Understanding the differences, advantages, and disadvantages behind Amazon 1P, Amazon 3P, and the 3P Exclusive Authorized Seller models.
Introduction
If you’re not selling products on Amazon yet, you’re missing out on a capturing some of Amazon’s $490B GMV. Whether you’re selling directly on Amazon or not, your products are likely available on the platform and remain unregulated by your team. Those who are actively selling on Amazon are faced with a variety of challenges and nuances associated with their particular selling relationship with Amazon.
In this eBook, we’re going to take a closer look at Amazon selling models including 1P (First Party), 3P (Third Party), and an Exclusive Third Party (E3P) relationship. We’ll break down what they are, how they vary, and what some of the key features of each are so you can decide which model is the best fit for your business.
- 1p, 3p, E3p Defined
- Differences Between Amazon 1P, 3P & E3P
- Other Areas to Consider
- Which to Choose? 1P, 3P, E3P Pricing
- Conclusion
1P, 3P, E3P Defined
What is Amazon 1P ?
First Party or 1P seller (1P) means the business has a direct selling relationship with Amazon. A 1P relationship means that Amazon buys product from you and sells your products on the marketplace. As 1P is invite-only, Amazon Vendor Central, or 1P, will not be a choice brands can make unless they are already a substantial player in the mass market or have substantial sales they can show. An invitation means that a brand is meeting Amazon’s criteria as a nationally distributed brand.
What is Amazon 3P ?
Third Party Seller or 3P Seller (3P) means that the business has become an Amazon seller. You create an Amazon seller account and you are in charge of selling your own products online through the ecommerce giant.
What is Amazon E3P ?
A Exclusive Third-Party Seller (E3P) relationship means that a 3P sellers buys inventory directly from a brand and then resells the inventory on the marketplace as an authorized seller, if not the only authorized seller. Exclusive 3P sellers take on inventory risk and assist brands ecommerce growth by reinvesting margins into brand growth through content and advertising, brand protection, and global distribution into new markets and regions.
Differences Between Amazon 1P, 3P & E3P
Inventory Ownership & Order Fulfillments
AMAZON 1P:
AMAZON BUYS YOUR PRODUCTS In the 1P model, Amazon directly buys and resells your product, displaying your listing as sold and shipped by Amazon.com. 1P ensures that your product is price competitive, Prime eligible, and comes with two-day shipping.
AMAZON 3P: YOU OWN YOUR INVENTORY
As a marketplace seller, you take ownership of all inventory until the time it sells to a consumer. This means that you account for all of the inventory until the time it sells and Amazon will only pay you for the units sold.
AMAZON E3P: AN 3P SELLER BUYS YOUR PRODUCTS
In most cases, a 3P Exclusive Seller purchases and owns the inventory directly. The seller under this model will list on their own seller central account and select the fulfillment method based on margin economics and how to best represent the brand and enable sales on the Amazon platform.
Amazon Fulfillment Methods
1. FULFILLED BY SELLER
- As a seller, you can use your own fulfillment network which Amazon calls Manufacturer Fulfillment Network (MFN) or Fulfilled by Merchant (FBM). Inventory will remain in your warehouse or your 3PL’s warehouse until the order is executed and then an inventory feed or a manual pick from seller central will allow you to ship the products directly to the consumer. You can choose to use your own carrier or buy shipping via Amazon’s recommended shipping carriers.
- When a customer sees your products on Amazon, they will see the shipment show, “Sold & Fulfilled By Seller.”
- Prime Eligibility can be granted via seller fulfilled prime or FBA On Site. These programs require longevity of on time order compliance and shipment times. You have to meet certain metrics such as order to ship time, and on-time delivery or you run the risk of losing eligibility to these programs.
2. FULFILLED BY AMAZON (FBA)
- Amazon has an extended network of fulfillment centers that sellers can use to do end fulfillment to consumers. Sellers select how much inventory they would like to ship into FBA centers and Amazon Fulfillment ultimately drives the pick, pack, and ship for each customer.
