In May 2020, eCommerce platform Shopify became Canada’s most valuable company. Regardless of the company’s ability to maintain its top position, the unexpected change is reflective of a major shift in focus for many businesses: developing an online channel. The new reality of having customers confined to their homes has businesses of all sizes rushing to adopt eCommerce.
As a classically-trained marketer, I was fortunate to expand my expertise into eCommerce in 2014. Since then, I am constantly expanding the reach of premium brands from a traditional distribution channel, to a B2C online channel. The transition is not always smooth, but necessary.
Why Consider Selling on Amazon?
Any conversation about online selling has to include Amazon, especially if your target audience is located in North America. Selling on Amazon is very tempting to brands looking to fastback their eCommerce strategy. Amazon offers brands new to eCommerce the quickest opportunity to make a sale online, at a reasonable cost. The amount of exposure and trust in the Amazon brand, particularly in United States, is time-consuming and immensely costly to replicate with an independently-owned online store.
While there is plenty of information on selling via Seller Central, selling via Vendor Central is less discussed, because access to the platform is restricted. Established premium brands, especially in a category of focus for Amazon, have good chances of receiving the Amazon invitation to access Vendor Central. Amazon deals mainly with the manufactures for this program; however, distributors of products that are difficult to source might also gain access to the platform.
Amazon Vendor Central versus Amazon Seller Central
Selling on Amazon can be confusing. Regardless of the platform, your products will be listed and available for sale on the Amazon country-specific consumer website. The chart below summarizes the differences between the two Amazon platforms sellers can use to list their products:
|Seller Central||Vendor Central|
|Access to platform:||Open to all businesses and individual sellers, regardless of size and years in business.||Invitation-only, usually sent to established brands with solid reputation and strong consumer demand.|
|Distribution model:||3 PL: Products are stocked by Amazon or drop-ship directly to consumers. Seller decides on which products will be warehoused by Amazon.||1 PL: Amazon acts as a distributor of your products. Amazon decides which products and quantities it will stock versus drop-ship.|
|Shipping To Consumers:||Amazon Warehouse Seller Drop Ship||Amazon Warehouse and Vendor Drop Ship|
|Control Over Retail Price:||Seller||Amazon|
|Marketing:||Seller||Amazon and Seller|
|Who Pays for Freight:||To Amazon Warehouse: SellerFrom Amazon Warehouse to Consumer: AmazonDrop-Ship To Consumer: Seller||Amazon|
|Prices:||Retail Prices||Wholesale Prices|
|Marketing Tools Available:||Basic||Advanced|
Things to Consider Before Saying “Yes”
The benefits above acknowledged, the decision to list your brand on Amazon Vendor Central should not be taken lightly. My experience using Vendor Central has exposed me to the downside of this business model, especially for premium brands. My intention is not to discourage you from accepting Amazon’s invitation; I simply want to highlight some less than ideal aspects you should be aware of:
Your brand’s retail price is out of your control (and in Amazon’s hands). As a distributor of your products, Amazon reserves the right to set market prices based on its own priorities and algorithms, not your Suggested Retail Price. Unfortunately, these algorithms do not take brand image or market segmentation into account. Amazon’s goal is to move products, regardless of the brand, its image, and policies. Your brand MAP (Minimum Advertised Price) or retail price will not matter to Amazon.
Amazon’s strategy has minimum impact on low-priced, high volume brands; however, it can have tremendous negative implications for an established premium brand that has been diligently protecting its retail prices across its distribution channels and market segments. Price signals quality; an unusually low price erodes the premium positioning, and spreads uncertainty among the customer base. Moreover, the inability to protect prices can lead to channel conflict with the other distribution partners, and company-owned distribution channels.
Vendor Fees Can Eat Into Your Profit Quickly. Further to the point above, you will be shocked to discover that Amazon retails your products at a single-digit margin, or in some cases even below their cost. How is that possible, you ask? Because Amazon makes most of its money from charging Vendor’s fees.
Every year, suppliers are being provided with a new agreement that includes the fees Amazon expects to deduct during the next 12 months. As of 2020, these fees are divided into three categories: Marketing Development Fund, Freight Allowance, and Returns.
Marketing Development Fund (MDF) fees-the compensation Amazon demands for its marketing efforts to promote a particular brand. In all fairness, Amazon does promote your brand, thus freeing precious marketing time that can be directed to other activities.
Freight Allowance-this fee is applicable in situations where amazon arranges the freight from your location to the Amazon warehouse, or customer. You will want Amazon to deal with freight because of their competitive rates, and streamlined process.
Damage allowance- is a fee expressed as a percentage, that Amazon charges to dispose of your products are damaged. There is also the option of Amazon returning the product to you, in which case you will have to pay for return freight (and a potential “handling fee”).
Amazon is a very difficult negotiator, often delegating the task to third-party agencies whose only goal seem to be to squeeze the most dollars out of every Vendor. Every year, without exception, Amazon will try to increase Vendor fees. In 4-5 years these amounts can eat into your profits so drastically that it no longer makes sense to sell to Amazon.
Amazon will not accept any cost increases. This is another shocker to companies that are used to doing business in the real world. In the non-Amazon world, occasional cost increases that account for inflation and increase in raw materials is a practice commonly accepted and expected. This is not the case with Amazon.
To start, the process of submitting a price adjustment is very frustrating, especially of you have hundreds of products listing on the platform. Templates that don’t download, inexplicable errors when submitting a file, and difficulty in tracking the results of your submissions; all designed (on purpose I believe) to make your abandon your new cost implementation.
Once the cost templates are uploaded successfully, do not assume your new costs are accepted by Amazon. In my 5 years of selling on Amazon Vendor Central, I was only able to implement a single cost increase, in the second year of our collaboration. That being said, Amazon will gladly implement any cost decrease expeditiously.
Higher Vendor fees and inability to increase your wholesale prices means Vendor Central will not generate the profit you might expect. In some cases, your Vendor central business will be less profitable than your brick-and-mortar distribution. And we haven’t even taken into account the operational upgrades your business will have to make to please Amazon.
Your operational performance will have to be top-notch. This is not necessarily a bad thing, however for a brand new to eCommerce, Amazon’s expectations might be difficult to adjust to. The Operational Performance dashboard is comprehensive, and strictly monitored by Amazon.
Some of the parameters that will affect your vendor performance include Purchase Order Accuracy, packaging compliance, late delivery, missing tracking number information, to name just a few. Meeting these expectations requires effective collaboration between different departments, such as Customer Service, Marketing, and Operations. It also requires streamlining and improving your fulfilment process, which can be costly.
Your operational performance is reflected on your sales performance. More specifically, Amazon updates the availability and the delivery time for your products based on your performance indicators. A product with a listed delivery time of “2-3 weeks” will probably turn most customers away, on a platform where expected delivery is 2 business days.
On a positive note, operational performance is reviewed by Amazon monthly, resulting in instant upgrades or downgrades. Any improvements will be reflected in the following month’s sales numbers.
Brands that operate on the Amazon Vendor Central trade control for convenience. The situation above is learned through experience, not presented to you before you accept the agreements. When making the decision, brands have to find the balance between these two elements and decide what’s more important: free time to explore other opportunities, or a brand image that is consistent across all channels and markets? Each situation is unique, but at least you have some more information to work with.