Amazon Vendor: What does it mean to sell wholesale to Amazon?
KhooCommerce's Managing Director spoke at the Manchester's Online Seller UK Conference for multi-channel sellers. Katherine spoke on 'Amazon Vendor: What it means to sell wholesale to Amazon'.
You can view the conference video, slides and talk overview below and if you have any other questions, do not hesitate to get in touch with Katherine.
Why are we talking about Amazon?
So, even if you aren’t selling on Amazon (or even wanting to) there are elements of this talk which will help you. Because Amazon, whether you work with them or not, is the starting place for 1 in 2 product searches. In the US, 52% of product research starts on Amazon, in the UK this is slightly lower at 45%. Still, this broadly means that about half of the time your customers are starting on Amazon.
This wasn’t the case a few years ago but now we have well-trained customers whose searching habits have changed.
Whether you’re therefore selling on Amazon, to Amazon or off Amazon, it’s interesting to see how they structure their purchasing and what goes into the selling-machine that is Amazon.
What different relationships can you have with Amazon?
Within this talk, we’ll have a look at the different types of relationships you can have with Amazon, how they differ and then we’ll focus on the wholesale relationship, under ‘Amazon Vendor’. We’ll close by looking at some upcoming changes to prepare those of you looking for a partnership with Amazon like this.
- Amazon Seller
- Amazon Vendor
- Amazon Vendor Express (To be discontinued)
What do each of these relationships mean?
Being a seller (as many of you will know) means:
- What It Is: The Marketplace program that Amazon offers to third-party sellers who may or may not own their brands and who are selling directly to Amazon consumers.
- The Model: Retail platform. With Seller Central, you’re selling individual units or small quantities to individual Amazon shoppers via the Marketplace.
- In a Nutshell: The Seller Central program is flexible and affords sellers a lot of control and it can be lucrative; it also requires a lot more hustle to make it happen and to compete against Amazon.
As a seller, you have two different fulfillment options; Fulfilled by Amazon (FBA) and Fulfilled by Merchant (FBM). Here are the differences:
- Fulfilled by Amazon (FBA): You send inventory to an Amazon Fulfillment Center (FC) and they manage shipping and returns from customers. You can control how much inventory to send to FCs as needed, and you pay storage fees for the product in addition to a fulfilment fee for every unit sold to customers. Keep in mind you, still own the inventory until a customer receives it.
- Fulfilled by Merchant (FBM): You fulfil directly to customers and manage shipping, returns and customer service. This is a good option for made-to-order products or for products that require a longer lead time for processing.
As an Amazon Vendor, your relationship with Amazon is very different:
- What It Is: The invitation-only wholesale program Amazon created for brand-owning manufacturers and distributors. Best for larger brands that perhaps own their own factories.
- The Model: With Vendor Central, you’re a supplier and you’re selling wholesale to Amazon in bulk. Amazon orders, you ship to their various warehouses, they hold the merchandise and fulfill individual orders.
- Vendor Central operates how most big retailers like Walmart and Home Depot do. Each department (i.e. a category of products) has one or more “buyers” managing the purchasing of products for that department.
- In a Nutshell: What you lack in margins and control, you make up for in volume and the ability to focus on making and innovating rather than selling to end-users.
Vendor Central Express is a scaled-down wholesale program that Amazon offers to smaller-scale brand-owning manufacturers and distributors. Best for young brands and artisanal producers. Vendor Express requires that you own the intellectual property rights for the products you sell to Amazon. If you do not own these rights, your products may still be eligible for other Amazon programs, as long as your products do not violate any third party’s intellectual property rights.
Vendor Central Express is closing down in January 2019 so we won't be majoring on this platform.
What are the main differences between Amazon Vendor and Amazon Seller?
1) Status: As we said, pretty much anyone can use Seller Central, but the same isn’t true for Amazon Vendor Central. It’s invite-only, meaning you have to invited to join. The two main types of sellers who get this invite are big companies and popular brands, as Amazon feels they’ve proven themselves enough to get that extra exposure. With Seller Central, you’re a third-party seller. But with Vendor Central, you’re not. You’ve now been bumped up to the class of first-party sellers.
2) How Ordering Works: What this means is that Amazon will do the selling for your products for you by pricing it themselves and then paying you. In essence, you’ll be an supplier and Amazon will be your buyer. So, you'll be receiving purchase orders from one customer, Amazon, rather than orders from multiple end consumers.
3) Marking/Amazon Vine: You know how services like Airbnb and Couchsurfing allow users to write reviews about each other? Well, it’s the same sort of concept with Amazon Vine, except you’re getting the marketplace’s top reviewers to say great things about you. It's mainly used to leverage new or pre-released items so that customers can get an early scoop on what a product is all about. Marketing as a Seller you are restricted to targeting by keyword and product. Although there is a long way that product optimisation and a good price can get you…
4) Inventory Management: If you're a regular Seller, you'll be managing your inventory yourself and payment whether directly or indirectly, for your inventory to be housed in a warehouse and dispatched. As a vendor, once your stock is sold to Amazon, they handle all of the inventory control.
