Should I sell 1P or 3P on Amazon? What about globally? How can I ensure my ecommerce distribution strategy gives me the most control of my online channels to reduce channel conflict and price erosion? These are all important questions for ecommerce businesses to consider as they evaulate their distribution strategy and decide whether to sell 1P, 3P, or use an exclusive third party seller.
Companies face multiple selling options when deciding how to go to market on Amazon. The four main ones are:
- Sell products directly to Amazon (i.e. the traditional “1P” approach)
- Sell through a hybrid model, with some products sold 1P through Vendor Central and others through on the Seller Central third party marketplace
- Sell solely on Seller Central through their own storefront
- Sell solely through Seller Central using an exclusive third party seller (“3P”)
This decision is significant for brands, and each approach brings its own unique challenges and opportunities. Indeed, this decision can—oftentimes more than any other ecommerce-related decision today—have the greatest impact on a brand’s ability to achieve its desired growth metrics, while maintaining overall brand stability and control across all other channels.
We’ll discuss in this blog how, for brands who want to maintain control over their own destiny while still reaping the sales opportunities in the Amazon channel, selling their products through an expert exclusive 3P seller can optimize sales growth while maintaining brand integrity.
Amazon challenges: Unauthorized sellers, brand equity erosion, CRaP’d products, & increasing channel conflict
The fact is, many brands engaged in a 1P go-to-market strategy are experiencing some form of brand erosion, which is often exacerbated by the presence of unauthorized resellers and the realities of Amazon’s dynamic pricing algorithm.
A typical scenario for brands across a myriad of verticals is as follows:
- The brand enters the Amazon channel without a clear distribution strategy, often selling directly to Amazon and allowing other customers to sell on Amazon as well (sometimes with no product segmentation strategy).
- Due to a lack of distribution controls in other sales channels, products are diverted or arbitrage opportunities leveraged by multiple unauthorized third party sellers, who promptly list their products on Seller Central.
- A battle for the Buy Box ensues between Amazon, other authorized sellers, and the free-riding, unauthorized third party sellers. Each slashes advertised prices in an effort to beat the other and maintain Buy Box control, and the downward spiral ensues.
- Making matters worse, if the brand also sells on other major ecommerce platforms, this spiral will quicken, with the other retailers chasing prices advertised on Amazon, Amazon chasing the other retailers, the other retailers chasing unauthorized third party sellers, and so on.
- Authorized customers in core brick-and-mortar channels soon begin complaining and clamoring for price concessions, and products on Amazon may end up CraPped out or Amazon may likewise demand additional concessions.
Virtually no brand, manufacturer, or product vertical is immune to this new reality. If brands do nothing, the end result inevitably is incredible downward pressure on their brand value and a significant rise in channel conflict. This can lead to what we call the Profitability Death Spiral, because as your price and brand spirals out of control online, your profits erode—on ecommerce and eventually on brick-and-mortar channels too.
Against this backdrop, executives are increasingly turning to their ecommerce and sales teams, demanding that they “fix this” right away. For the reasons below, a crucial first step towards fixing the problem—and achieving brand stability—is to take a critical look at your company’s online marketplace distribution strategy and making sure it realistically aligns with your key brand metrics.
Retaking control: Evaluating your Amazon distribution strategy
For many brands, while ecommerce sales remain a minority percentage of overall revenues, the channel conflict and erosion caused by a lack of control over online sales becomes the proverbial “tail that wags the dog” across all channels. Companies will find that their ability to protect and grow their brands in today’s retail environment will be significantly impacted by the Amazon distribution strategy they select. The chosen strategy will greatly inform whether control can be achieved, in addition to defining the additional actions that need to be taken or avoided along the way.
The following chart describes the pros and cons that need to be evaluated when considering which distribution strategy is best for your company. As is evident, for many companies seeking to maximize growth while protecting brand value, selling through an exclusive 3P seller often is the best Amazon GTM strategy.
In summary, by selling through an exclusive 3P seller that is capable of handling large product volumes, respects MAP, and works hand-in-hand with the brand in terms of advertising, search, content, images, product descriptions and the like, brands can achieve significant control over their products in the Amazon channel and dramatically improve sales performance. The brand’s products will be removed from dynamic pricing and no longer subject to being CraPped out, all while benefiting from the exclusive 3P seller’s intensive promotional and search enhancement efforts. For many brands, this strategy can be the quickest way to resolve challenges associated with channel conflict, brand erosion, and an overall lack of control in the channel, all while realizing improved growth metrics.
