Buy With Prime E-Commerce

How Should Brands Think About Amazon Costs?

Multi-Channel Fulfillment (MCF) costs are increasing – is Fulfillment by Amazon (FBA) next?

What will happen with 1P brands and vendors currently under negotiations with Amazon?

It’s almost the end of April 2023 and time for some reflection and honesty. Let’s face it, 2023 has been challenging so far.  We’ve seen layoffs at most of the large incumbents (Amazon, Microsoft, Meta, Google, and others), inflation, while virtually all businesses are looking for cost savings at every customer touch point. 

So what does this all mean for Amazon 3P sellers and 1P vendors? In the simplest terms, it means higher expenses and difficult negotiations. MCF has already seen a price increase and it’s likely it will be even more expensive as we approach Q4. 

Amazon will no doubt use Prime Day to demand more deals from brands of all shapes and sizes and will likely also use the always-crazy fourth quarter as another inflection point to increase costs associated with shipping, warehouse space, etc. 

Brands and vendors are almost certainly facing a year in which Amazon only gets more (and more) expensive. 

What can you do to manage these costs?

Frequent readers of this blog know how much emphasis we place on brands possessing a thorough understanding of their unit economics.  Use that data (again, at an ASIN level) to negotiate as hard as possible with Amazon to ensure you have some protective measures related to margins and profits. 

Don’t despair! 

Throwing your hands in the air if you just don’t care is simply enough.  We get it. 

Brands are in a tough position, is Amazon nothing more than a necessary evil?  Hmmm, where else (besides Amazon) can you sell as many units, reach as massive of a purchasing audience, and generate as much revenue as you do today, selling via Amazon?

The answer is nowhere. Currently, no other platform as powerful as Amazon exists.

But fear not, we suggest using 2023 as the year in which you remove those non-performing ASINs from your Amazon account and begin to sell via other channels such as your Direct-to-consumer (DTC) website. If you’re smart, and we have faith in you, you should also leverage Buy with Prime (BwP) to reach as many of those 157 million plus Prime members. 

Be strategic about the new products you add to the mix on Amazon.  Does this product generate enough margin and profit for your business? If the answer is no – do not list it. 

For lower-priced products (less than $50 per unit) bundle them together to grow your average order value (AOV).  And in case you missed the memo, selling any item for less than $10/unit on Amazon is akin to throwing money away.  Your order volumes would need to be MASSIVE to generate a profit. 

In addition, our internal research has shown that in many cases sellers are competing against lower pricing from sellers from completely other markets, like those where sellers can survive with either smaller labor needs and/or pay for more staffing at lower costs. 

Getting into an Amazon price war with these brands will not end well. 

Do you have a “leaky” Amazon sales channel?  Are you competing with a roster of unauthorized resellers selling your product on, or to Amazon?  If so, talk to us about creating and implementing an authorized reseller program.  Do it now!

Have a plan! Ensure that you have an ironclad minimum advertised price (MAP) policy for your distributors and resellers. Also, ensure that your manufacturing partners are contractually prevented from reselling your products to, or on, Amazon. Competing against your own partners is a recipe for migraines and diminishing returns!

Bottomline: Brands/sellers should control as much of their brand and product Amazon ecosystem as possible!  Accentuate the positive and do everything in your power to ensure that Amazon’s impending cost increases (winter is coming!) do not effectively kill your best-selling products or business. 

We’d very much like to hear about your marketplace pain points and serve as your guide on this journey. Let’s get started – reach out to us today.  


Top 3 Amazon Vendor Negotiation Tips

As of mid-April 2023, most Amazon 1P vendor brands are either attending Amazon Vendor Negotiations (AVN) also known as Joint Business Plans (JBP), or in the initial stages of working with their vendor manager to create a business plan for 1P sales for the next 12 months. 

Here are a few tips designed to help vendors prepare for AVNs.

1. Download your sales and operations data from Vendor Central.

Brands should already have this habit, but in prep for AVNs go to Vendor Central, download the agreement, and prepare notes on the core elements of the latest agreement. Pay special attention to allowances (marketing and freight), terms (base and payment), incentives (volume), and pay-to-play programs.

2. Know your true 1P costs.

Ensure you and your team have a thorough understanding of costs – both on and off of Amazon. Calculate all the costs related to selling via 1P. What are your PPM (Pure Product Margin), Net PPM, and Operating Margin? Same for your off-of-Amazon costs.

PPM (Pure Product Margin) – This is based on the wholesale prices Amazon pays for your items in 1P purchase orders. PPM reveals the ratio of net profits to revenue.

Net PPM – This factors in all the operational costs that it takes to operate on Amazon’s platform such as labor costs of your Amazon team (or agency), logistics, and purchase order processing. 

Operating Margin – Net PPM plus other costs that Amazon charges brands for not ensuring that the relevant products are available to consumers. < Proposed: This is the operating income minus all operating expenses including variable costs for production, wages, and raw materials

3. Ask the right questions.

When you can speak with your vendor manager – ask the right questions. Ask for details on how marketing development funds (MDF) were used at an ASIN level. Which ASINs were used during promotions and marketing events, and how did this impact customer impression numbers and of course, sales?

The Amazon Vendor Negotiation (AVN) process is potentially stressful but if you plan accordingly, and prepare scenarios and questions that are both relevant and attainable, you can help to ensure that the entire AVN process is beneficial to your brand. 

This can be a complicated process full of moving parts, so take the time to prepare to ensure that your team is adequately informed and ready to interact in a meaningful way with your Amazon vendor manager. 

If you agree, disagree, or would like to debate any of this, please reach out to Equity Commerce today.  We look forward to hearing from you.