- When a customer sees your products on Amazon, they will see the shipment show, “Sold By Seller & Fulfilled By Amazon.”
- Prime Eligibility is always granted under an FBA offer and is a major factor for why sellers choose to use FBA as a fulfillment method. d. Fulfilled by Amazon provides a guarantee to consumers of 2-day shipping and similar customer service efforts by Amazon for returns. If you are planning on using Amazon’s vast fulfillment network to ship your products, you will want to ensure that the FBA shipping costs are going to allow you to remain profitable on your products. Amazon provides a free profitability tool to verify your shipping costs and commissions required to sell a product on their platform.
Use our free FBA Revenue Calculator to gauge the FBA fees, revenues, expenses, and profits of your Amazon ASIN. Set your price points before you start selling.
Out of Stocks
If Amazon runs out of inventory of your product, it will be marked “Out of Stock” and the Buy Box will defer to another seller who will win the Buy Box in Amazon’s place. If ALL sellers and Amazon are out of stock, the product detail page will no longer be searchable other than through an Amazon.com/dp/ ASIN URL direct search for the product.
Inventory Forcasting
The intricacies of forecasting have become even more complex since the birth of ecommerce. Here are additional variables to keep in mind for 1P, 3P, and E3P when it comes to forecasting.
1P FORECASTING
In a 1P relationship you sell your inventory to Amazon (who is acting as a retailer) and ship to their warehouses. Vendor Central uses their algorithmic demand forecast to replenish products that are in the brands catalog. Brands have very little control over how much inventory Amazon will order and as we’ve seen recently, sometimes Amazon might not even order your inventory or may drop you as a 1P seller all together with little or no notice. Orders can be executed manually or via Electronic Data Interchange (EDI). Both have their challenges and most brands will have to ship to 20+ locations. If any data in Vendor Central is incorrect, the item on the PO can be rejected for incorrect pricing, incorrect case pack size, etc. Amazon may also charge you for shipping incorrect quantities.
3P FORECASTING
You are completely responsible for maintaining stock inventory levels that are consistent with demand. Both MFN, FBM, and FBA will require you to retain enough inventory in your warehouse or in the FBA warehouses and regularly restock inventory to ensure that you are in stock on products.
3P AUTHORIZED WHOLESALE PARTNER FORECASTING
Several 3P sellers have sophisticated inventory forecasting systems that allow them to place POs with a brand based on Buy Box percentage and sell through rate on the Amazon platform.
Shipping Requirements
“Packaging your shipment correctly is crucial to making sure your inventory reaches us safely and that it’s optimized for entry into our fulfillment centers.” – Amazon
1P SHIPPING REQUIREMENTS
Amazon requires vendors to provide products consistent with their shipping guidelines or they enact chargebacks and deductions. Amazon has a Vendor Prep and Shipping Guide that walks through the various requirements needed. Amazon has an entire section of their Vendor Central account dedicated to Chargebacks. In this area, they will monitor mislabeled products, on-time compliance, if you are cancelling orders, getting products to their warehouse within the specific window of time that they require, and will tack on a chargeback. Some Vendors have reported that these chargebacks can add up to upwards of 5% of their PCOGS wholesale revenue.
3P SHIPPING REQUIREMENTS
Amazon provides a large list of compliant shipping and routing requirements for sellers to adhere to or sellers will have to pay additional fees and chargebacks. FNSKUS: For most products, sellers are meant to individually label their skus with an FNSKU # which is unique to a sellers specific account and allows trackability of products. Commingled Inventory: For ASINS that Amazon 1P and 3P both sell, a seller can elect to have inventory which is not required to be labeled but ultimately gets mixed with other sellers and 1P offers inventory for the same like SKUs. If a seller does not comply with shipping guidelines, inventory will become stranded until further actions are taken. Actions can include re-labeling the products or prepping the products for shipment. These actions are added up as an additional service fee and then deducted from payments.
