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.
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.
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.
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.
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.
Let’s start with the pros for partnering with an Amazon retailer (1P or 3P):
Now for the potential cons of working with an Amazon retailer (1P or 3P):
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.
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.
Work with an Amazon retailer if:
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.
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:
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.
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 for partnering with an Amazon agency:
Cons for partnering with an Amazon agency:
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.
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.
Either start by working with an Amazon agency or transition to one if:
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.
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.
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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