Amazon 1P vs 3P vs Hybrid – How to Choose the Right Supply Method
Article by: John L. Ghiorso
Choosing your supply method is one of the most consequential decisions you can make regarding your Amazon business. While Amazon has largely evened the playing field between Vendor Central (1P) and Seller Central (3P) in terms of marketing capabilities, there is still a lot to consider when it comes to your supply relationship.
There’s no generic or simple way to know what is right for your business. And there isn’t an obvious advantage between 1P and 3P in terms of driving sales. Instead, your choice should depend on your unique circumstances and capabilities.
How do you sell to other retailers? Do you sell directly to consumers? What does your channel look like? Do you enforce a MAP policy? Several factors should come into play and can even change over time. Just because 1P was effective for your business three years ago does not mean that 3P isn’t the right way to go now.
To make the best choice, decision makers need to be focused on three critical questions:
1. What are your operational capabilities?
Here’s an opportunity to play to your strengths. If you are a brand that does a lot of direct to consumer sales, then the 3P marketplace might be more aligned with your operational capability than a retail environment.
Conversely, if you are a traditional retail brand and have established success shipping pallets and truck loads to retailers, you might be better suited to a 1P retail environment.
Don’t underestimate the work that goes into shifting your operational set-up. If you plan to grow your Amazon business dramatically (and you should), you will need to consider how your operational setup might handle a dramatic increase in volume.
While there are options like Dropship and FBA (Fulfilled by Amazon) which give 1P vendors and 3P sellers some flexibility with warehousing and shipping, brands shouldn’t consider them reasons to overlook a complimentary operational setup.
2. What does your channel look like?
One of the biggest differences remaining between Vendor Central and Seller Central is how Amazon handles pricing. On the 1P side, Amazon is going to price match your products across channels. If you have a channel that is not fully MAP compliant (like 99% of brands) you can expect Amazon to price match or sell below. As a 3P marketplace seller, you have the ability to set your own retail pricing with few exceptions. This can be significant for brands that experience frequent channel issues.
3. What makes you most profitable on Amazon?
Much like operational capability and channel health, profitability depends on a myriad of factors. Neither 3P or 1P is always more profitable for every business. Brands should consider their ASP (average selling price), item volume, and product weight and size among other factors. The best approach is to run a pro forma profitability analysis ahead of making a decision to go one direction or another.
… What about driving Amazon revenue?
Most brands are concerned with choosing a supply method that allows them to maximize their sales and understandably so. In past years, the decision to go 1P, 3P, or hybrid had a big impact on your ability to drive business and, indirectly, to create revenue for your brand on the platform. This was because Amazon was offering drastically different programs at different times for each supply method. In the last two years, however, that gap has been almost entirely closed. There are still a few exceptions with some programs being easier to access or slightly more nuanced on either side of the platform. But for all intents and purposes, your ability to drive business through content, SEO, paid search advertising, display advertising, promotions, and marketing programs is largely the same whether you are 1P, 3P, or Hybrid. Brands are much better off choosing their supply method by evaluating their operational capabilities and what’s best for their channel.
… What about hybrid strategies?
Don’t do it just to do it. Hybrid may sound like “best of both worlds,” but it can very quickly add unneeded complexity to a business. Certain conflicts between 1P and 3P can become obstacles rather than solutions. That’s why most hybrid brands only add on the other supply method after already establishing their business on one side of the fence. In these circumstances, a real business need like profitability or channel issues will drive the additional investment (because it is an investment).
Avoid oversimplifying your choice. Focus on your operational capability, channel needs, and profitability. And only pursue a hybrid approach if you have good reason to. Lastly, consider Orca Pacific to help guide your business through these critical decisions. With over a decade of experience working from Amazon’s backyard, our team of 50+ former Amazonians and top industry minds are ready to discuss what the best path forward is for your Amazon business.