One of, if not the first and most consistent questions business owners have to ask is, “How much will it cost?” When it comes to selling products on online marketplaces, finding a clear answer can be surprisingly difficult.
To address that issue, Kaspien will spend the next several posts delving into the costs of doing business on Amazon.
Currently, there are three primary business models brands can use for selling their product on Amazon:
- Sell product wholesale to third-party (3P) retailers (FBA and dropship)
- Sell product wholesale to Amazon Retail (also called “first-party” or “1P”)
- Sell directly from your own seller account on Amazon. This has two sub-options:
- Work independently, supplying labor, expertise, and resources internally
- Work with an agency or consultant to outsource labor, expertise, and resources
In this post, we’ll explore the costs associated with the most prominent business model on Amazon, third-party retailers.
WHAT IS A THIRD PARTY SELLER & HOW DO THEY WORK?
In the most simplified terms, third-party retailers are middlemen. A brand manufactures product, sells the product to a third-party retailer, and then the third-party retailer resells the product at a higher price point on marketplaces, often utilizing custom marketing strategies to increase velocity. These third-party retailers utilize the Amazon Seller Central platform to resell product.
This model works well for brands because they receive a large check from the third-party retailer; they don’t have to wait for the product to sell unit by unit to make a profit on manufacturing costs. This model also has the significant added bonus of reducing labor costs for brands. If brands want to sell product directly to consumers, they need to supply the manpower, hardware, software, strategies, and expertise themselves. By outsourcing, they save on those expenses.
For third-party resellers, this model relies on thin margins. After purchasing product from a manufacturer, they resell – or retail – it for a higher price, deriving their profit from the difference. Those pennies on the dollar have to pay for the third-party retailers’ expenses, from salaries and benefits to warehouse storage fees and business development.
In the best 3P partnerships, this business model is mutually beneficial, providing a steady and growing cashflow to both the brand (in the form of monthly, quarterly, or annual purchase orders) and the third-party retailer (in the form of good product margin).
WHERE ARE THE COSTS?
You’ll notice that in the section above, there are no costs. That’s because, at the basic level, there are no costs for working with third-party retailers. A retailer pays the brand for product, and that’s it.
Where the costs come in is in additional services. Today, most third-party retailers don’t just retail; they offer many other services on top of simply storing, listing, and distributing product.
Perhaps the most common service retailers offer is marketing. By marketing products, retailers sell more. And the more they sell within a set period, the more product they can purchase from manufacturers in their next order.
In this way, marketing is a mutually beneficial service for both the brand and the retailer. Most retailers will ask brands to fund marketing, which is often done through monthly or annual funding or discounts to purchase orders. In some cases, retailers may commit to help fund marketing with a small percentage of revenue, though this varies widely across the industry.
There is a myriad of Amazon marketing services brands can use to increase brand exposure and drive sales. Below, we’ve included some of the most effective marketing services, along with the minimum starting budget Kaspien generally recommends:
- Sponsored product ads ($300+/month)
- Sponsored brand ads ($300+/month
- Influencer marketing ($1,000+/campaign)
- Paid social media ads ($500+/month)
- Coupons ($100+/month)
- Giveaways (dependent on product price)
- Amazon livestreams (free)
- Social media engagement ($400+/month)
- Listing optimizations (free)
- Photography and video (dependent on number and type of shots)
Retailers like Kaspien may also offer software for online brand protection. Brand protection software varies, but most feature some combination of detecting unauthorized sellers and pricing policy violations, identifying IPR violations, identifying potential counterfeits, and providing historical seller data.
This type of software is typically available on a subscription basis.
Retainer fees are the exception to the norm. As we said earlier, there are no upfront costs to working with third-party retailers. The exception to that rule is when brands and/or their products are new to the marketplace, and retailers do not expect to make a profit from retailing.
Instead of relying on margin to fund their expenses and generate a profit, retailers may charge a brand a retainer fee in exchange for bringing the product to market. In these cases, the retainer fee transitions to a traditional wholesale retail relationship once the product has gained enough traction and velocity to be profitable.
For Kaspien’s First-to-Market (FTM) Program, we typically transition from the retainer model within 6 months of launching the new product.
For brands, this model represents a long-term investment developing a strong buyer-supplier relationship. Retailers expand their reach and open additional sales channels, positioning them for future growth.
THE COST OF AMAZON RETAIL & VENDOR CENTRAL
To summarize, typically there is no upfront cost to brands for a third-party retailer relationship. Brands can incur costs by opting into additional services, but in most cases, these services provide a positive ROI and eventually pay for themselves. For non-revenue-generating services, such as brand protection software, the intangible benefits may outweigh the tangible risks.
In our next post, we’ll review the costs associated with selling as a vendor to Amazon Retail (1P) through the Amazon Vendor Central platform.