Difficult vendor negotiations, shrinking margins, and recent vendor terminations have led many brands to reconsider their 1P relationship with Amazon. But is switching to Seller Central (3P) really the right move?
It’s a question many business leaders are asking. Both models have changed significantly in recent years. And with a surge of new sellers during the pandemic, third-party sales on Amazon have reached all-time highs.
In 2024, 61% of all sold units on Amazon came from third-party sellers. But this doesn’t mean it’s also more profitable.
So in today’s article, let’s explore when you should consider moving to Seller Central and what to look out for when pursuing this strategy.
This article will cover:
- Why move from 1P to 3P on Amazon?
- When to move from Vendor to Seller Central
- How to make the switch to Seller Central
- Challenges of switching 1P to 3P
Why move from 1P to 3P on Amazon?
The reasons why vendors think about becoming third-party sellers usually fall into three categories.
They either want to…
- Improve their margins,
- Control their product prices, or
- Take back control over their inventory management.
The frustration many brands have with the 1P Vendor model stems from the fact that it’s become more complex and expensive to manage.
Today, most Vendor Managers refer brands to self-service tools or the case system in Vendor Central, leaving suppliers without much human interaction to manage their Amazon accounts.
At the same time, vendors are subject to annual trade negotiations, or Joint Business Plans (JBPs). Brands often see these negotiations as lengthy and difficult, adding a bitter taste to the 1P sales model.
With more transparent rate card fees for 3P Sellers than for 1P Vendors, switching from Vendor to Seller Central can present a cost-saving opportunity that brands should consider when selling on Amazon.
| Vendor (1P) | Seller (3P) |
|---|---|
| Brands and manufacturers sell wholesale (1P) to Amazon. | Brands and manufacturers list products and sell directly to consumers. |
| Various supply chain and fulfilment options to minimise costs. | Standard fulfilment options: Fulfilled by Merchant (FBM), Seller Fulfilled Prime (SFP), Fulfilled by Amazon (FBA). |
| Limited control over product pricing, inventory management and product launches. | More control over product pricing, inventory management and product launches.1 |
| Amazon provides customer support by default. | Customer support provided by brand (FBM, SFP), or by Amazon (FBA). |
| Highest chance of winning the Buy Box by default. | Has to compete for the Buy Box with lower prices and fast delivery. |
| Annual negotiation of vendor trade terms. | Fixed commission rates and variable fees that cannot be negotiated. |
1 Note that the Amazon Marketplace Fair Pricing Policy may restrict the Buy Box if offered 3P prices are not competitive.
When to move from Vendor to Seller Central
There are many reasons for opening a 3P Seller Central account. However, it’s vital to understand the scenarios in which switching to a hybrid or 3P selling model can offer real benefits. Let’s take a closer look at each of them:
Scenario 1: Amazon has given up on you
If you don’t have access to a dedicated Vendor Manager and rely on raising cases in Vendor Central to resolve issues, chances are you’re being managed by Amazon’s Vendor Success Program (VSP).
Their job is to manage brands with low revenue figures at scale, while keeping direct human interaction to a minimum. It’s not uncommon for VSP managers to handle several hundred vendor accounts simultaneously.
This makes it difficult for 1P brands to get dedicated support for managing inventory levels, operations or questions about their catalogue.
On the other hand, Amazon invests significantly in the support for its 3P sellers. They can regularly speak to an account manager on the phone and receive well-documented instructions on self-serving their seller account.
So if Amazon isn’t showing much interest in your 1P business or sent you a termination notice, opening a 3P account will likely give you access to a better support system that your teams can use to develop your marketplace sales.
Scenario 2: The cost to serve Amazon has become unsustainable
Poorly managed trade and cost support negotiations can quickly erode your vendor margins. That’s because these investments aim to support Amazon’s profitability but often don’t return any revenue-attributable growth for your brand.
Add rising media costs, chargebacks, and price or quantity variances to the equation and your customer margins quickly become unsustainable.
In this case, you can either negotiate an increase in your cost prices or a reduction in trade terms. However, both are lengthy and complex discussions that your Vendor Manager won’t readily accept.
Another option is to move unprofitable selection to 3P/FBA, while keeping your vendor account. This hybrid setup ensures you can continue to sell your entire portfolio while working with your Amazon manager to find a long-term solution.
Scenario 3: Amazon erodes your prices
Before we get to this point, let me say one thing right up front: It’s unlikely that Amazon is eroding your prices. Instead, chances are your incentive structures with other retailers, wholesalers and distributors is causing the issue.
For example, if you’re a brand that offers volume discounts to wholesalers who also sell on Amazon, you’re effectively funding your direct competition that will undermine your prices to win the Buy Box.
As a result, switching to Seller Central is unlikely to be an effective solution. You’ll need to update your selling policies and introduce a selective distribution first.
However, if Amazon pursues a price-leading strategy on your portfolio, switching to 3P will be your only option to regain control over your product’s prices.
Note that Amazon’s Marketplace Fair Pricing Policy may suppress 3P Sellers in the Buy Box if their product price is deemed uncompetitive. So you still need to ensure that your 3P price is competitive compared to other retailers.
Related: How to Increase Your Average Selling Price on Amazon
Scenario 4: You want to diversify your Amazon business
Another scenario in which you may want to move to Seller Central is to reduce your dependency on Vendor Central.
In this case, a 3P Seller account serves as insurance if anything drastic happens to Amazon’s vendor ecosystem, such as introducing higher fees, margin pressure, or serving a termination letter to your brand.
Brands will typically open a 3P account to familiarise themselves with the systems but do not (yet) see it as the primary route to selling on the Amazon marketplace.
