As an e-commerce seller, managing sales and finances across multiple stores takes a lot of work. From inventory shortfalls to profitability reporting issues, crucial business decisions become near impossible when you lack visibility.
So, integrating reporting and bookkeeping becomes critical when preparing to expand onto Amazon – either through wholesale or third-party selling relationships.
Yet another sales channel should never create more financial stress or blind spots. That's why understanding the difference between selling to Amazon as a 1P vendor or independently as a 3P seller is so important from the start.
This comprehensive guide examines the core differentiation when weighing these two selling alternatives on Amazon, as well as realistic pros and cons, eligibility criteria, and critical factors around control and profit potential through each model.
Let’s get started.
Key Takeaways from this Post
Defining Amazon Selling Models: Understanding the distinction between Amazon's 1P and 3P models is crucial for e-commerce sellers. While 1P involves selling wholesale to Amazon with limited control, 3P allows independent selling on Amazon, offering more control but increased responsibilities.
Pros and Cons of 1P vs. 3P: The blog outlines the advantages and drawbacks of each model. 1P provides access to Amazon's brand authority but with lower profit margins, while 3P offers more control and higher profits but involves greater operational responsibilities and fees.
Choosing the Right Model for Your Business: Factors such as business goals, control preferences, and profit considerations should guide the decision. The guide emphasizes the need to weigh these factors carefully.
TL;DR Summary - Amazon 1P vs. 3P Explained
Amazon 1P sellers supply their products wholesale directly to Amazon, which then sells the items under their own branding and sets retail prices. 1P sellers have less control but also less overhead.
Amazon 3P sellers list and sell products directly to consumers as independent retailers using Amazon's marketplace, allowing for more branding flexibility but also more responsibility.
So, in short - 1P sells to Amazon, and 3P sells on Amazon. Keep reading as we explore the key differences in more detail!
What is 1P?
1P simply refers to a "first-party" relationship between a manufacturer or wholesale supplier like yourself and a large retailer like Amazon or Walmart. In this model, you sell your inventory directly to the retailer.
They buy your products wholesale and handle all aspects of selling them to end consumers, including fulfillment, shipping, returns, and customer service.
You maintain ownership of your products until the retailer purchases them. At that point, the retailer takes ownership, and you get paid at wholesale rates.
It's an easy way to gain exposure and scale, especially if you lack warehousing, logistics, and online selling resources. However, profit margins are smaller since the retailer marks up your rate when selling to consumers.
What is Amazon 1P?
When sellers have a "first-party" arrangement with Amazon, they essentially team up directly with Amazon itself.
Here's how it works: Amazon sends you, the seller, bulk purchase orders for inventory. Once you ship those wholesale products off to Amazon's warehouses, you've completed your main responsibility.
From there, Amazon takes full ownership of the items and handles all retail work, including listing the products online, marketing them to customers, setting prices, shipping orders out, providing customer service, etc.
1P on Amazon is an exclusive business-to-business relationship. The customers don't even know you, the initial supplier, exist! You need an invitation from Amazon to be a 1P seller.
What is 3P?
3P stands for "third-party" and describes when you sell products directly to consumers via a retailer's marketplace while still handling fulfillment yourself.
For example, while third-party selling on Amazon, you list products for sale on the Amazon site but use Fulfilled By Merchant (FBM) to warehouse inventory and ship products yourself after a sale.
The main benefit of the 3P model is a higher profit margin since you set retail pricing, and customers purchase from you directly.
However, you also do more operational work related to order processing, shipping, and inventory storage. So, it works better once you've grown your capabilities.
Yet, by leveraging the marketplace's built-in audience, 3P enables small sellers to scale while owning the entire customer experience.
What is Amazon 3P?
The alternative to teaming up directly with Amazon as a behind-the-scenes supplier is to sell as an independent "third-party" retailer using Amazon's marketplace to reach customers.
This means you sell products directly to shoppers while using Amazon's massive storefront to gain visibility.
Everything from managing inventory to branding, marketing, customer communication, returns, and actually shipping orders falls on your shoulders as the independent seller in the Amazon 3P model.