E3P EXCLUSIVE SELLER SHIPPING REQUIREMENTS
Since most wholesale partners are prepping and fulfilling products from their warehouse, they typically offer a bit more flexibility in how the product is received. The E3P Seller will then prep the product for Amazon fulfillment through either MFN or FBA and adhere to the policies that Amazon has established.
Other Areas to Consider
If Amazon runs out of inventory of your product, it will be marked “Out of Stock” and the Buy Box will defer to another seller who will win the Buy Box in Amazon’s place. If ALL sellers and Amazon are out of stock, the product detail page will no longer be searchable other than through an Amazon.com/dp/ASIN URL direct search for the product.
New Product Launches
Launching a new product on Amazon can be exciting, but it can also be a nightmare if you don’t have sales momentum to convince Amazon to purchase enough product orders to keep up with demand.
1P AMAZON NEW PRODUCT LAUNCHES
Launching a new product can become problematic as Amazon often waits to order the product until the listing has enough traffic. Once the product shows some traffic on its page, they will initiate an order of typically one case. As Amazon is taking inventory risk, they want to make sure that they will be able to sell through any inventory they order. They wait to see what the demand is, then order two cases, and then begin scaling up as the product starts to gain traffic and momentum on the platform. This approach lends itself to out of stock risks which can be particularly detrimental during the launch period.
Amazon launched a program called Born to Run which allows a vendor to choose their initial inventory position when launching a product. They setup the agreement under a Launch Buy Quantity. Terms for this program include the brand’s commitment to receive full returns on all unsold products from the Launch Buy Quantity, an additional accrual, and a commitment to support the launch with advertising between 10-25% on the wholesale cost.
3P SELLER NEW PRODUCT LAUNCHES
As a seller, you choose how much inventory to list on either MFN or FBA. You send in the inventory and can stock up for promotions or new product launches.
E3P EXCLUSIVE SELLER NEW PRODUCT LAUNCHES
E3P Sellers can work with the brand to understand the potential size and scope of a new product and order additional inventory to stock up in their fulfillment network. Then, similar to a 3P Seller new product launch, can choose how much inventory to list.
Product Listing Management
Do you have a couple of really stellar products or hundreds of product SKUs? Understanding who is in charge of listing them on the Amazon platform along with who manages the content is important whether you’re 1P, 3P, or E3P.
1P PRODUCT CONTENT & LISTING MANAGEMENT
Although Amazon is the one buying inventory, it is up to the brand to ensure the content and listing looks great so people actually want to buy your products. Amazon does NOT create or optimize any content on behalf of a brand and does not handle any marketing other than automated marketing services which both sellers and vendors receive (i.e. retargeting on Amazon, email follow ups etc.).
Amazon’s automated campaigning is a far cry from current advertising technologies and struggles to truly optimize your advertising dollars. Amazon does offer some content services for a fee, like product images, but they’re generally not worth what you pay for it. A+ Content is a tool that allows you to change the layout of your listing, include more images, and speak about your product in more detail. If you can make your product stand out and look fantastic with something like A+ Content, you’re more likely to attract customers and make a sale. Keep in mind that these tools require full creation and management from your team.
3P PRODUCT CONTENT & LISTING MANAGEMENT
Just like with Vendor Central, in Seller Central, the brand is still responsible for creating content for the product listing. Basic content can be updated in bulk via spreadsheet upload or by individually updating the items in the manage inventory section of seller central. A+ Content is also the tool for updating below the fold content. Any content optimization, SEO, marketing, and so on, will be heavily dependent upon the seller’s internal team.
E3P EXCLUSIVE SELLER PRODUCT CONTENT & LISTING MANAGEMENT
Brands can direct work for a exclusive 3P seller to update content and manage listings. Typically most wholesale partners will not create content or develop assets for a brand unless incentivized to do so. We provide 360 product renderings, infographics, A+ Content creation, and help merge and variate product listings to provide the best consumer experience on a detail page.
