October 19, 2020

Pros & Cons of an Authorized 3P Seller Network

By John LeBaron / Brand Control

Earlier this month, we talked about the different selling models available on ecommerce and whether to consider a 3P partner. Exclusivity is a very successful model for most ecommerce brands, giving them more control over their pricing, consistency with their ad spend, and the resources they need to grow long-term.

For some brands, however, an exclusive relationship may not be just right—it can create some hairy situations for their ecommerce business and even impair their relationship with Amazon. When that’s the case, brands looking for a solid backup may find it in a 3P authorized network instead.

The seven ecommerce selling models

A 3P authorized network is one of seven primary selling models available to brands moving into the ecommerce space. We’ve described them briefly here so you know how they compare.

Common Ecommerce Selling Models Available on Marketplaces | Pattern

3P Unmanaged: With this model, your brand has no active management, which means you’ve got no control on pricing, inventory, or content. Price erosion is exacerbated in a 3P Unmanaged model, because unlike in authorized networks, sellers don’t follow your rules.

1P: In a 1P model, you sell your product directly through a retailer. This gives you listing control, merchandising, and up-front POs. The downside is that it limits your inventory, eliminates price control, and it can get spendy.

2P: 2P is the Fulfilled by Amazon (FBA) model. With an FBA model, you don’t need to negotiate with Amazon (a big plus) and you have limited investments. The FBA model, however, gives you no control on pricing, inventory, listings, or advertising.

3P: In a 3P, you are the retailer. You own and ship your products without going through Amazon’s fulfillment centers. This model has more potential for higher margins and better control on inventory, listings, and advertising, but you also have limited capabilities and it takes a larger chunk of investment than other models.

Hybrid: The Hybrid model leverages both the 1P and 3P strategies. You have inventory control, lower risks, and better negotiating power with a hybrid model. You also have to navigate Amazon’s buyers and maintain compliance with their policies.

3P Partner: In a 3P partnership, you work with one partner to sell your product. This gives you better MAP compliance, up-front POs, and focused attention on the success of your brand. The downside is it has lower margin potential and gives you less direct control.

3P Network: This is the model we’re talking about when we talk about authorized networks. In a 3P network, you have a wide group of partners working together to distribute your product.

So why would you choose a 3P authorized network over the rest, or why shouldn’t you? Good question.

All Ecommerce Selling Models Explained Exclusive Selling Partner | Pattern

Advantages of an authorized network

Requires less resources/Amazon know-how One of the biggest reasons why brands go with an authorized network rather than a 3P partner is that the learning curve is easier for their brand. The exclusive seller model gives you no incentive to lower your prices, which means you have to be well-versed in Amazon and have the right resources to make your brand reach more shoppers. Generally brands are not set up to do this well, so they don’t. An authorized network allows your brand to go further on Amazon without all the trappings.

Diversified risk With a 3P partner, you’re putting all of your eggs into one basket. That puts your brand at increased risk if something were to happen. Let’s say your partner gets shut down by Amazon or goes out of business. Your brand presence is toast.

In an authorized network, your risk is diffused across multiple sellers, providing more protection for your brand.

More control and price integrity An authorized network allows you to have more control in the supply and distribution chains because you have a larger base to operate from. You’re better able to maintain price integrity, enforce MAP, and adhere to quality standards so your products don’t fall into the hands of grey market sellers lurking in the 3P Unmanaged space. In that way, you’re able to maintain wider distribution than you would in a 3P partnership.

You won’t get blocked by Amazon If you’re a big enough brand, Amazon may block you from being a 3P exclusive seller on their site altogether. Amazon’s seller standards state that although other brands can sell in their store, “if any of the Brand’s products are sold by Amazon, the Brand may not also sell those products as a seller in the Amazon store.” Having an authorized network can prevent blocking from happening.

Cons of authorized 3P networks

Price erosion The more sellers you have in your network, the higher the risk that price erosion will happen, because your sellers will compete on price to stand out. While this may be easier to control in an authorized network than an unmanaged model, it’s still a risk for your brand. Without proper mechanisms in place to prevent it, price erosion can lead to decreased profitability over time and send your brand into a nasty tailspin we call the Profitability Death Spiral, which can kill your long-term growth and even get you kicked off Amazon altogether.

Coordinating marketing & promotional periods Having a network of sellers to keep track of instead of just one makes it much harder to coordinate on marketing, advertising, and National Promo Calendars. Amazon doesn’t allow your advertising to work unless you own the Buy Box, and in a traditional authorized network, you’re essentially doing a round-robin with all of your sellers to give them a percentage of the Box. Without proper coordination on advertising, you may create artificial bidding wars between your sellers.

Diminished returns When you have one seller, that seller is very invested in improving things like your content, images, customer service, and rankings, because all of those improvements aggregate back to the seller of record. When you have a network of sellers, those sellers are artificially disincentivized from making good improvements to the representation of your brand online (SEO, video, content, images, bullet points, etc.), therefore you get diminishing returns based on your investments.

Like we mentioned previously, authorized networks can be good backups, but they aren’t ideal for most brands. That said, if you’re looking to mitigate risk, an authorized network might be right for your brand.

How do you create an authorized network?

The first thing to do is consider the sellers you want to work with. You’re building a network, remember, and you want that network to help your brand succeed. Find sellers that you believe are trustworthy enough to maintain your pricing and quality control standards. There are a myriad of things to look for as you select the sellers that are going to comprise your seller network. You might consider if their warehouses are equipped for your products, for example, or if they’re taking the proper precautions for Covid-19. You also want to make sure you have sellers committed to your brand.

How many sellers should you have in your network? Ideally, three to five, but that number can go up to 20. Beyond that, it gets much easier to lose control, which is why we recommend having fewer partners.

Another thing you need to navigate are the logistical constraints of having an authorized network, like what will happen with your returns or advertising and if your sellers will all ship into one central distributor. These are all things to think about.

Finally, the big question to ask yourself when considering this model is if your company has the appetite to forcibly remove sellers who violate your trust or aren’t part of your network. That’s a big element of maintaining control, so it’s an important reality to think about.

How Pattern can help

Pattern operates as an exclusive seller, but we also offer a myriad of resources for brands looking to shift into the authorized network space, including a solution for coordinating your advertising.

Our unique Predict omnichannel technology runs across multiple authorized sellers and coordinates your advertising across your whole network so you don’t need to worry about keeping track of it all. We can also recommend good potential partners that can help your brand network thrive.

To learn more about how Pattern can help your brand’s ecommerce presence, contact us in the form below.

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