Brands selling on Amazon can choose to sell wholesale to Amazon’s first-party seller division, Amazon Retail (1P). At first glance, the prospect of working directly with Amazon sounds ideal. They own the platform, so they’ll provide the most value. As is often the case, the reality is a bit different.
Too often, the vendor experience is frustrating one as Amazon makes unilateral decisions that go against the brand’s wishes. With a mammoth $490 billion GMV in 2020, $300 billion of which comes through the third-party seller marketplace, Amazon isn’t afraid to throw its weight around. It’s not an equal partnership.
Pricing, in particular, is a common pain point we hear from brands selling through Vendor Central. Amazon Retail either drops their prices or even raises their prices against the brand’s wish. While Amazon is one making the decision, it’s the brand that suffers the consequences.
As stated by Amazon’s Marketplace Fair Pricing policy, Amazon is committed to offering consumers the lowest price available, and it takes quick action to live up to that promise. If your product is offered for a lower price by another seller on Amazon or ecommerce site, Amazon Retail will drop their price to match, even if that means dropping below your MAP or MSRP.
This is an issue that can be largely avoided by integrating Amazon into your overall brand strategy, making sure that your brand and products are represented consistently across all sales channels. Doing this effectively requires a secure distribution network – if unauthorized sellers can easily obtain your product, it becomes far more difficult to enforce consistent pricing. If a rogue seller drops their price, Amazon Retail will follow suit.
While Amazon Retail has earned a reputation for price slashing, there are times that it increases prices, even to the point of price gouging.
Amazon does this by taking advantage of a technicality: Offering the lowest price available doesn’t necessarily translate to the lowest price possible. When Amazon is the only seller in a listing, they sometimes take advantage of the situation and increase prices to increase their margin. If the price is higher than MAP or MSRP but you’re the only one selling it, it’s still offered at the lowest price available.
Some brands are frustrated by Amazon’s unilateral decision making, especially because it is their brand that receives the brunt of shoppers’ frustration at higher prices.
Brands who want Amazon Retail to lower their product price have limited power, but there is one way to take back control. Amazon Retail’s ability to raise prices is based on them be the sole seller.
Brands can remove that power by partnering with a trusted distributor and third-party seller, ideally one that has Seller-Fulfilled Prime (SFP) so they can continue offering the same delivery speeds.
When Amazon Retail raises their prices and refuses to heed the brand’s request to lower them, the brand can ask their distributor to send a set amount of inventory to the third-party seller. The third-party seller will then list the product at the price that the brand desires, and Amazon Retail will be forced to follow suit to uphold their promise.
In this model, the brand reclaims control of their pricing policy and the third-party seller enjoys sales from the limited purchase order. Of course, this strategy requires partnering with a trustworthy distributor and third-party seller. Without shared trust (perhaps reinforced by signed agreements), this strategy could cause new problems.
In addition to restoring a brand’s control over their pricing, strategically partnering with a distributor and third-party seller has several other notable benefits.
If Amazon Retail runs out of stock at FBA, the third-party seller can step in to start fulfilling orders from their inventory. Some sellers can also integrate dropship order management systems with a brand’s warehouse, so they can fulfill orders even if they do not have inventory at FBA.
As 2020 showed us, it’s best practice to have multiple fulfillment methods available, in the event that FBA experiences category restrictions, IPI increases, or other issues that jeopardize your ability to store and fulfill orders. Diversification is a proven risk-mitigation tactic, and that extends to ecommerce.
Amazon Retail is not obligated to place new purchase orders, and they may decline to replenish inventory for a number of reasons. This notably occurred in 2019, when Amazon Retail stopped placing purchase orders with vendors who sold less than $10M annually on Amazon. Thousands of vendors were reportedly blindsided by the move, and while Amazon resumed placing purchase orders for many of them a week later, some vendors never received a new purchase order.
Partnering with a third-party seller while still using Vendor Central provides a safety net, allowing brands to continue selling on Amazon uninterrupted even if Amazon Retail stops buying their product.
We mentioned earlier that Amazon Retail will slash prices to match those offered anywhere else on the internet. This is problematic for brands that struggle with rogue sellers and retail arbitrage. If an unauthorized seller lists a product for well below MAP, Amazon will also drop below MAP. This can harm brands’ relationships with their brick & mortar sellers and creates a risk of smaller purchase orders due to lower profits.
If a brand is partnered with a trusted third-party seller, they can stop selling to Amazon while Amazon Retail refuses to abide by MAP. Once Amazon Retail sells through inventory, the brand will reclaim control over their pricing, at least through their authorized sellers.
Partnering with a third-party seller doesn’t solve the unauthorized seller problem, though. Unauthorized sellers typically arise from leaks in the distribution network, when distributors sell inventory to anyone who comes asking. The best way to plug these holes is to sign new agreements with distributors that limit to whom they are allowed to sell product.
For more info, check out our blog post about brand protection strategies.
Throughout this post, we keep returning to trust. Brands need to be able to trust their distributors and sellers to act in their best interest. That trust is built easiest when the partnership is mutually beneficial between parties that both wield power.
In the case of Amazon Retail, that’s rarely the case. Amazon is a $490 billion gorilla, and they make unilateral decisions that harm your brand if they think it will entice consumers.
While Amazon Retail may be too rich an opportunity to pass up now, it‘s far too great a risk to be overly-dependent on them. Seek complementary and supplementary ways to capture sales on Amazon, whether that’s through a third-party seller or equipping your brand to fulfill direct-to-consumer.
If you’re ready to call it quits on Vendor Central and launch your own Seller Central account instead, check out our post on How to Switch from Vendor Central to Seller Central.
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