Recent online trends suggest that a large number of brands have started creating a space of their own on Amazon and going forth with the direct-to-customer model. This model allows them to offer services and products directly to their customers without getting the “middleman” involved. Cutting out the “middleman” allows brands to gain more profit, control their products or brand mission and also the pricing of their product. Consumers too prefer to purchase their products directly from the manufacturer as they have more trust in the product and feel that they are getting a better price deal.
We encourage brands to go for the direct-to-consumer model as it gives them the opportunity to market the products in alignment to who they are as brands. You can use Amazon’s storefront to tell the story of your product and provide a consistent experience to your consumers. Additionally, Amazon too is making strides to get more brands involved in the marketplace by making it difficult for distributors to signup and have an account on Amazon. This goes back to the trust issue that Amazon is facing with regards to counterfeit goods. Consumers are trusting the legitimacy of the products more if it comes directly from the brand.
Amazon as a Marketplace
Amazon has an active distributor model that, in most cases, creates a platform where the price of a product drops as distributors end up competing with each other. A distributor is an entity, company or individual, who is selling other brands in the marketplace. They may have their own inventory or are manufacturers producing for other brands on a contract basis.
In the last couple of years, we have seen more brands take control over their products and become exclusive sellers on Amazon. This has turned out to be bad news for distributors as they are restricted from selling these products on Amazon.
However, if you are a manufacturer and have decided to go the direct-to-consumer route on Amazon, here’s all the information you need to get started.
Selling Models of Amazon
There are essentially two ways to sell on Amazon. You can sell on the Vendor Central platform also known as 1st Party (1P) or you can sell on the Seller Central platform also known as 3rd Party (3P). There is an intermediary platform between Vendor Central and Seller Central known as the Vendor Express. Furthermore, Amazon also provides the option of a hybrid model which is a combination of Vendor Central and Seller Central.
The Vendor Central (VC) is a platform where brands have a wholesale relationship with Amazon and you get to sell your inventory to them at wholesale price. Amazon negotiates a price with you for each of your product and places a purchase order (PO) with your brand. The payment is made within a period of 60-90 days as per your negotiated agreement. Most of the other costs and fees associated with the sale of your product after that are covered by Amazon. They also take care of most of the customer service, inventory handling, storage, and fulfillment. This is a familiar model for most brands who are already having a wholesale relationship with retail stores or distributors.
By comparison, Amazon also has a marketplace of its own and provides this marketplace as a commercial platform for all brands. This type of a selling arrangement is conducted on a platform called Seller Central (SC). SC is a marketplace model where you get to sell directly to your consumers on Amazon. The transaction is completed on Amazon, however, it’s the brand that’s actually selling the product to the customer through Amazon. You also have the option to choose Amazon to fulfill the orders through the Fulfillment by Amazon program. The fee structure for brands who opt for this will include Amazon’s charge for a percentage of the sale.
Breaking it Down
The major difference between VC and SC is pricing or the control over pricing. On SC, you have the direct control over the price of your product and can elect to run sales or promote products whenever you want to. SC may also be more appealing as you get to have full control over your product. You can ensure that your product is in harmony with your brand’s message and that your brand’s marketing does not differ from the ones on other social networking platforms or your own website channel. However, on VC, Amazon controls the pricing of the products.
Amazon may or may not adhere to your pricing map and may offer the best deals to customers dropping the price of your product. In most cases, you completely lose control over your product once it’s on VC. As a result, brands need to have a clear picture of the costing, margins, and mission to make a decision regarding the model that might suit best. If you want to dictate the prices of your products, VC is not the best place for you! It is also difficult for a brand to get on the VC. The entry requirement is an invitation from Amazon, and it is not possible to approach Amazon to get you in.
Within Amazon’s organizational structure, the vendor and seller teams are actually quite unattached and seem to have different targets of their own. As a result, to decide between the two or have a combination, you need to study both the programs and understand how the platforms work. When the VC representative tries to woo you, you need to be able to negotiate the best deal, PO terms and promotional programs for your brand and your product. You need to understand what is involved in the offer the representative makes.
Recently, a lot of the marketing tools, that were once available only on VC, are also being added to SC. Advertising with the headline search ads is now available on SC too. Brands selling on SC have tools to enhance the content with five different templates. You also have free content pages to further optimize your product information. Amazon has included storefronts on SC where you can add videos to your content and further enhance your product story for your consumers. All of these additions to SC, which were previously only available on VC, are balancing the scales between the two models to some extent.
The intermediary platform between SC and VC is the Vendor Express. However, with Vendor Express, you lose even more control over your products. There isn’t a representative to work with you, and you don’t have anyone you can approach about POs, product issues, and inventory. Vendor Express is a completely automated system and it turns out that if you are a brand looking for a quick start on Amazon, Vendor Express isn’t quite so express! Since it’s an automated system, it can take some time to get the POs moving and you only get POs on a weekly basis. As a result, you run the risk of stock-outs. You also do not have access to a buyer or representative on Amazon, unlike on VC, and the pricing of your product is entirely machine driven.
The Hybrid Model
The hybrid model is essentially merging the best of VC and SC. You have the option to have a portion of your catalog sold through a vendor (either on VC or Vendor Express); you get to sell that portion of your inventory to Amazon on a wholesale basis. You can have another portion of your inventory sold through SC, i.e., you are selling those products directly to your consumers on Amazon. In some cases, brands may have the same product on both platforms or have a select part of the catalog only available through SC and another only available through VC.
The hybrid model gives you the opportunity to benefit from the best of both worlds. You can minimize the level of customer service that you need to handle by having Amazon manage it for a specific part of your catalog on VC. You also have the opportunity to take advantage of the marketing tools available only through VC. Think of coupons, lightning deals, the fact that you get control over the implementation timeline, or the wine review program to name a few.