This allows brands they assemble the right teams, acquire the necessary knowledge and train their employees to eventually switch to 3P without losing sales.
How to make the switch to Seller Central
Brands that want to pursue a move from Vendor to Seller Central should first consult their legal team and review their terms and conditions with Amazon.
Amazon often includes a manufacturer clause that can prevent vendors from becoming sellers without Amazon’s written approval.
It’s advisable that you discuss the move with your Vendor Manager and let them know that you intend to open a 3P account.
You can then follow these steps to migrate from Vendor to Seller Central:
- Open a Seller Central account
- Register with Brand Registry
- Set up a Seller Central Amazon Ads account
- Choose a fulfilment option (FBM/SFP/FBA)
- List your products
- Set your product pricing
- Manage your inventory
- Manage product content
Vendors generally have two options to become 3P sellers: They can either take a 1) hybrid approach or 2) make a hard switch to Seller Central.
Hybrid approach
A hybrid approach enables brands to maintain control over key aspects, like pricing and inventory, while also strategically leveraging Amazon’s infrastructure in areas such as fulfilment and marketing on key products.
In my recent industry study, half of all Amazon vendors take a hybrid approach, using both first-party (1P) and third-party (3P) selling models.
The advantage of a hybrid approach is that vendors can choose which distribution mix is most profitable for their business.
For example, unprofitable products in Vendor Central can often be sold at a fraction of the cost through 3P, increasing their profitability in a brand’s P&L.
This makes the hybrid approach also an effective alternative to continue selling products for which Vendor Managers have refused to adapt cost prices.
Brands should generally consider a hybrid approach if they:
- Struggle with Amazon regularly running out of stock;
- Want to speed up NPD launches;
- Lower their cost structures;
- Want to become more agile when testing new products;
- Sell seasonal products their Vendor Manager refuses to buy.
Vendors gain more control over their brand and customer experiences when leveraging data insights from the first- and third-party models.
However, not every brand wants to continue selling via Vendor Central. Their alternative is a hard switch to Seller Central.
Hard switch
Transitioning from 1P to 3P requires brands to effectively transform their internal capabilities to cater to the third-party model.
After all, a hard change also risks interrupting existing revenue streams if not planned carefully.
In such cases, brands should consider hiring external agencies or consultants to bridge any knowledge gaps in their organisation.
The hard switch is suitable for brands that:
- Struggle with high trade terms in Vendor Central;
- Receive small PO volumes that don’t justify the cost to serve;
- Sell a wide portfolio range across multiple product categories;
- Focus only on private-label products;
- Want to use Amazon as a DTC channel instead of a wholesaler;
- Seek to avoid annual vendor negotiations.
Challenges of switching from 1P to 3P
Moving to Seller Central comes with many challenges brands need to be aware of. The following highlights the most common hurdles organisations face when considering leaving the 1P Vendor model.
1. Amazon may hinder your move to Seller Central
Amazon introduced their first-party business to ensure the availability of critical products at low prices. Leaving Vendor Central poses a direct threat to the online retailer’s Flywheel.
If you consider yourself a category-critical brand, you can expect your Vendor Manager to exhaust their options to keep you on Vendor Central.
Amazon’s Standards for Brands Policy states that Amazon can prevent you from creating a 3P account or listing products previously available through 1P.
In these cases, a switch to Seller Central needs to be carefully executed.
The hybrid model will almost always be the preferred option as it allows you to list future products through 3P while selling your existing portfolio in Vendor Central.
Alternatively, you can also consider appointing a distributor to sell part of your range on Amazon’s marketplace. This can often still be more profitable than selling through Vendor Central alone.
Related: Amazon Standards for Brands Policy: The Complete Guide
2. Your distribution strategy gets in the way
Brands that sell to multiple retailers know that Amazon will follow the price of the cheapest option in the market.
This becomes even more difficult when your teams sell to wholesalers who are themselves third-party sellers.
In such cases, switching to Seller Central means that you’ll be competing with your own distribution partners on the Amazon marketplace. But without the benefit of being prioritised as a vendor in the Buy Box.
3. Amazon may suppress the Buy Box
One of the biggest misconceptions about moving from Vendor to Seller Central is that brands regain full control over their product pricing.
Let me be absolutely clear: This is not the case.
Instead, Amazon will suppress your Buy Box offer if you set an uncompetitive product price. So if another retailer sells your product at a lower price than what you’re offering it for, Amazon will remove your offer from the product detail page.
See also: Amazon Marketplace Fair Pricing Policy
4. Amazon imposes tough requirements on sellers
Lastly, brands that aren’t operating efficiently will struggle to meet the expectations of customers and Amazon alike.
Amazon strives to provide an exceptional experience for its customers. For this reason, all third-party sellers are expected to meet a set of minimum performance goals:
- Order defect rate: <1%
- Pre-fulfillment cancel rate: <2.5%
- Late shipment rate: <4%
If brands fail to meet these requirements, they risk having their seller account deactivated and being left without a revenue stream on Amazon.
Therefore, business leaders need to ensure their organisations can meet the operational requirements of a 3P Seller model before ending their 1P relationship.
Final thoughts
Moving from Vendor to Seller Central has become the holy grail for many marketing agencies out there. They consider it an attractive alternative to the expensive vendor model.
However, brands should be aware that the transition to 3P requires a very different set of skills and knowledge from their teams. Seller Central lacks most automated supplier systems such as order, price or inventory management, which means brands have to manage these themselves.
As a result, vendors must weigh up the risks associated with moving to 3P and calculate the exact business case to ensure they protect their profit margins long term.
Unsure about switching from Vendor to Seller?
If you’re thinking about moving your vendor business to 3P, we should talk. I offer tailored advice to help you navigate through the complex decision-making process and assess your business case.