5) Payment: Those of you who are sellers will know that you get paid by Amazon pretty frequently however,if you’re part of Amazon Vendor Central, then you’re looking at a payout time of two to three months. This is fairly standard when dealing in the wholesale-world however, it can be crippling if you're not careful as a new or high-growth business, as we all know what a challenge cash-flow can be!
6) Pricing Control: As a Vendor you sell to Amazon at a wholesale price point and therefore lose control of the end price of your item to a consumer as Amazon can list at any price they choose! This can be a problem if you're selling through other channels so this is a key consideration as you do not want to be competing with yourself.
7) Customer Services: Vendors have Amazon handle all of the customer services related to their items - this can be a real time-saver!
When does it make sense to sell via Amazon Vendor?
There is no hard and fast rule around this however, there is some basic analysis you can carry out to help determine whether Amazon Vendor would be a good model for your business.
To help us run this analysis, we'll use a bit of research conducted by Channel Advisor and adapt the maths:
Consider a scenario where you have a product that has a landed cost of $15 and then consider the various wholesale/retail price ratios, the wholesale profit margins and ratio of vendor to seller unit volume that you could sell. Essentially, how much will you sell to wholesalers for, and how much stock do you think you can shift as a Vendor vs as a Seller. It will be these figures that will determine whether Vendor is viable.
We'll then plot the 'Wholesale profit margin' against the 'Ratio of Vendor to Seller Unit volume'. For example a wholesale price point of $25 (on our product which costs $15) would give us a 'Wholesale profit margin' of 40%. And by 'Ratio of Vendor to Seller Unit Volume' we are estimating how much will sell via Vendor vs Seller. i.e. a Ratio of 0.5 says that "we will sell twice as much as a Seller than as a Vendor", and at the other end of the scale a ratio of 5 states "Amazon will sell five times as much as a Vendor than will would as a Seller".
For a wholesale/retail price ratio of 45%, we can see that selling as a Vendor is only viable over a Ratio of Vendor to Seller Units of 2.5 and for wholesale profit margins of over 50%.
As the wholesale/retail price ratio increases, the viability of being an Amazon Vendor increases.
We can therefore see as rule of thumb (with all caveats applied!) that being a Vendor is profitable when you believe Amazon will sell significantly higher volumes as a retailer than you could do as a third-party seller. This is particularly true for brans with slim wholesale margins and/or robust retail profit margins.
Can you use both Amazon Vendor and Amazon Seller?
This is a question we get asked a lot..
Yes! Some people run a hybrid but requires careful strategy as you are competing against your own products - but with no control of their price!
For example, if you sell via Vendor Central and are a brand or manufacturer, Amazon reserves the right to get first pick from your range. By extension, Vendor can, and often does, restrict your activity as a Seller. They can stop you from offering product as a Seller if you don’t also offer it to them as a Vendor, and can shut down your Seller account if it impacts Vendor sales. This is not the case for resellers, the policy only mentions brands.
The key to success in the hybrid approach is managing your assortment, and making strategic decisions about the products you sell to Amazon as a vendor, and the products you sell direct to consumers through the Amazon marketplace.
Both models have advantages and disadvantages, but with the hybrid approach and a well-considered product strategy you can get the best of both worlds.
It’s also worth mentioning how Amazon Vendor can be used in conjunction with your other sales channels: a multi-channel strategy is imperative.
What does it look like therefore to sell wholesale to Amazon?
Well, the nitty-gritty of Amazon Vendor consists of a Vendor portal:
- Vendor Central Portal
- Process PO’s (perhaps daily) —> this can be a lengthly manual process
- List your products and manage Marketing
- Process Invoicing and manage fines (again, this can be lengthly)
- There are ways to automate using an integration (and again, could talk at length about this as this is the part we do within the KhooCommerce platform)
For many of the businesses we work with, the weekly grind of processing orders through the Vendor Central portal can be a large burden on their business and we work to help automate order processing and inventory management.
What should I do, if I’m a brand owner, and I’d like to sell on Vendor?
Routes into Vendor can vary however, it’s useful to think through the following:
- Have a great product, that is selling (very) well
- Consider your predicted volumes (Vendor look for high-volume forecasts) and be able to increate your volumes significantly
- Be recognised as a manufacturer or main distributor of a product
- Consider your wholesale price point to see if viable
What should I do if I'd like to know more?
If you'd like to know more about how to sell wholesale to Amazon as an Amazon Vendor, or if you're already a Vendor and would like to discuss your processes, contact the KhooCommerce team by clicking here.