Ecommerce distribution strategy pros & cons
|Distribution Strategy||Pros||Cons||Best Candidates|
|Multiple Resellers & No Controls||Requires no effort on the part of the brand.||Brand will have no control over its online sales, brand image, product quality or consumer experience. Brand will likely face a high degree of intrabrand competition, significant erosion of its value, and material channel conflict. Online sellers will have no incentive to invest in a brand's growth.||Companies that have no real concern for long-term brand value (i.e. those selling highly commoditized, low margin, short life-cycle products and relying predominantly on raw sales volume as a success metric).|
|Brand Sells All Applicable Product Line 1P||Requires minimal involvement. Amazon will likely win the majority of sales in the channel given its ability to secure the greatest Buy Box percentage.||Brand is unable to have a meaningful MAP program, as Amazon will typically not follow MAP policies. Products are captive to dynamic pricing algorithms, which will benchmark off of unauthorized 3P sellers and other retailers, often automatically reducing price to keep Buy Box. This creates significant downward pressure on advertised prices and, over time, material erosion of brand equity. “CraP’d” products and frequent concessions demanded. In light of recent announcements, may no longer be an option for many brands.||Companies that want to actively engage with Amazon platform and have no strategic need to preserve brand value over an extended timeframe for products at issue. Again, brands whose key metric is pure sales volumes. Best suited to companies selling high volume, short life-cycle products, and companies not susceptible to intrabrand competition.|
|1P/3P Hybrid||Affords the company the ability to insulate strategically important and/or new product launches through 3P distribution. More commoditized and pure volume plays can continue to be sold 1P.||Company will continue to face control challenges associated with IP products.||Companies that sell a differentiated mix of products, with some commoditized items and others that are more strategically important from a brand value and consumer perception perspective.|
|Brand Operates Own 3P Storefront||Highest margin in marketplace channel. Brand maintains full control of all marketplace activity.||Requires commitment of material internal and fulfillment infrastructure to maximize potential. Brand must realistically evaluate whether its internal resources are capable of driving equivalent performance on an expert 3P seller.||Companies with deep internal experience in marketplace sales and growth tactics, as well as the resources to execute on the same.|
|Exclusive 3P Seller||Company obtains a true “partner,” highly incentivized to protect and grow its brand. Ability to leverage true marketplace growth expertise. Typically respect MAP policies—company not subject to dynamic pricing algorithms. Company maintains control over brand image and presentation. Oftentimes growth levels achievable that are well beyond current performance. MAP stability on Amazon channel.||Requires company’s dedication to restoring order to distribution channels and clearly defining how products may be sold in an authorized manner across channels. Brand must have a clear strategy for ensuring an authorized 3P seller is capable of winning the vast majority of the Buy Box.||Companies that desire a “partner” in marketplace channels to which to largely outsource marketplace management. Companies facing erosion of brand equity due to presence of unauthorized sellers, competing marketplaces, or other market dynamics. Companies seeking to materially increase sales on marketplace channels. Companies seeking to reduce channel conflict and protect long term brand value.|
E3P checklist: What to look for when selecting an exclusive 3P seller
As more and more companies realize the benefits of the exclusive 3P selling model, more and more 3P sellers crowd the market. The result is a significant amount of noise, with newcomers and fly-by-nighters vying for brand attention. Oftentimes, 3P seller pitches become indistinguishable, leading to confusion for companies who want to know who is best.
Companies evaluating 3P sellers should carefully probe and evaluate the following criteria before selecting the exclusive seller for their products on Amazon:
- What major brands are they already selling? You don’t want to be a “guinea pig” or the seller’s first foray into partnering with a major brand. The ideal 3P seller will already represent multiple major brands and be able to quickly provide references.
- What level of sales is the seller generating in marketplace channels on behalf of its partner brands? The most successful 3P sellers are selling in excess of $300 million of their partners’ products annually.
- Do they have the ability to distribute into and sell your products on international marketplace platforms? The best 3P sellers have the ability to distribute products into major international online marketplaces, providing a global one-stop marketplace solution.
- What is their average customer annual growth rate? The best 3P sellers will be fully transparent with respect to their average brand partner growth rates, which should significantly out-pace industry average growth rates.
