30 May 2018
By Drew Smith
Drew is the Director of Product Strategy at Volo and focuses on how technology can help brands and retailers deliver what their customers want.
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Amazon can seem like a total contradiction to brands. On the one hand, it is a dominant online force receiving 40% of online retail spend in both the UK and the US markets. On the other, there are stories of brands feeling controlled by or beholden to Amazon. So, is Amazon an opportunity or an enemy?
For many brands and manufacturers, their first business interaction with Amazon comes in the form of a negotiation as Amazon looks to sign them up to its Vendor Central service. Through this service, Amazon makes wholesale orders of their products.
Clearly, harnessing the power of Amazon’s audience size and the convenience of its platform should be an opportunity that manufacturers take seriously. However, they should also be aware of the potential of the other route to market on Amazon, which is often referred to as “third-party” or Seller Central, after the portal where it can be managed.
What's the difference between Vendor & Seller Central?
Both approaches have advantages and disadvantages. First, let’s cover why selling on Amazon is a good plan in the first place.
Why sell on Amazon at all?
With around half of product searches starting on Amazon, it’s rapidly becoming a closed system for consumers where research and purchasing occur entirely within the Amazon sphere. For brands that means that failing to appear in these search results means failing to appear to the consumer at all during their purchase journey.
The compelling Prime offer has reached over 100 million members worldwide, and the loyalty generated by the program is impressive as Prime members shop more often and spend more on Amazon.
So which option is better for brands to take advantage of all that?
As noted, often brands are first drawn onto the platform when Amazon approach them with an invitation to participate in the Vendor Central, first-party model. Immediately, this is good for cash-flow, as Amazon may purchase large quantities and generate new business for the brand. However, too often there is a lack of attention and focus on the follow-up to a wholesale agreement with Amazon. This can result in a loss of control over pricing and brand image.
Ex-Amazon employees say that Amazon’s primary concern is selling units, and that to achieve this, the retail arm may price lower than your Minimum Advertising Price. Brands are more or less powerless to stop this. The ecommerce giant’s leverage and negotiation practices are such that they can afford to play hardball with all but the biggest brands.
The result is that your brand can be damaged as customers see the lower price and perceive the item to be of lower value because of the frequent and/or steep discounts.
This is by no means an inevitable result of selling through Vendor Central – it’s just an example of a scenario which has negative consequences for your brand. The core issue is that you relinquish control over the customer’s experience of your product and brand as soon as it’s shipped out to Amazon, moreso than with most distributors or retailer.
On the plus side, selling through Vendor Central gives brands and manufacturers access to Amazon Marketing Services (AMS). This is a set of marketing tools to drive engagement and brand awareness through Amazon. With more than half of consumer product searches beginning on Amazon, the ability to put the brand in front of shoppers at their purchase destination is highly valuable. Perhaps most importantly, it enables them to create a store page where their products are collected under one branded page.
Vendor also comes with extra costs – with packaging fees, Market Development Funds, freight and damage allowances all adding up to a not insignificant cut of your margin. Amazon can also charge warehousing fees if the products are not selling as fast as they would like. If cash flow is a priority, the net-60 policy with Vendor orders could be an important consideration.
Products sold to Amazon through Vendor are automatically eligible for Prime, and are more likely to win the Buy Box than a third-party listing for the same product.
With Vendor Central, you have no ability to scale inventory up or down to match demand – so regardless of the marketing and reach you have outside of Amazon, you can’t allocate more inventory to Amazon, or re-allocate it from the marketplace to another sales channel.
Amazon’s forecasting is also limited, though it is improving. There are scare stories of businesses receiving advance notice of large order quantities, moving these through production and then being notified that the actual purchase order from Vendor is significantly lower. However, these appear to be rare cases and Amazon is improving the demand and purchase order forecasting capabilities available through the Vendor platform.
Setting up a direct sales presence on Amazon allows brands to have total control over their listings. By signing up to programs such as the Brand Registry, brands can correct and lock down product details on the catalogue page, which prevents other re-sellers inputting incorrect information. Of course, Seller Central allows brands to control pricing entirely, which means it can fall in line with wider strategic goals and does not move according to Amazon’s own sales targets.
Using Seller Central to sell through the Marketplace is a time consuming, highly skilled and specialist set of tasks. Large brands using this tactic employ a full team to monitor and manage their Amazon presence. Smaller-scale presences do not require massive resource to manage but it should absolutely be a consideration.
Outside of the optimisation and management of listings, brands need to have access to order management, customer service and fulfilment capabilities, either in house or through partnerships.
Once the backend resource is in place, brands can expect as much as double the margin of Vendor sales by selling directly to consumers through Seller Central. This is unsurprising considering the profitability of direct sales is of course higher than that for bulk purchases, but it’s important to note that this means that the brand is more self-sufficient and in control of its revenue stream than by allowing Amazon to handle the retailing of its products.
Seller Central also releases payments on a 7 or 14-day basis, which makes for significantly smoother cashflow.
This is a slightly tricky point as it’s essential to note that third party sellers have access to Prime eligibility through Fulfilled by Amazon and Seller Fulfilled Prime (for more info on those terms and any others in this piece, check out our Amazon Glossary).
In general it’s accepted that Amazon is more likely to win the Buy Box for a given item than a third party, where they compete.
Again, this should be qualified: brands selling through Seller Central should not be competing against Amazon on their own products. This would mean selling wholesale to Amazon and then also selling that same product third-party directly, which effectively guarantees cannibalising one revenue source or the other. The point is that Amazon can win the Buy Box more of the time, which can lead to an advantage in sales performance.
Essentially, if the brand has a strategic goal of maximising sales and achieving higher market share at the expense of margin and direct control, Vendor may be the better option. Third-party offerings can still achieve mostly comparable sales to Amazon’s own retail program.
Using Seller Central means that brands can allocate as much inventory and as much of the product range as they see fit to the Amazon channel. They have no obligation to deliver a certain amount of sales or volume of product beyond the orders they receive.
That means the channel is much more naturally scalable, as investment in advertising and sponsored products campaigns can adapt on-the-fly to the growth of sales and improvement in organic rank.
The choice isn’t as simple as either Vendor or Seller Central. A hybrid approach is often valuable as this means brands get the best of both worlds with access to the AMS tools, as well as the ability to directly manage their image, pricing and presence.
When evaluating an Amazon presence, it’s important to consider the alternative. Of course, you could decline to sell to Amazon in the first place or simply stop the existing sales. Perhaps the brand does not feel that Amazon is the right channel to be on in the first place, although this has its own risks. Just because the brand isn’t directly offering products to Amazon does not prevent them from being offered by third party retailers on the Marketplace.
Having an official presence (through either Vendor or Seller Central) allows you to use Amazon's Brand Registry to control the listing details of your products on Amazon, which helps to limit the amount of damage unauthorised resale can do, as you provide the product data for the listing. The Brand Gating program means sellers have to be in good standing in terms of their performance and customer feedback in order to list against your product listing in the catalogue – although it’s still often advisable to retail your own products on Amazon as an official entity so as to reassure consumers who are becoming increasingly savvy about the potential for counterfeit goods or rogue sellers.
This then removes any element of control – brands are often shocked by the poor quality of merchandising and service their products are associated with online. Part of the issue is visibility, as the problem is out of sight and out of mind for many brands. Certainly, the first recommendation to brands who aren’t keen to sell to Amazon or on Amazon themselves is to proactively monitor their supply chain and appearance on marketplaces in order to prevent damaged brand equity.
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