You get support from Amazon through their platform, tools, and optional fulfillment services (when you choose FBA vs. FBM for shipping and fulfillment). Still, customers see you as the retailer rather than buying from Amazon directly.
You pay Amazon a fee for each sale you make and keep the rest of the money. Anyone can sign up to sell 3P on Amazon without an invite. Brands like AnkerDirect, Utopia Deals, and Pattern are some of the top 3P sellers on Amazon.
Pros and Cons of Amazon 1P and 3P Selling
When weighing these two selling models, both options have unique advantages and drawbacks.
Below, we break down the key pros and cons of selling Amazon 1P versus Amazon 3P.
Pros of Amazon 1P
- Access to Amazon's established brand authority and Prime customer base.
- Hands-off after sending initial wholesale product shipment.
- Consolidated billing and account management through Vendor Central.
- Lower risks - no concerns over returns/refunds or excess inventory.
Cons of Amazon 1P
- Little control over product listings, pricing, or brand marketing.
- Lower profit margins selling at wholesale rates.
- 30-60-90 day payment terms mean delayed access to funds.
- Possibility of sudden account suspension without much warning.
- Additional fees in the form of co-op and other fees may stack up to 25%.
Pros of Amazon 3P
- Retain complete control over branding, listings, pricing, and marketing.
- Higher profit margins selling directly to consumers.
- Immediate access to payments from each product sale.
- Unlimited potential to expand catalog and global reach.
Cons of Amazon 3P
- All customer service, fulfillment, and logistics responsibilities.
- Lots of platform rules and changing Amazon seller policies to stay on top of.
- Hundreds in fees for selling privileges, referrals, and more.
- Fierce competition in crowded marketplaces can hamper visibility.
1P vs. 3P on Amazon: Key Differences
While the core distinction between selling directly to Amazon (1P) or independently through Amazon (3P) is straightforward, comparing additional key differences can further demonstrate the dividing line:
Customer Interactions
1P sellers deal only with Amazon behind the scenes. Amazon manages all customer-facing retail responsibilities.
3P sellers interact with end-consumers directly as independent e-commerce retailers. They must provide customer support, returns processing, and fulfillment.
Inventory Management and Fulfillment
Amazon purchases wholesaler inventory from 1P sellers and then handles storage, order picking, packing, and shipping to customers.
3P sellers must provide their own fulfillment solutions or use Fulfillment by Amazon (FBA) services for these tasks (for substantial fees).
For a detailed understanding of FBA packaging requirements, check out our detailed post on ensuring compliance with Amazon's guidelines.
It provides valuable insights into how sellers can meet the necessary standards and optimize their FBA experience.
Payment Terms
Wholesalers selling 1P may wait 60 days or longer for Amazon to release payments. 3P sellers receive direct payment transfers for each order sale.
Account Control
Amazon can dictate product listings, pricing details, availability, and more for 1P inventory.
3P sellers choose how to showcase and sell items in their independent retailer accounts.
Revenue
There are tradeoffs to consider when comparing Amazon's 1P vs. 3P revenue potential.
1P sellers earn thin margins providing goods at wholesale rates but gain order volume guarantees with Amazon purchase orders.
So, revenue tiers are predictable but limited in upside.
Meanwhile, 3P sales, pricing autonomy as independent retailers, and Prime eligibility open far greater profit and revenue growth potential.
However, sales volume is more uncertain.
Fees
Beyond referral sales commissions, 3P sellers also pay Amazon 3P fees like FBA fulfillment fees, monthly account charges, advertising, and more.
1P sellers typically enjoy consolidated rate billing from Amazon.
How to Become an Amazon 1P or 3P Seller
Now that you understand the core differences between selling 1P and 3P on Amazon, let's discuss each pathway's eligibility and application criteria.
How to become a third-party seller on Amazon (3P)
The process to become an approved Amazon 3P seller simply involves:
- Creating a free individual or professional Seller Central account.
- Agreeing to Amazon's selling policies and tax agreements.
- Listing eligible products for sale in the Amazon marketplace.
Use Amazon Seller University resources to launch a 3P seller account within a week properly.
How to become a first-party seller on Amazon (1P)
Amazon's Vendor Central accounts are an exclusive invite-only program reserved for established brands rather than individual sellers.
