Last modified: September 26, 2018
As companies contemplate new sales opportunities, it’s no surprise most of them have Amazon on their minds. And rightfully so – this ecommerce giant accounted for almost half of all online sales in the U.S. in 2017 and doesn’t seem to be slowing down.
Over 300,000 U.S.-based small and medium-sized businesses started selling through the Amazon marketplace just last year. And while this number continues to rise, many companies are still unsure of the best way to optimize the revenue potential of this channel within their ecommerce mix.
Alexa, what is the right channel strategy?
As consumer preferences and shopper experiences evolve, companies can’t afford to ignore the marketplaces that consumers know and trust. Everyone knows Amazon, but not everyone knows the different ways to sell through Amazon, and how to execute a balanced channel strategy that complements direct-to-consumer (D2C) ecommerce to enhance customer experience and grow revenue.
There are two relationships your company can have with Amazon: first party (1P) and third party (3P). Brands with a 1P relationship sell products directly to Amazon, who then sells them to end consumers – like a wholesale relationship. On the other hand, brands with a 3P relationship sell products directly to end consumers on Amazon’s marketplace.
So, which route is better for your company? Consider these factors when making your decision.
1P: Amazon decides which of your products they will buy, and how many. One month Amazon could demand all your inventory and the next month they could demand none – leaving you with little to no control.
3P: As a 3P seller, you have complete control over the portion of inventory you allocate to Amazon, with the freedom to increase or decrease the amount as sales dictate. 3P sellers can add or move inventory between multiple sales channels.
Having greater control of your inventory is especially important when it comes to balancing a successful multi-channel strategy. Consumers expect a seamless buying experience on every channel, and overselling products can be detrimental to both your relationships with customers and your sales. Real-time inventory management across all your sales channels is an imperative factor to consider.
1P: Amazon takes care of the order management and acts as merchant of record (MOR) and seller of record (SOR) for 1P sellers, allowing for greater ease of use. Amazon also handles order fulfillment, but you cannot use the same inventory to fulfill multi-channel orders. As a 1P seller, you typically receive Amazon wholesale purchase orders weekly.
3P: Amazon acts as MOR for 3P sellers, but the individual sellers are responsible for much of their own order management. As a 3P seller, you handle your own order fulfillment (unless you choose to use Fulfillment by Amazon), and you are able to use the same inventory for multi-channel fulfillment. 3P sellers receive customer orders constantly in real-time.
Many companies choose to find an ecommerce partner that can help make their order management seamless no matter where the order is coming from. Consider looking for a partner that can act as your SOR and own the risk associated with online orders from all of your sales channels. Bringing in an ecommerce partner for order management also allows for the possibility of side-by-side reporting and customer service capabilities for all channels.
1P: 1P suppliers sell their products to Amazon at wholesale, and then Amazon decides at what price to sell them. Amazon can demand lower wholesale prices, which can potentially impact your margins across all sales channels.
3P: As a 3P seller, you decide your retail pricing strategy and adjust it when necessary. There is no wholesale pricing pressure from Amazon.
Brands selling on Amazon often feel pressure to lower their prices due to the ever-growing marketplace competition. Furthermore, today’s price wars between retail giants like Amazon and Walmart drive prices down and create a more urgent need for a balanced approach that includes marketplace options along with a D2C ecommerce channel for a brand’s go-to-market mix. Diversifying brand distribution provides the opportunity to build a stronger, more resilient identity that is going to have a greater impact on consumers in the long term. Selling directly to customers, a vital tactic in a company’s multichannel selling approach, can result in this kind of long-term brand loyalty.
Customer and Order Information
1P: Amazon provides 1P sellers with basic sales and inventory information but does not provide them with any customer information.
3P: Amazon provides more detailed sales data including payments, fulfillment, and customer satisfaction information. Amazon also offers some consumer data to 3P sellers, but brands are prohibited from using this data for direct contact.
Whether you are a 1P or 3P seller on Amazon, your brand faces a lack of control over your customer experience. Because Amazon provides a limited amount of customer information and each sale is viewed as a one-time transaction, sellers are unable to foster and nurture relationships with customers. That lack of control over customer experience further emphasizes the need for a balanced approach with your D2C channel.
Alexa, how can I make more money?
While there’s no sign of marketplaces like Amazon slowing down, a brand’s D2C ecommerce channel is still your most strategic route to market. These sales are growing over time as brands realize how crucial this channel is in owning their customer experience. Owning a D2C channel gives you the opportunity to create a beautiful and personalized shopping experience that consumers want.
Investing in your D2C channel and complementing it by plugging into powerful marketplaces like Amazon will allow you to unlock new revenue opportunities. However, juggling a more balanced multichannel approach can be overwhelming for many companies. We’re here to tell you that it doesn’t have to be a headache.
Finding an ecommerce partner that can own the risk for all your online sales, whether they originate directly from your website or from an online marketplace, can alleviate the stress of managing it on your own. Furthermore, consider an ecommerce partner that can allow you to compare sales side-by-side on one commerce platform.
Interested in learning more? I’m speaking about developing a complementary online channel strategy that includes both D2C and Amazon at our Commerce Connect event in London on October 18. Space is limited – register for this exclusive event today!