Expansion into Ecommerce has Accelerated
Before 2020, ecommerce had been steadily growing its share of all retail. But when the coronavirus hit and countries around the world issues stay-at-home orders, it forced consumers and businesses to turn to online sales channels in numbers never seen before. As a result, we’ve seen an acceleration in brand and consumer adoption of ecommerce.
Road Bumps Along the Way
But, 2020 also saw brands face many hurdles on online marketplaces. Amazon struggled to keep pace with the surge in purchases, and they had to restrict which types of products they would accept into their fulfillment centers for a time. Amazon’s first-party (1P) division, Amazon Retail, and third-party sellers (3Ps) alike struggled to remain in stock as supply lines locked down, manufacturing was interrupted, and consumer demand skyrocketed for products well outside of their typical peak season.
Charting a New Course
After the turbulence of 2020, many brands are reconsidering their approach to ecommerce. To help brands make an informed decision, we’ve put together a list of the key factors that brands should consider when deciding if they should work with an Amazon retailer (1P or a 3P) or transition to working with an Amazon agency.
Should You Work with an Amazon Retailer?
Now that we’ve covered the primary options, let’s dig into key factors for making a decision about working with an Amazon retailer, an Amazon agency, or transitioning from one to another.
What is an Amazon Retailer?
Starting from the top, when a brand partners with a retailer, the retailer buys product from the brand at wholesale prices, then sells it for retail prices on Amazon.
The brand’s profits are payment for their product, minus the cost of manufacturing. The retailer’s profit is the consumer’s payment for the product, minus the wholesale expenses and channel management costs, which includes things like shipping, storage, fulfillment, commission, and marketing fees.
When it comes to Amazon, brands that sell through a retailer can partner with Amazon directly (first-party or 1P) or with a third-party seller (3P). Learn about their key differences in our blog post, Amazon 1P vs 3P.
Many brands choose to sell through a retailer because it provides cash up front, and the brand doesn’t have to get involved in the hassle of actively managing an Amazon channel.
Pros of an Amazon Retailer
Let’s start with the pros for partnering with an Amazon retailer (1P or 3P):
- Paid upfront via a retailer’s purchase order, which can be useful for funding manufacturing costs
- Not responsible for managing consumer-facing sales channel (fewer infrastructure costs)
- They handle online sales tax
- They are already registered for international value-added taxes (VAT), making international expansion much faster
- They provide the expertise and resources
- Perhaps the simplest way to start selling on Amazon
Cons of an Amazon Retailer
Now for the potential cons of working with an Amazon retailer (1P or 3P):
- Limited control over your brand’s representation online
- Limited control over product pricing
- Limited visibility into channel performance
It’s worth noting that some of the cons of working with a retailer can be mitigated by partnering with a trustworthy partner. If you’re interested in this business model but concerned about the cons, seek out a retailer that’s committed to building a healthy relationship with your brand.
Costs of an Amazon Retailer
As mentioned, in a retail model, the retailer pays the brand for their product. However, retailers may ask for various discounts from the brand so they can pay the numerous Amazon fees (commission, shipping fees, tiered storage fees, and fulfillment fees) while still having some margin left over to generate revenue for themselves.
Making a Decision
Work with an Amazon retailer if:
- You want to focus on the manufacturing and brick and mortar side of your business, while they handle taking your products to market
- You don’t want to be responsible for paying shipping, storage, fulfillment, and commission fees
- Your business’s cashflow model relies on large purchase order payments
- You want to expand sooner rather than later into foreign markets
Should You Work with an Amazon Agency?
If you’re not interested in starting with a retailer or you’re working with a retailer and want to take more ownership of your Amazon channel, you may consider working with an Amazon agency.
What Value does an Amazon Agency Add?
Now, let’s say a brand doesn’t want someone else representing them on Amazon; they want to sell their products themselves. That’s an increasingly popular decision, and one that we’ve seen more and more brands transition to in recent years.
