Considering a switch from 1p to 3p / Vendor Central to Seller Central is not a new phenomenon. What’s changed in the past 10 months is that the world’s gone mad.
Container rates have gone mad. Raw material-driven price increases have gone mad. The dollar’s inflation is going mad.
This makes it timely for everyone on the Vendor Central side to get a wholesale price increase. Or two.
If only it was that simple!
Because of this more often than not when talking with current or prospective clients, the question comes up: “Hey Peter, should we just leave Vendor Central and switch to Seller Central instead?”
The question is indeed burning. However the answer, I’m afraid, can’t be a simple yes or no. Instead as with most things Amazon-related, the answer instead is: “well, it depends…”
This series of articles will introduce and discuss what factors to take into consideration if you’re entertaining moving even a single ASIN from 1p to 3p. In this first piece, I’ll walk you through the top 3 things that in my experience brands tend not to consider deeply enough when making the switch decision.
Here we go!
1. Understand WHY you want to switch – do a holistic diagnostic of the account bottom up to understand what’s waiting for you on the other side. Measure up everything, not only the benefits.
To do so I highly recommend understanding the exact Amazon economics from your own side (likely you’ll know this quite well already) and also from Amazon’s perspective. Which is what most brands miss.
Let’s look at your own brand’s perspective first – Amazon compatibility – the brand’s perspective
In most cases, the need and want to switch comes from either having declining profitability and/or wanting more control/certainty and predictability regarding the Amazon revenue stream (Why are my POs not coming, right?!)
These combined with the ever unresponsive Vendor Managers (VMs), leave usually no reliable path to turn the profitability and revenue uncertainty around.
Because of this, often Seller Central (SC) from the Vendor Central (VC) side seems to be the promised land whenever VC profitability gets squeezed, the VM doesn’t respond to the price increase request or annual terms come.
Now, most decision-makers expect that going over to SC will eliminate the following headaches:
- my wholesale prices being locked in
- my profitability being restricted by the locked wholesales
- praying for the vm to respond to emails if there’s something off with the POs or I need help with
- constant money drain that is shortages and chargebacks
Yes SC, will remove Amazon’s control in all of the above topics and more.
However, one thing it won’t do is change the economics or Amazon compatibility of your brand. On top, it will bring a set of new responsibilities to manage (that’s to come later).
This brings us to the first key point: Ensure you do a full-on, holistic diagnostic of your brand. On an ASIN level, no shortcuts! Understand why precisely you are considering changing from 1p to 3p and what P&L (profit and loss) elements would change if you went from VC to SC.
In addition, it’s worth understanding during the same exercise what elements of the P&L will drive your profitability, if changed high or low, as well as the incrementality of the change those elements yield.
An Example Analysis Of The Incremental Change
A quick example to show what I mean by understanding incrementality of change: if I reduced the packaged product dimension and weight by 1.29%, would it actually put the product into a lower FBA size tier or keep it in the same?
If it’s the same, you’ll still win some margin on container rates but not on the fulfillment. So focus elsewhere or be tougher on the product engineering team to make their efforts worthwhile.
For purposes of 1p comparability, let’s assume Amazon charges themselves the same fulfillment fee as they do their FBA sellers – the example is valid for both 1p and 3p.
Without knowing what the exact tipping point is, in our example lowering the FBA size tier to reduce fulfillment fee, chances are some of the assumptions won’t work out quite how you planned them. So do the math – it’ll yield benefits.
Now back to understanding the incrementality. When the bottom up approach is done, bring it all together to see the economics of your brand. What does it look like on 1p and what would it look like on 3p?
On top of the dollars, how do the cost elements change as a % of revenue? Your revenue per unit sold will, by default, go up as you’ll shift to realizing retail price per unit vs wholesale. That by definition changes the ratios (say fulfillment % of revenue). There will be a natural shift towards lower %s when compared to revenue – say ad dollars – given the wholesale to retail shift. Don’t let the margin dollar increase per unit blind you and make sure you pay attention to the margin %s as well.
Doing the above piece of work will give you one perspective and one side of the equation. Which is useful in itself, however, it’s not the whole story.