Earning one of the coveted wholesale supplier spots involves gradually exhibiting prerequisites like:
- Multi-million dollar existing business revenue.
- High-volume international production and distribution capabilities.
- Longstanding 100% compliance with Amazon's evolving vendor policy rules.
- Retail expansion goals aligned with Amazon's growth plans.
There is currently no direct application process or form to complete. Instead, potential 1P vendors must proactively get their brand onto Amazon's radar through exceptional marketplace performance and industry visibility:
- Excel as a 3P seller first - Build a track record of strong sales, perfect customer satisfaction ratings, rapid restocking, and top-tier listing quality on the Amazon 3P marketplace over the years.
- Attend major trade shows - Many Amazon vendor managers scout and network at major industry trade conventions. Getting face time can accelerate the invite process vs. just impressive e-commerce metrics alone.
- Market successfully off Amazon - Proof of expert branding, promotions, and channel expansion offline builds additional confidence in a brand's scale appeal.
However, even meeting Amazon's lofty standards does not guarantee receiving a 1P invitation. The program's exclusivity means only brands aligning with Amazon's current retail and category priorities typically receive offers.
That said, the 3P marketplace and advertising capabilities have considerably closed the gap regarding performance benefits once exclusive to 1P vendors.
So brands shouldn't view wholesale as the only pathway to immense Amazon success anymore.
Amazon 1P vs. 3P Selling - Factors to Consider
Evaluating a few critical factors will help determine the better selling approach aligned with your e-commerce business's specific situation and strategy:
Business Goals and Strategies
Will you focus on accelerating short-term sales or establishing long-term branding? Prioritizing immediate sales may suit 3P selling, while investing in branding aligns better with 1P.
Can you accommodate fluctuating wholesale order volumes that accompany 3P? Do you eventually hope to transition seller accounts to 1P? Mapping business goals and timelines will clarify the better path.
Control and Flexibility
Are consistent presentation and customer experience a priority? The expanded control of 1P selling enables branded customization.
Do you need dynamic pricing and promotional capabilities? 1P limitations may hamper that flexibility.
Pricing and Profit Margins
Will you rely primarily on slim wholesale revenue percentages or work to build retail profit markups?
Can you sustain the cash flow inconsistencies of Amazon's payment methods?
Carefully weighing considerations such as these will steer your decision-making toward the ideal model.
If you want a more calculated approach, calculate actual profits per item sold for Amazon 3P vs 1P. Then, compare how consistently the payout timing fits with paying your business bills. This shows which model earns enough profits regularly.
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Frequently Asked Questions (FAQs)
Let’s take a look at some FAQs on ‘Amazon 1P vs. 3P’ that sellers usually have:
Is it safe to buy from Amazon third-party sellers?
Yes, purchasing from Amazon 3P sellers is generally safe. Amazon requires approval and oversight for all sellers on their marketplace. They also protect buyers with their A-to-Z satisfaction guarantee.
Why does Amazon need 3P sellers?
Amazon partners with 3P sellers to expand their product selection, fill inventory availability gaps, and funnel more business through their fulfillment services without all the risk and overhead incurred from direct wholesale purchasing.
How many 3P sellers does Amazon have?
There are over 2 million global small-to-medium active third-party seller accounts on Amazon, along with options for large enterprise-level sellers.
To provide some context, more than 60% of Amazon sales are from 3P sellers, according to Statista.
When did Amazon launch 3P?
Amazon opened its marketplace to third-party seller listings as far back as 2000. However, the program saw slow adoption until Amazon steadily added features and tools to streamline onboarding over the past decade or so.
What is 3P fulfillment?
Third-party sellers have multiple options for fulfilling orders. They can provide their own warehouse, staff, and shipping capabilities or enlist providers like ShipBob, Deliverr, ShipMonk, and others.
However, large third-party sellers commonly leverage Fulfillment By Amazon (FBA), tapping into their delivery network.
Conclusion
As this overview detailed, both first-party and third-party selling structures have unique pros, cons, responsibilities, and financial considerations that must align with your current business priorities and capabilities.
Whichever selling model you choose, managing the bookkeeping and financial tracking on the backend can prove challenging, especially for rapidly scaling sellers.
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