Last week, our team presented the first webinar in our Vendor Strategy series: Increasing Sales and Maximizing Profitability Through the Hybrid Model. This was an in-depth look at the differences between Vendor Central and Seller Central and why a 1P (First Party), might consider leveraging the 3P (Third Party) platform to gain market share and increase profits.
During the presentation, our Lead Amazon Strategist, Sam Jennings, briefly walked through the cost breakdowns for both Vendor and Seller and how to analyze your catalog’s profitability on both channels. In this blog post, we will dive into the topic further by explaining the four steps to performing a 1P vs 3P profit analysis.
STEP 1: UNDERSTANDING VENDOR CENTRAL COSTS
As a Vendor, the brand sells its products to Amazon at their designated ‘cost price,’ or wholesale price. Each ASIN in your catalog is assigned a cost price when created. The cost price is nearly impossible to increase and Amazon will often pressure you to lower costs if an ASIN is nearing their own internal profitability thresholds.
Strategic Vendor Tip: As long as your internal systems can manage, raise your cost prices by 10-20% above your wholesale pricing when creating an ASIN in order to provide a buffer for Amazon’s attempts at lowering them in the future.
It is important to understand the cost price because this is the number Amazon’s Vendor Central fees are based on. Vendor fees, or Terms, are percentages taken on the Purchase Order amount (Cost Price x Units Ordered). These percentages are re-negotiated (aka Amazon tries to take more money from you) on an annual basis and can be found in your Vendor Central account under Settings > Agreements:
- Base Accrual – Usually referred to as MDF (Marketing Development Funds) or COOP, this fee relates to Amazon’s investment to continually improve the customer experience, increase the discoverability of your products, and ultimately drive sales.
- Freight Allowance – This is the cost to get your products from your warehouse to Amazon’s fulfillment centers. If you choose to take the responsibility of getting your items to Amazon (collect or prepaid), you’ll have to calculate this cost.
- Damage Allowance – What happens to your products when they are damaged.
- Payment Terms – If Amazon pays ahead of their due date, they will often reward themselves with an extra percentage.
Aside from the four terms fees, another important cost to consider specific to Vendor Central is Chargebacks. There are a very wide variety of Chargebacks which can pertain to Amazon having problems with Advance Shipping Notifications (ASNs), Package Preparation, the Receive Process at Amazon, Transportation issues and much, much more.
Vendors experience Chargebacks in varying degrees, but they can often be confusing and difficult to solve. To understand the Chargebacks your account is receiving on a weekly and monthly basis, go to your Reports and then Operational Performance. To calculate this as a percentage, add up your total Chargebacks from the 6-12 months and then divide that dollar amount by your total Cost of Received (found in the Operational Metrics Report) in that same timeframe.
STEP 2: UNDERSTANDING SELLER CENTRAL COSTS
As a Seller, or 3P, the cost structure is much different because you are selling your products directly to the end consumer, as opposed to selling to Amazon. Whether you are utilizing Fulfillment by Amazon (FBA) or Fulfillment by Merchant (FBM), a Seller pays $40 per month to keep their account running and a 15% Referral Fee off of the price that you sell each item to the end consumer. In addition to that, there are costs associated with both FBM and FBA.
Fulfillment by Merchant – If you are shipping your items directly to the customer after the order is placed, you will only need to pay the shipping cost. Generally, we do not recommend FBM unless your warehouse or shipping facility has the ability to meet the requirements of the Seller Fulfilled (SFP) Prime Program.
Fulfillment by Amazon – if you go the route of “renting” space in Amazon’s warehouses and having them fulfill your orders, you will inquire three FBA fees:
- Monthly Storage Fee – This is a monthly fee for storing one unit in an Amazon fulfillment center. Calculated based on volume of the product in cubic feet.
- Fulfillment Fee – Covers handling, pick & pack and the shipment to the consumer per unit sold and is based on size and weight.
- Ship to Amazon – This is the cost to ship the item to an Amazon fulfillment center. This is completely dependent upon the size of your shipment (sending a pallet vs a shoe box of product would change this cost heavily) and you will not know the exact cost until you create your first shipment.
To find the first two FBA costs above for each of your products, use the Seller Central FBA Calculator here. Copy and paste the ASIN into the search, type in the Retail Price under the Amazon Fulfillment column, and hit the Calculate button at the bottom.
STEP 3: CHOOSING ASINs TO ANALYZE
With a large catalog, it can be a daunting task to analyze the profitability of all your products. The next step in the process is to choose which ASINs are the largest opportunities for potential transition to Seller Central.
We recommend identifying ASINs that are:
- CRAP (Can’t Realize a Profit) and Amazon is no longer ordering
- Often stocked out
- Tied to frequent Chargebacks
- Lower in Cost Price relative to the Retail Price
It is also important to analyze products of diverse sizes and weights as well as varying price points so that you can understand how the different variables effect margins.
STEP 4: COMPLETE THE ANALYSIS
Now that you understand how to determine the Vendor Central and Seller Central costs and you have chosen your ASINs to analyze, the next step is to compare each ASIN’s profitability for Vendor and Seller, side by side.
You can build a simple excel sheet to accomplish the analysis or shoot us a note if you’d like us to send our Vendor Central vs Seller Central Margin Analysis Calculator Excel.