- What is their average brand partner MAP compliance rate? In the US, the best 3P sellers will be similarly transparent regarding the overall MAP compliance rates for the products they sell.
- Will they pay for the legal foundation necessary to achieve control over your online sales and stabilize your channels? Will they pay for the unauthorized seller enforcement truly needed to clean up your channels? The best 3P sellers happily pay these costs because they know that this work is critically important for them to realize the value of channel exclusivity through maximized sales.
- What marketing and advertising support will they provide? The best 3P sellers contribute significantly to these efforts and provide detailed analytics regarding the efficacy of various approaches so that resources can be focused on tactics that will generate real growth.
- What is their relationship with the major marketplaces? Are they able to access services available directly from marketplaces on behalf of their customers? The best 3P sellers will enjoy overall positive relationships with Amazon and have meaningful contacts within the organization.
- Does the 3P seller have inherent advantages with respect to Buy Box ownership? This includes: large number of units sold over time, a very high seller rating, high sales volume across multiple product categories, low defect scores, and the ability to purchase and maintain large amounts of inventory. The best 3P sellers share this data and clearly explain how it benefits their ability to win the Buy Box over lesser sellers.
- What investments has the 3P seller made in personnel who have deep experience growing brands on marketplaces? What specific marketplace expertise do these individuals or teams bring? The best 3P sellers have retained high level ex-Amazon and other marketplace executives, they have top notch data and technology teams, and they have first in class distribution processes around the world.
- What enhanced quality control measures will the seller implement with respect to your products? The best 3P sellers will go the extra mile to provide enhanced quality controls, inventory auditing procedures, and other testing to ensure the highest quality product in-channel and to best support legal claims against unauthorized sellers.
- What data and analytics can the 3P seller provide? The best 3P sellers provide robust monitoring and data that enhances the ability to drive sales rather than simply report on “vanity” metrics.
- What is the 3P seller’s customer retention rate over time? The best 3P sellers have extremely high customer retention rates across a number of different product categories and will be fully transparent with that information.
- What case studies is the seller able to present? The best 3P sellers will have case studies clearly explaining how their efforts lead to material shifts in business success for their partner brands.
- What top tier references can the seller provide? The best 3P sellers will be able to provide multiple references at diversified businesses for which they have delivered superior results.
3P seller red flags: When to keep looking
As discussed above, as the Amazon marketplace continues in its dominance, new “professional” 3P sellers pop up all the time. Each has a slick website and makes largely indistinguishable promises concerning increased sales, channel management, and the like. However, in the world of 3P resellers, all are NOT created equally.
When you identify the issues, consider looking elsewhere:
- The 3P seller represents only a few smaller brands or a series of obscure brands about which you have no knowledge or familiarity.
- The 3P seller is unable to present clear, comprehensive case studies demonstrating their partner brands’ successes over time.
- The 3P seller is unable to commit to regular product purchases at market-appropriate levels.
- The 3P seller lacks true internal thought leadership in terms of marketplace strategy, data and analytics, and fulfillment processes.
- The 3P seller is actually a former diverter or gray market 3P seller and is now simply dabbling with direct buying relationships.
- The 3P seller lacks any distribution or fulfillment capabilities.
- The 3P seller cannot offer services on international marketplaces.
- The 3P seller is unable to provide sophisticated data and analytics around marketing and advertising spend and/or enforcement efforts.
- The 3P seller is unable to provide enhanced quality controls for products sold into the marketplace channel.
- Finally, the 3P seller can’t or won’t fund the legal work needed to support this model.
An exclusive 3P seller could be an advantage & help control online channels
Many companies can significantly alleviate—if not solve—their biggest pain points in the marketplace channel by moving towards an exclusive 3P strategy. The alternative is to do nothing (which could be a disaster), or keep products solely 1P and face consistent downward pressure on your brand value. By placing your products with a strong 3P seller on Amazon and conducting robust enforcement against remaining unauthorized sellers, brands can stabilize their brands on Amazon and across their other channels all the while realizing increased growth.
Pattern is a global exclusive 3P seller, data provider, and strategic partner. If your company is considering using an exclusive 3P seller, confused about the best go to market strategy for your products, or has marketplace challenges you want to solve with an E3P solution, schedule a demo at email@example.com or call 888.881.7576.