2020 was quite the year for ecommerce, particularly for ecommerce brands on Amazon. Close to 60% of Amazon sales came from third-party sellers in 2020, and that number is expected to keep climbing, showing that a 3P strategy can be a real tour-de-force for any brand willing to enter the fray.
Becoming a 3P seller can be a daunting step for your business, but it can also be a great way to increase sales and the best way to take control of your brand online. In this month’s On-Demand Pattern Webinar, ecommerce leaders from Pattern, Vorys eControl, and Megafood sat down to discuss the challenges and benefits of having a 3P on Amazon and how a 3P strategy can help your brand grow.
1P vs. 3P
There are several methods for selling on Amazon, but two of the most common are 1P selling and 3P selling. In the 1P model, your brand operates as a wholesale supplier to Amazon, who handles most of the selling and pricing details. In a 3P model (or third-party relationship), you are an independent seller on Amazon, making your own pricing and shipping decisions. These models work for different brands for different reasons—buyers are more likely to trust 1P sellers because their product comes from Amazon, while 3P sellers have more freedom to customize the purchasing experience.
“The easier entre is 1P,” said Steve Ellis, VP of Sales at Pattern, “but brands quickly find that based on some of their business practices, their pricing practices, and how they distribute their product, that 1P is not a good fit for them, and then they have to course correct halfway in.”
According to Ellis, a 1P strategy can be great for a brand that doesn’t care about the price their product is sold for, but for growing brands on the Amazon platform that want to be in control of their own destinies, the 1P model doesn’t quite cut it.
Why sellers are switching from 1P to 3P
“When you’re selling in a 1P model, you ship your product and you have very little control from that point forward,” said Daren Garcia of Vorys eControl.
In a 1P strategy, Amazon can sell your product at any price they want, and you have limited control over how much of your inventory is available at a given time. That can lead to lower margins and endless frustrations.
Nancy Eichler, VP of Ecommerce and International at MegaFood, said she’s worked at companies with 1P and 3P strategies. She said the 1P environment was far more resource-demanding—”I spent more time proving to Amazon that we had shipped something than I did actually working on selling the product and my marketing”—and brand control was continually an issue.
“Pricing always was impacted,” Eichler said. “I felt like it was a fairly frequent issue that I would log on and see our products either dropped down significantly or slightly up. It was kind of all over.”
Lack of control manifests itself in other ways. As a brand gets bigger on Amazon, it tends to experience more channel conflict, like unauthorized sellers interfering with 1P sales. Unauthorized (or gray market) sellers can easily distribute a brand’s products at marked down prices, eroding pricing across every one of that brand’s other channels and negatively impacting their reputation and distributor relationships.
Brands want to be able to tell their offline customers that they’re doing all they can to maintain control, Garcia said. They want to incentivize high quality partners to sell their products, and do everything necessary to promote them. When a brand has no control online, things like marketing initiatives, displays,and pricing in their brick-and-mortar stores become tougher to prioritize and every corner of the business suffers.
Brands are ultimately switching from 1P to 3P or taking a blended 1P/3P approach because they want more control, they want to drive business, and they want a true growth partner in their corner.
The benefits and challenges of 3P
A 3P strategy allows brands to take back the reins in the Amazon space on inventory, pricing, distribution, content, and more. With a 3P strategy, instead of Amazon sending you purchase orders, you can dictate when you’re sending product into the ecosystem, which is a huge shift for most brands, Ellis said. You won’t get turned away during new product launches because of inventory issues.
A 3P strategy can also help brands navigate unexpected policy changes or scenarios that Amazon may throw at them. Eichler gave an example of a time Amazon automatically dropped the prices of authorized resellers without their approval, creating confusion for the brand and its sellers. Having Pattern as a 3P partner in their corner allowed them to navigate this scenario (and a few others) much more easily, Eichler said.
Another benefit of moving to a 3P is that, if you have one seller, you can have that seller distribute your whole catalog, Ellis said, that way your footprint on Amazon becomes more comprehensive. 3P relationships are particularly effective when they’re exclusive, because they maximize your control, leverage the expertise of your partners, and allow you the freedom to personalize the customer experience.
That said, switching to a 3P model can be difficult.
“It takes time, it takes discipline, it takes rigor within the business, and there’s a lot of clean up that has to happen,” said Ellis.
Brands have to identify who their gray-market sellers are and have a coordinated strategy through either multiple authorized sellers or one authorized seller, otherwise a 3P relationship can present some of the same control issues brands deal with in a 1P relationship. Those control issues get worse the wider your distribution is.
Your brand may have done really well in the brick-and-mortar space for several decades, but Amazon has dramatically changed the game in the past 5-10 years. A revenue at all costs strategy no longer works. Unless you adjust and make fundamental changes to how you go to market, you’re going to see massive brand erosion and market share erosion.
How to enact an effective 3P strategy
According to Garcia, the first step to having an effective 3P is to get your authorized sellers under control, meaning you have to make necessary policies and agreements with your distributors, retailers, and co-ops that spell out how and when your product can be sold. You have to really define your channel.
Secondly, Garcia said you have to have an appropriate legal foundation to stop unauthorized sales. This is where brands have things like special quality control programs and differentiating warranties that apply to products purchased from their authorized sellers. With a legal foundation, you can both enforce your policies and support your exclusive sellers.
“Going out with a 3P strategy without those necessary control foundations in place is a losing proposition, because your designated seller will become lost in a sea of resellers that aren’t invested in your brand,” Garcia said. “You won’t be able to get sales, you won’t be able to begin to approximate your 1P sales, and the strategy may fail.”
Brands need to be willing to put teeth to their policies and, along with weeding out unauthorized sellers, put authorized sellers back into their lanes when they slip up.
Should you try to do 3P by yourself?
While many brands have talented ecommerce teams, they don’t have the internal capabilities, numbers, or tools to get into the 3P space alone. Having a partner like Pattern by your side can not only give you the expertise and tools you need to grow long-term, it can also give you support that can’t be found in a 1P relationship.