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The Difference Between First-Party and Third-Party Sellers
If you’ve thought about selling online, you’ve probably heard of first–party (1P) solutions offered by top marketplaces, like Amazon and Walmart. But what does that mean exactly?
First-party simply means that the owner of the marketplace platform also has a retail entity that partners with brands and represents their products. For example, Amazon has a retail division called Amazon Retail, though in the Amazon community, it’s frequently just called “1P.” Amazon Retail buys inventory from manufacturers and distributors at wholesale cost, then sells the product on Amazon.com. They also offer additional services to their brands for online protection and digital marketing. Walmart also has a retail division that functions much the same.
What, then, is a third-party seller, or “3P”? A third-party seller functions similarly to a first-party seller, however, they do not own the platform on which they are retailing, hence the “third-party” name. A third-party seller can be a dedicated retailer, as is often the case, or it can be the brand itself, if the brand chooses to sell their products without assistance from another entity.
On Amazon, third-party sellers began as a minority, but now account for more than half of the sales made on Amazon. To compete with 1P, many 3P sellers have expanded or enhanced their services to make a 3P partnership more enticing than a 1P partnership.
How to Decide if 1P or 3P on Amazon is Better for You
If you’re a brand trying to decide whether to partner with 1P or 3P, look at the data. Where do you believe the market is going? At Kaspien, we look at this kind of market data quite frequently. For us, one of the most interesting pieces of data is how sales volume is oriented on Amazon. 2018 was the first time that third-party seller volumes surpassed Amazon volumes on the Amazon marketplace. In Amazon’s latest earnings report, they reported that 53% of overall gross merchandise value (GMV) was from third-party sellers. Compared to previous years, GMV has grown from 30% to 50%.
Based on this data, we can infer that Amazon wants their growth to focus on their 3P business. That leads to the ever-important question: Why would Amazon favor 3P growth over 1P when they operate their 1P business? The truth is surprisingly straightforward: Ultimately, having other sellers on their platform provides a better economic outcome for Amazon because they avoid inventory risk while still profiting from commissions and marketing fees.
Another key consideration when comparing 1P and 3P is service offerings and performance. What sort of capabilities and expertise do these providers offer to meet your brand’s needs? Do they have a proven track record of success? Are they helping you grow or just maintaining the status quo? Maximizing success depends on finding a partner who can not only provide for your current needs, but also provide new opportunities for growth.
One of the most important services, especially for larger, more established brands is control. Amazon has spent the last year under intense scrutiny due to rampant counterfeits and illegitimate sellers who threaten consumers and businesses, and this lack of control has made some major brands sever ties with Amazon. For example, Nike announced they are pulling off the Amazon platform because they don’t feel they have the control or creative freedom they want in their 1P partnership with Amazon.
If control of your branding, control of pricing, control of consistency, and control of messaging are important to your brand, then you’ll likely be more satisfied by working with a third-party seller.
If you’re interested in comparing the costs associated with 1P versus 3P, check out our whitepaper, The Costs of Amazon. It compares expenses for 1P, 3P, and direct-to-consumer options.
The Future of Third-Party and First-Party Solutions on Amazon
Judging by historical trends, we will continue to see third-party volumes grow at a higher rate compared to Amazon Retail (1P). As previously described, this is partly due to the economics being more favorable for Amazon when more sales come from third-party sellers, presuming of course that those third-party sellers are reputable and don’t harm Amazon’s reputation with consumers.
However, it’s unlikely that Amazon Retail will ever completely disappear because some top tier brands are more comfortable working directly with Amazon. Amazon has also been alleged to require top tier brands to work with 1P if they want to list their products on Amazon. Amazon would do this because, in the case of global brands, they may make more revenue through the 1P model than 3P.
How Does 1P and 3P Apply to Other Marketplaces, like Walmart.com or eBay?
We’ve compared 1P and 3P for Amazon, but how do they apply to other major online marketplaces, like Walmart and eBay?
It comes back to consistency and control. When brands work with a 3P seller, they can have a single entity manage all of their channels in unison, ensuring that pricing, content, and marketing are consistent. This provides a clean and positive customer experience, while also mitigating the risks of competing marketplaces rolling up the Buy Box because of pricing inconsistencies across marketplaces. If brands partner with 1P for each marketplace, establishing that same consistency will be very difficult and require more active monitoring and communication on the brand’s part. Kaspien offers services for third-party retail, direct selling supported by an agency, and direct selling independently supported by self-service software.
If you’d like to learn more about any of these services, reach out through our contact form.
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