sellers to create “virtual” products
pack size. Difficult for mfg.
Subject to high operational errors
Depends on seller
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Might not be eligible
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FULFILLMENT CONSIDERATIONS
Amazon Fulfillment center types
 Sortable (<18”L, <14”W, <8”H and < 20lbs)
 Non-Sortable
 Specialty




Clothing
Jewelry
Delayed Allocation (DA)
Hazmat (usually a caged in area inside a non-sortable FC)
Limitations of Fulfillment Centers
 Temperature control
 Humidity control
 Tracking serialized inventory
 Lot tracing
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CUSTOMER EXPERIENCE CONSIDERATIONS
What does Customer Experience mean to Amazon?
Selection, Convenience, and Price
 Quickly finding what you want to buy



 Search
 Browse
 Helpful content
 Helpful reviews & FAQ
Trust that you are getting a good deal
 Sharp prices
Trust that you will receive the product when you want it
 In stock
 Multiple delivery options
Trust that you will receive the product that you ordered
 Inventory management / proper labeling
 Damage free
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TRAFFIC CONSIDERATIONS
Ultimately, the traffic that we are concerned with is the number of times a
customer views your product detail pages (aka glance views, detail page hits)
What are the major drivers of traffic?
 Amazon organic search results
 On Amazon promotions
 On Amazon merchandising/advertising
 External Traffic
 Affiliate links, Blogs
 Google search results and display ads
 Deal sites
 Facebook ads
 Manufacturer “Where to Buy”
 Etc.
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COMPETITION CONSIDERATIONS
Competition on Amazon comes in two major forms:
 Same product being offered by multiple sellers drives competition to win the buy box:

 Best Price
 In Stock
 Seller Rating
 Amazon Profitability
Similar products offered by other brands:




Amazon organic search results
Customer Reviews
Pricing
Personalization
 “Customers Who Bought This Item Also Bought”
 “Frequently Bought together”
 “Customers Who Viewed This Item Also Viewed”
 Sponsored Products
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COST CONSIDERATIONS
Cost Structure on Amazon comes in several major forms:
 Cost of the product itself








 Best Price
Inbound Transportation
Outbound transportation
Referral Fees
FBA Fees
FC Handling
Customer Service
Customer Returns
Allocations
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PRICING CONSIDERATIONS
How Pricing is Managed
Amazon Retail Pricing
 Extraordinarily scalable, fast, and automated
 Highly market competitive
 Algorithm driven
 MAP pricing – limited adherence
3P Pricing
 Complete control of pricing at ASIN level
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RELATIONSHIP CONSIDERATIONS
Working with Amazon
 COOP
 Negotiations
 Cost Increases
 MAP
 CRAP
 Commercial Terms
 Legal Terms
 Chargebacks
 Getting Paid
 Receiver Errors
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