The wine review program, not available on SC, helps you build reviews for any new product that you are about to launch on Amazon. The hybrid model is also attractive because it lets you cover stock-out time, in theory, by also offering your products through SC as opposed to the case of Vendor Express.
When you have a large catalog with product prices ranging above and below the $15 threshold, the hybrid model is the best option for you. If you sell products below the $15 threshold on SC, you limit your profit because of the FBA fees. Having your low-cost products on VC is then preferable as Amazon takes care of all the logistics and you don’t have to pay for that. For your products above the $15 threshold, SC is a good option as you get to control the prices and your profit margin can cover any of the logistic charges. You may also have other distributors or retailers on Amazon selling your products. This might result in a lot of competition for the Buy Box. In this case, having a foot on VC is favorable as Amazon favors having their own inventory as the Buy Box eligible seller.
The tricky aspects of implementing the hybrid model
If you have started selling on Amazon’s VC and are now trying to get the hang of SC, as may be the case while implementing the hybrid model, there are a couple of hangover issues.
There are some cases where brands selling on VC have found that the rate of POs coming in from Amazon does not meet the expectations or demand of the product. This has led to a stock-out of the product and the product is unavailable to the customers consistently. In this case, brands have opted to sell the same product on SC with the same ASIN as on VC. However, when you are selling exactly the same ASIN on both the platforms you are, essentially, competing with yourself! For this purpose, you can also consider bundling the products, those you are selling as individual items on VC, and sell on SC. This can create a new ASIN for your product so as to avoid competing with yourself on both the platforms. Bundles, multipacks, and gift packs are a huge opportunity for brands especially around this time of the year.
There are also issues where you may be Buy Box ineligible for a significant amount of time and one of the keys for Buy Box eligibility is sending your product to FBA. With the hybrid model, if you go for the FBM option on SC, more often you will end up without the Buy Box eligibility at the outset of opening your account. You will remain Buy Box ineligible even if Amazon has no inventory of the product on VC and the FBM of the same product on SC is available. Basically, if you are implementing the hybrid model and moving between VC and SC with the same ASIN, you have to commit your products to FBA for the Buy Box eligibility!
You also need to consider how selling on two platforms is going to affect your workload in dealing with the Amazon channel. Having the best deal on VC will require a lot of continued negotiation with Amazon. You also need to check your product reports, POs and be on top of all products fulfillment. Keep in mind that Amazon may assign your account all fees for late and incorrect shipments and there’s quite a lot of work associated with VC too! Selling on both the platforms could essentially double your workload as you are dealing with two different “languages” of SC and VC, the buyers, the DIY aspects of SC, the different promotional programs coming in through VC…the list goes on! You need to understand the functioning of both the platforms to navigate successfully on Amazon and keep both accounts healthy.
What does Amazon prefer?
With regards to the financial point of view for Amazon, they include all 1P vendor inventory on their balance sheet and have to purchase the inventory so as to hold, collect and pay sales tax on it. It’s a very capital intensive model for Amazon. On the other hand, 3P allows Amazon to hold unlimited inventory available on the marketplace without having to invest in it. They just have to collect fees on the inventories that flow through their system. As a result, 3P is more profitable for them as the inventory is not on their balance sheet. Brands also choose to fulfill the inventory on their own and, in these cases, Amazon doesn’t even have to handle the logistics.
Handling existing relationships
If you have decided to take control over your products on Amazon, you need to revise your agreements with your distributors who are already selling your products on Amazon. You also need to try to reduce and monitor the number of distributors selling your products or to curtail any competition for the Buy Box.
On the other hand, distributors could be in an enviable position of having all the data on what products sell and the product trends on Amazon. This could give them the ability to create their own brand that fills in the gaps of the market. They would also have a good understanding of the supply chain in the industry and established contacts with other manufacturers, enabling them to source the products elsewhere. A great example of this is Amazon itself! Amazon has created their own label brands in the apparel, food, baby and pet products categories. They used all the data from their retail and marketplace sales to decide what products to launch, the customer value proposition, pricing, and product range. Distributors also have the opportunity to make genuine improvements on the products by leveraging data and customer feedback in order to enable differentiation.
You might risk upsetting your distributors if you were to revise all your agreements to try and reduce the number of sellers that market your brand out there. As a result, on one hand, you can negotiate the exclusivity of your brand with distributors. On the other hand, if you are a distributor, you can also be the one to negotiate product exclusivity with brands. It can be a win-win scenario if you agree on the commitment to represent the product as it was intended by the brand. This way brands and distributors would not end up competing with each other and can become real partners instead of having just a transactional relationship. Amazon, too, favors exclusivity arrangements! Demonstrating that you are the exclusive distributor for a particular brand can get you access to their preferential programs. Basically, there are ways also for distributors to adapt to this new trend of brands selling directly to customers on Amazon.
How can Bobsled help you?
To enjoy successful outcomes on Amazon and really establish and improve your brand sales, it’s really important to choose the right model, study up and understand all the advantages and disadvantages of each option. Bobsled will help you make this decision by analyzing which platform is optimal for your business and if the hybrid model is a suitable option for you. We have the experience and knowledge of working with both sellers and vendors as well as the know-how of setting up and navigating the hybrid model for brands.
Finally, if you are looking to start selling direct-to-customers as a brand on Amazon, you need to commit to it. When the launch time comes, you should be willing to steer away a part of your customer base from your website towards Amazon to get some momentum. This means that you will leverage the customer base you built outside of Amazon for the benefit of your launch on Amazon.