Amazon announced that on April 28, 2022, they will increase the third-party fee that's charged to merchants using its fulfillment services by 5%. What does this mean for brands considering a 1P vs 3P strategy for distribution?
We asked one of our experienced Vorys eControl Partners, Natalia Steele, to provide some valuable insights. The following includes our line of questioning and Steele's direct answers:
Steele: I think it will definitely be a factor for brands just deciding on their marketplace strategy or deciding whether to switch their focus or deploy a hybrid approach. This cost increase is just one dynamic brands consider in choosing their overall go-to-market strategy.
Another factor that is also a new development this month is Amazon’s introduction of FBA Prime service for brands’ own websites. This service will have limited reach for now, by invitation only, but the increased cost of the service may be more palatable to brands that will be able to outsource their dot-com fulfillment to Amazon and save on the associated costs and customer service headaches.
Of course, as with every development, there is always the flip side of relying on Amazon to provide distribution services, not the least of which is sharing (or loss, if you want to take a less rosy view) of very valuable customer and product trends data with Amazon. So, aside from financial costs, with every decision on how to operate on Amazon (1P certainly requires little hands-on day-to-day management, whereas 3P requires dedicated daily effort), there are also intangible costs associated with the brands’ convenience being traded loss of control and ability to capitalize on brands’ own data.
“I think it will definitely be a factor for brands just deciding on their marketplace strategy or deciding whether to switch their focus or deploy a hybrid approach. This cost increase is just one dynamic brands consider in choosing their overall go-to-market strategy.”
Steele: Taking operating costs and logistics out of the equation, the 3P model provides more stability for brands because Amazon 1P is an automated partner that (1) is often a price follower, (2) sets its ordering based on actual consumer demand, and (3) limits its inventory positions more than “traditional” retailers (expanding FBA access to brands comes with squeezed FCs space).
The 3P model, as mentioned above, can require more day-to-day management by the brand, but with that comes more control over pricing, and consumer data experience. However, neither model is a recipe for success without proper downstream channel controls, goals, and incentives alignment between the brands’ “traditional” B&M retail and eCommerce, and properly-supported ability by the brand to pursue and remove disruptive resellers that interfere with the 1P strategy by dragging Amazon pricing down or the 3P strategy by siphoning sales from the 3P vendor through discounting that the brand’s 3P is not going to match.
To learn more about how Vorys eControl can help position your brand for success across all of your sales channels, contact our team.
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