Customer Service
The way customer service is handled is very important in the ecommerce world. It can be the difference between a repeat customer or a negative product review, which in turn affect sales.
1P CUSTOMER SERVICE
As Amazon takes ownership of the inventory, they also take ownership of the full customer service process for consumers ordering the products.
3P CUSTOMER SERVICE
As a seller of a product, you will be responsible to respond to customer inquiries and process returns. Amazon Seller Central mandates that customers receive a response no later than 24 hours after they submit a question including weekends and holidays. If you fail to respond within the proper time, you may have your account suspended.
E3P EXCLUSIVE SELLER CUSTOMER SERVICE
The exclusive 3P seller who sells the actual product will be responsible for responding to customer questions and complaints along with the responsibility of processing refunds and returns.
Payment Terms
After figuring out whether or not to sell to Amazon or sell on Amazon, the more important question is, “How do I get paid?”
1P PAYMENT TERMS
Amazon pays its vendors monthly, either 30, 60, or 90 days after invoices are submitted, depending on your needs. During negotiation, Amazon includes several types of 1P accruals for vendors. Accruals are chargebacks for specific areas of running and operating the business.
Common accruals consist of:
- Base Accruals: Amazon essentially deducts a base percent (typically between 5-10%) of your wholesale price. This accrual used to be called marketing accrual and is typically called out as being an accrual to support many of the automated advertising such as retargeting and general business fees.
- Accel Accrual: This 1% accrual is typically an optional accrual to give a brand access to additional data from Amazon Retail Analytics Premium (ARAP) which provides insights into demographics, search keywords, and sales history.
- Freight Accrual: 2-7% accrual meant to fund and support freight shipping
- Damage Accrual: 2-10% accrual meant to fund damages and returns
- Merch Accrual: 4-6% accrual funding merch program activities on Amazon
- AMS Committed Spend: 2-7% buyers often require acommitment of AMS and paid search spend on Amazon
3P PAYMENT TERMS
Amazon will pay you twice a month and notify you after each payment. There are several costs and deductions that are taken out of your Amazon payments similar to accruals.
These costs include:
- FBA Shipping Costs: Aggregated costs of all shipping FBA costs
- Seller Commission Fees: % of total retail value of the product based on category
- Long Term Storage Fees: Additional fees for products held in Amazon’s fulfillment centers over 6 months • Promo Rebates: for any discounts or concessions provided to customers
- Advertising Costs
- Premium Account Monthly Cost Shipping Requirements
Sales Tax
Understanding how to sell on Amazon can be tricky. Understanding how taxation works on Amazon can be even trickier.
1P TAXES
Amazon handles sales tax as they own the inventory being sold to a consumer.
3P TAXES
Amazon requires a seller to file their own taxes with each state that requires ecommerce taxes. Because Amazon FBA centers ship products and inventory to multiple Fulfillment Centers in a variety of states, you are technically liable in the Tax Nexus to file individual taxes with each state you have inventory.
3P AUTHORIZED WHOLESALE PARTNER
The wholesale reseller of products will be liable for filing taxes according to Amazon’s policy
Amazon Brand Registry
Vendors or suppliers often find their products being resold by third-party sellers without permission. Often there are duplicate listings, mislabeled information, wrong content, and bad brand experiences. Some of the listings violate trademark infringements and these listings often contain very little detail and can harm your brand image.
BRAND REGISTRY AVAILABLE TO 1P, 3P, AND E3P
By using with Amazon’s Brand Registry program, you have a tool to assist in deactivating or merging duplicate listings and trademark violations. Amazon will not enforce or work with any brand to stop unauthorized sellers. Instead, they defer to the brand to work directly with sellers to stop selling.