It’s now time to flip the table upside down and do the same as if you were Amazon selling your brand. What would you think if you were on the other side?
The Amazon side of the compatibility and economics
Based on my experience as an ex-Amazon VM and SVS (now called AVS), understanding the holistic economics of your brand from Amazon’s perspective is the number one favor you can do to your brand’s future. Regardless if you afterwards choose to stick with 1p or move onto 3p. Everyone’s talking about how to stand out in today’s more and more saturated Amazon marketplace. As a 1p seller, one of the -hands-down – best ways that only a handful of vendors do is diagnose, understand and act on Amazon’s P&L just as much as you’d on yours.
Here’s why!
There always is a factually traceable reason (or in some cases multiple) that makes the algorithms decide not to accept a price increase coming from you. Or makes the algorithms insist on a certain trading terms increase.
It is also not by chance that products get suppressed, POs stop coming or become spotty, or products become ineligible for advertising.
All of those symptoms have a root cause that comes from the economics of your brand, more precisely something that’s not working for Amazon’s P&L even though it may work well on your side (seemingly).
Making therefore a switch from VC to SC will mean that the economics of your brand now will become 100% your responsibility. Amazon won’t absorb any unevenness or hide any inefficiencies. This means chances are you’ll start seeing new costs popping up or the existing ones growing as you are taking over Amazon’s P&L in its entirety.
These are not necessarily bad though. What is a problem, is that they often come as unexpected/unplanned and surprising. This is due to never having completed an in-depth diagnostic of the state of the VC account to unveil them. Let alone any of them saw an attempt to improve.
So ultimately take the time to diagnose the state of your Amazon account not only from your own perspective but also from Amazon’s. Do it, as you will need to take care of those costs after the switch. (Or lower the services you offer to customers which will impact your revenue, but more on that later.)
The costs that currently won’t let Amazon allow you to increase your wholesales will transition over onto your plate. Would you be able to and willing to pay them?
A question that is well worth considering and answering before making a VC to SC switch.
2. When the 360 diagnosis is done, then comes the question of what to move. The whole catalogue? One range/collection?
To answer this question, we have to accept the following two, very important statements:
- Statement 1: not all products are equal – certainly not in the eyes of Amazon.
- Statement 2: a move from VC to SC is a two-way door.
Regarding the first statement, one product has a better sell-through rate/higher inventory turn, the other has a lower ACOS but might be slow-moving. The third one is awkward to handle from an operations perspective and has a high fulfillment fee to retail price ratio.
If the Amazon compatibility is done from bottom up as suggested above, that will reveal the 1-2% profitability differences selling an ASIN on VC vs SC and moving some ASINs that make sense vs the whole catalogue. Sum up the 1-2% deltas in profit across the entire catalogue and you’ve just gained a point on your bottom line versus making an all or nothing decision.
Additional considerations for not blanketing the switch decision may include: how the detail pages look when a customer views a variation. One sold by Amazon, the other one by your brand.
Does your customer care?
All things being equal, does the conversion rate change significantly? If so in which direction?
A short case study
I’ve seen conversion rates go both ways all things being equal – same retail price for the same product, in season, same fulfillment message, same advertising support dollars and we are talking about ASINs of a well established international household brand in the outdoor space.
As soon as the “sold by” portion of the Buy Box went from Amazon to the brand, the conversion rate increased by 13.4% (from 6.9% to 7.8%). Couldn’t believe my eyes! Certainly not what I would have initially predicted.
That’s why we tested it in real life and in a strictly controlled environment so that the results are meaningful. Then tested more ASINs to see how they behave on 1p and what changes, if anything, on 3p.
The moral of the story?
Establish a base hypothesis why you’re looking to move products over and what you’re expecting them to deliver on the SC side. Then test it in real life and validate if it works. Let the validation decide the ASINs to be kept on VC or moved to SC.
Whether or not it’s actually going to work, well… my guess is as good as yours if we don’t test it. The truth is neither matters at the end of the day.
It’s the customers who decide.
So why not ask them to express their opinion?
It’ll pay hefty benefits, I promise.
