Finally jumped the gun and trying to break into Amazon? For businesses looking to tap into the vast potential of Amazon, a crucial first step is deciding between the 1P (first-party) and 3P (third-party) seller models. In this great debate between Vendor Central and Seller Central, the consideration hinges on various factors such as your company’s size, resources, and business goals. Read on to see how a 1P or 3P selling model can help your business.
TABLE OF CONTENTS
1. 1P vs. 3P Fundamentals
2. Pros & Cons of Each Model
3. 1P vs. 3P: Choosing the Right Fit
4. More Resources on Choosing the Right Business Model
5. How VASO Group Helps You Choose Between 1P and 3P
1P vs. 3P Fundamentals
As the names suggest, the 1P model and 3P model refer to your business’s position in the process of making a sale to Amazon.
What is 1P on Amazon?
In a 1P, or first-party, arrangement, you act as a wholesaler, selling your products in bulk directly to Amazon. You sell your products to Amazon in bulk at a pre-negotiated price, and Amazon takes care of everything else – storage, fulfillment, customer service, marketing, and returns. You receive a purchase order, ship the products to Amazon, and get paid based on the agreed-upon wholesale price.
What is 3P on Amazon?
In the 3P, or third-party, model, you operate as an independent seller on Amazon’s marketplace. Here, you list your products on Amazon. You control pricing, branding, marketing, fulfillment (through Amazon FBA or your own channels), and customer service. Amazon charges various fees for listing, fulfillment (if using FBA), and transactions.
Pros & Cons of Each Model
1P Advantages & Drawbacks
Typically suitable for brands that prefer to be more hands-off in everyday selling operations, the 1P model offers many convenient perks like a smaller workload, instant access to a wider, higher-intent audience, and a larger sales volume. Especially since you will be relying on Amazon to do your selling, Amazon will do all it can to move your inventory (now theirs). The problem is, the price tag that comes with such dedicated and favorable services is hefty: Amazon will charge you a wholesale price, which lowers your profit margins, and they have the control over pricing, which can either help or hurt your business.
Pros:
- Reduced Operational Burden: Amazon shoulders the logistical and operational weight, freeing you to focus on production and inventory management.
- Enhanced Visibility: Your products benefit from prominent placement on Amazon product pages, potentially leading to increased sales and brand awareness.
- Streamlined Order Fulfillment: No need to worry about picking, packing, and shipping individual orders.
- Potential for Increased Sales: Leveraging Amazon’s vast customer base and marketing muscle can significantly boost sales.
Cons:
- Limited Control: You relinquish control over pricing, marketing strategies, and product listings.
- Profit Margins: Profits are often lower due to wholesale pricing structures.
- Performance Pressure: Meeting Amazon’s strict performance requirements, including minimum order quantities and on-time delivery, can be challenging.
- Invitation-Only Entry: Gaining access to Vendor Central is highly competitive, often requiring a proven sales record and established brand presence.
3P Advantages & Drawbacks
On the other hand, brands that are looking at the 3P selling model may find that the additional control over pricing, branding, and data analysis is a worthy trade-off for the extra effort needed to run marketing, fulfillment, and customer service.
Pros:
- Greater Control: You have complete control over pricing, branding, marketing strategies, and product listings.
- Profit Potential: Profits can be higher due to the ability to set your own prices.
- Lower Barrier to Entry: Anyone can create a Seller Central account, making it accessible to businesses of all sizes.
- Scalability: The 3P model allows you to easily scale your business up or down as needed.
Cons:
- Increased Operational Burden: You’re responsible for product listing creation, inventory management, order fulfillment (unless using FBA), customer service, and marketing.
- Visibility Challenges: Standing out from the competition on Amazon’s crowded marketplace can be difficult.
- FBA Fees: Utilizing Amazon’s fulfillment services comes with additional fees that can eat into profit margins.
- Competitive Landscape: The 3P marketplace is fiercely competitive, requiring strategic marketing efforts to attract customers.
To recap, here are key considerations when choosing between the 1P and 3P business model on Amazon:
1P vs 3P: Choosing the Right Fit
Who Should Consider 1P?
With an invitation-only model on top of expensive manufacturing and storage costs, going 1P requires high up-front costs to get started. As such, only established brands with a good track record of selling should consider this approach to expand their business to online marketplaces. On the other hand, businesses that already have good production and sales capabilities but lack customer-facing resources for marketing and customer service can also benefit from this model.
To recap, 1P is for you if:
- You have steady, high-volume production capabilities
- You maintain a proven track record of brand recognition and sales
- You want to tap into a wider market reach and increased brand exposure
- You are comfortable with relinquishing some control over pricing and marketing
- You face operational challenges like lack of customer-facing resources (marketing and customer service)
Who Should Consider 3P?
3P is a much more flexible option for sellers: it is not as exclusive (unlike 1P, which is invitation-only), and even offers different fulfillment models (FBA and FBM) to fit your storage and shipping needs. On top of such flexibility, 3P sellers can easily take the reins on their pricing and branding strategies, which helps control profitability. The only downside would be higher operational fees in terms of marketing or customer service. Usually considered a good option for businesses of all sizes, those with unique or niche products can find extra advantages when opting for the 3P model, as it allows for greater brand control and fosters a direct relationship with customers.
To recap, 3P might be the model for you if:
- You have strong brand identities and marketing capabilities
- You seek greater control over brand presentation and pricing
- Your business is smaller and has limited storage and shipping resources
- Your product category is unique or niche, and may not be a good fit for 1P
PRO-TIP: There’s no one-size-fits-all answer. Some businesses might even consider a hybrid approach, leveraging both 1P and 3P models to reach different market segments or test new products.
More Resources on Choosing the Right Business Model
Choosing a selling model determines the framework of all your other operations, like branding, pricing, marketing, and shipping. As such, you can imagine that this is a decision which requires much research and consideration. We encourage you to learn more about these 2 selling models through extra resources:
- Amazon Seller Central Help Page: A comprehensive resource providing detailed information on both Seller Central and Vendor Central, including eligibility requirements, fees, and best practices.
- Amazon Webinars: Amazon periodically hosts webinars specifically addressing 1P and 3P models. These webinars offer valuable insights directly from Amazon experts.
- Jungle Scout – A Complete Guide to 1P vs. 3P on Amazon: This guide by Jungle Scout, a leading eCommerce tool provider, offers a detailed breakdown of the 1P vs. 3P models, along with helpful decision-making frameworks.
- Shopify – Vendor Central vs Seller Central on Amazon: Which Model is Right for You?: This article by Shopify provides a clear comparison of the two models, highlighting the advantages and disadvantages for different business types.
- Online Amazon seller communities like r/AmazonSeller and Amazon Seller Forums
How VASO Group Helps You Choose Between 1P and 3P
Still have questions? Our account management experts are constantly keeping up with updates in the 1P vs 3P business model debate. We will work with your sales and marketing team to determine your business capabilities and goals in order to provide the most accurate recommendation and estimation of your expenses. By carefully considering the factors mentioned outlined in this article, we will help you make an informed decision about which Amazon selling model best positions your business for success.
Ready to take the leap into Amazon business models? Reach out to us at VASO Group if you want even more account management tips to cut costs and maximize profits.