Brand registry also allows a brand to create A+ Content that will improve the consumer experience, boost your brand recognition, and instill trust in your brand. Brand registry is a step to helping manage and control product listing content and consumer experiences.
COUPONS & PROMOTIONS
Amazon has standardized many of the self-service coupons that brands and sellers have access to. Coupons in Vendor Central, Vendor Powered Coupon (VPC), and Seller Central, Coupons, offer customers discounts on their products. Vendor Powered Coupons (VPCs) appear as digital coupons within ad units (Amazon). Similar to VPCs, Sellers can upload coupons into Seller Central that show up as a clipped digital coupon ad. Promotional codes that are redeemed at the end of cart can be generated by both sellers and vendors.
SUBSCRIBE & SAVE
One of the best methods for increasing customer retention is the Amazon Subscribe & Save program. Subscribe & Save is a feature offered through Vendor Central to approved Sellers to help them retain and acquire repeat customers. Customers that choose Subscribe & Save will receive free shipping. They’ll also get a 5% discount on their first four subscriptions, and a 15% discount for five subscriptions or more if their subscriptions are from the health, baby care, grocery, or beauty categories. All other product categories are capped at a 10% discount.
Which to Choose? 1P, 3P, E3P Pricing
While Amazon may have started out as the sole retailer on their platform back in 1994, the 3P marketplace has become more profitable for them than the 1P side in many instances. Which selling model you choose will ultimately depend on your pricing and distribution strategies. Here’s why and which option to choose depending on your goals.
WHY GO 1P, 3P OR E3P? PRICE CONTROL
“Your margin is my opportunity.” – Jeff Bezos
1P PRICING
When Amazon sells your product for you, that also means they have the right to sell it at any price they see fit—even if that’s below your established Minimum Advertising Price (MAP) or even wholesale cost. Some online shoppers can be unsure about a new brand, but seeing that the product is sold by Amazon helps to reassure them enough to click “Buy.” Amazon’s goal is to help shoppers find the best deal, and so the liberty of pricing to meet those needs could mean your product is sold at cost value as opposed to retail value.
3P PRICING
As the retailer of record, you maintain the price at which you sell your inventory. Due to the complex dynamics of having multiple sellers listing on products, you may find that if you price too high, you will not win the Buy Box and therefore not sell any of your inventory from your seller account. This incentivizes many brands to lower prices until they can win the Buy Box by having a lower price than other resellers.
It is recommended that you create individual item P&Ls to understand the price point thresholds of profitability for your products. Many believe that as a seller you’ll price and sell your product according to your needs. However, Amazon will always defer to the lowest priced seller on the marketplace with the exception of similarly priced MFN (fulfilled by the seller) vs. Amazon FBA seller (fulfilled by Amazon). This means you’ll have tougher competition for the Buy Box.
For more information about getting pricing control of online sales and winning back the Buy Box, check out our eBook about online brand control.
E3P EXCLUSIVE SELLER PRICING
An E3P seller is limited in lowering price by the margins that they make on the products. Some sellers are incentivized to sell through remaining inventory as quickly as possible to avoid long term storage fees or to move unit volume.
OVERALL, 3P OUTPERFORMS 1P IN SALES
A Cleveland Research Company report estimated 3P sales will likely account for nearly 70% of GMV for Amazon in four years as Amazon has realized that letting sellers sell their own products on the marketplace is far more lucrative than for them to own those costs.
Overall this makes sense as there are millions of Amazon sellers and Amazon is pushing for an even more curated 1P owned selection. We will likely see 3P share driving higher over the coming years as Amazon pushes for profitability and less inventory ownership risk.
We suggest brands use a 3P approach if they care about their pricing policy and margin. If their goal is simply to make sales on Amazon,without regard to pricing policy or brand equity, 1P is a suitable option.
Conclusion:
Ultimately, there is no wrong way to sell on Amazon. Whether you sell 1P, 3P, or use an E3P seller is up to your brand and your individual goals.