However, there’s a challenge in representing yourself. Managing an Amazon channel requires three things that can be hard to come by:
- Personnel: You need bodies dedicated to managing your Amazon channel. If you’re using existing personnel, what projects are you pulling them off of? If hiring new personnel, you need the budget for salaries and benefits.
- Expertise: At over 25 years old now, Amazon is a mature marketplace that requires complete attention. With millions of sellers on the platform, you must enter the platform with a strong understanding of the landscape and strategies if you want to succeed.
- Time: If you manage your brick-and-mortar relationships, do you have time to also manage your ecommerce relationships (and critically, keep the two in balance so that one relationship doesn’t sour the other)?
If you lack in any of the above, then you may need outside help to fill in the gaps. That’s where Amazon agencies come in.
What is an Amazon Agency?
Amazon agencies can typically offer services in two ways: complete Amazon management or selected services. The former means that they provide everything needed to run every aspect of your Amazon channel. The latter means they provide only a handful of services that you specifically need help with, such as managing your Amazon advertising campaigns, while you handle the rest.
Pros of an Amazon Agency
Pros for partnering with an Amazon agency:
- More control over your brand’s representation online
- More control over product pricing
- Increased visibility into channel performance
- Your profit margin may exceed that of a retail model
- They provide the expertise and resources
Cons of an Amazon Agency
Cons for partnering with an Amazon agency:
- You’re paying the agency instead of having a retailer pay you
- You may be responsible for inventory and supply chain management (some agencies offer this service, but not all)
- Since you are selling through your own Seller Account, you are responsible for collecting and remitting online sales taxes
- You’re also responsible for VAT in international markets, slowing your ability to expand internationally
When determining if you’re willing to pay for an agency’s help, think of it as an investment. If you pick the right investment, it may set you back at the start, but soon, it will pay for itself and then some.
Costs of an Amazon Agency
In an agency model, the brand pays for all the Amazon fees themselves (commission, shipping, storage, fulfillment, marketing), but you have more margin to work with. Because the brand holds the inventory risk in an agency partnership, the agency fee can be significantly lower than the retailer’s margin. The agency then collects either a monthly retainer or a commission.
Making a Decision
Either start by working with an Amazon agency or transition to one if:
- You want more control of your brand’s representation online
- You want a greater share of product margin
- You need additional personnel, expertise, time, or resources to effectively manage your Amazon channel
- Your budget allows for you to pay a retainer or commission
- Your business’s cashflow model can adapt to using revenue from end-consumer sales
Should You Sell Yourself (Direct to Consumer)?
If you want to represent your brand yourself on Amazon and you have the personnel, expertise, time, and resources to do so, then you don’t need to partner with a retailer or an agency.
This route is the end goal for many brands, but it has by far the most and greatest requirements. As such, we often see brands start in retail or agency partnerships, then transition toward selling themselves.
In this post, we’re focused on comparing working with a retailer to working with an agency, but you can learn more about a Direct-to-Consumer model in this blog post.
Amazon Retailer vs Amazon Agency: Which is Better?
The annoying but honest answer is that it depends.
Retail is generally the better choice for brands that need immediate cash flow to fund their manufacturing. Working with a retailer also simplifies domestic and international taxes, as brands do not need to deal with VAT or sales tax when selling online through a retailer; the retailer handles it for them. This also enables brands to expand into foreign markets quicker, since the legal infrastructure is already in place.
Agency is generally the better choice for manufacturers with tight margins, want larger margins, and/or want more ownership over their brand’s presence in online marketplaces.
Service That Grows with You
Kaspien holds a unique position in brand services for online marketplaces, as we’re able to serve brands in both capacities: We can be a brand’s Amazon retailer, Amazon agency, or help them migrate from one to the other. Through our platform, brands can continue building upon the same foundation of data, products, services, and solutions, no matter how their ecommerce needs evolve.
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