Speaking about testing the impact…
3. The fulfillment promise – and your customer
The impact it can have on your product’s performance is very often undervalued and underappreciated.
Let me explain.
It’s very difficult to estimate without actually testing how much the reduction of the fulfillment promise will alter the conversion rate.
There are the obvious scenarios when it snows and having vs not having Prime shipping promise means the entire world between 2 snow removal tools for the customer – understandably.
For more evergreen categories/products it’s less straightforward.
The fulfillment promise (note I’m using promise and not actual speed as the customer makes a decision on what’s shown to them and what’s being promised at time of purchase) drives two direct levers of sales:
- Conversion rate – the impact depends on category competitiveness, Prime can easily add 3-5 points on top of a non-Prime promise or take away from an existing one
- Organic traffic – perhaps more important than the conversion rate, you lose the attention of the Prime members. We know how loyal to Amazon they are and we know the spending power they have. On top, the algorithm won’t prefer non-Prime shipping either so expect some traffic-related penalties and lower search ranking.
The problem comes usually after the above two factors have been considered. Advertising and the slower fulfillment promise-driven consequences.
When a product starts to sell less (vs expectations or P70), the usual automatic response is to throw some advertising dollars into the mix and drive the sales.
This is where the false economy starts.
Note the sequence of decisions: save some margin on fulfillment speed → conversion rate and traffic drops → spend more on ads to balance it out.
Sounds good but don’t forget, the conversion rate is already compromised as explained above. So now we are going to drive more people to a lower converting detail page. This means the ACOS is going up, ad efficiency going down.
Back to the previous sequence: save some margin on fulfillment speed → conversion rate and traffic drops → spend more on ads to balance it out → but slower fulfillment drives lower conversion rate means higher ACOS → which means lower product margin → and we are back where we started before we decided to eliminate Prime shipping.
To make sure we don’t step into the above-described sequence, it’s worth diagnosing, testing in real life, and then making the decision (yes, the pattern is back and with a good reason!) understanding that it is again not a one-way door but a two-way door.
The good news is that VC gives everyone great data that shows where your customers are located. This gives you the opportunity to very accurately model how much maintaining Prime shipping would cost out of your warehouse/3PL and with your current shipping table. No average freight load factors, no shortcutting! We don’t want to artificially inflate or deflate the product’s expected profitability so again do it bottom up.
Conclusion?
Switching from VC to SC is one of the most important decisions you’ll make in your brand’s life. It’s no joke. And certainly not quick and easy as some forums on Facebook or LinkedIn make it sound like. It’s not supposed to be easy, which makes it rewarding if you get it right.
Note the triangular approach appearing in all segments of this article:
- Diagnose on ASIN level
- Test & measure on ASIN level
- Conclude and decide on ASIN level
The reason to keep the bottom up approach is simple: Amazon is a collection of ASINs.
Not brands, brand stores, or portfolios.
ASINs.
That’s how the algorithms think and decide about your products. Individually and one ASIN at a time. Therefore I suggest to take the same approach, especially with a decision as important as a VC to SC switch.
In addition, it’s worth reiterating that it is most certainly not a one-way door if done right. Meaning if you don’t like what you see after a test period, you can ultimately go back to 1p as long as the move is done correctly.
Your brand deserves the decision and the move to be done after a holistic bottom up diagnostic. Your customers deserve to enjoy your products the same way they used to. Allow them to do so – which starts with diagnosing your brand’s Amazon compatibility.
Understanding what specific elements drive your customers’ buying habits on Amazon. ASIN by ASIN. That will allow you to make an educated decision for your brand and products.
And your customers.
They’ll be there, on the sidelines, eagerly waiting for your next bestseller to be launched. Regardless if it’s via SC or VC.
About the author
Peter Beke is one of the two ex-Amazonian co-founders of The Hawker’s Club. An e-commerce advisory that works with America’s most authentic and unique e-commerce brands to ensure these brands directly position their value offer and brand potential as an Amazon partner and they gain profitability and sustainable revenue growth with certainty.
Outside of work Peter is an amateur craft brewer and road trip enthusiast.
