Amazon 1P vs 3P: Choosing the Best Amazon Strategy for Your Business in 2024

The Amazon marketplace is changing fast, and it’s making sellers rethink everything about their business on the platform. What worked like a charm in 2020 might be holding you back in 2024.

In this post, we will do a deep dive into the biggest decision of all, whether you’re currently selling to Amazon through Vendor Central (1P) or should consider changing to Seller Central (3P).

Understanding the difference between Amazon 1P vs 3P is more important than you might think. It can shape your business strategy and boost your success on Amazon.

Maybe you’ve been selling as a 1P vendor, but you’re starting to feel like you’d like more control over your pricing and customer relationships. Or perhaps you’re a 3P seller and the logistics are getting a bit overwhelming, making you wonder if 1P could simplify things.

Whatever your situation, knowing when and why to switch between 1P and 3P can be a game changer. The answer will depend on a unique combination of:

• Unit economics 
• Risk tolerance
• Control over product distribution

To aid you in making an informed decision, we’ve created a comprehensive blog post that highlights the pros and cons of each model. This guide aims to provide valuable insights and detailed comparisons to help you choose the path that best aligns with your business goals and operational capabilities.

What is the Difference Between Amazon 1P vs 3P

Let’s break down the difference between Amazon 1P (First-Party) and 3P (Third-Party) selling.

Vendor Central (Amazon 1P)

In the 1P model, you sell your products directly to Amazon, and they act as a retailer. Amazon places orders for specific products, at specific prices, in specific quantities, and you fulfill the orders. Amazon then owns the inventory and sells it to consumers while paying back the company through contractual payment terms. You’re essentially a supplier to Amazon.

Imagine you manufacture high-quality hiking boots. With Amazon 1P, you’d sell these boots to Amazon in bulk. Amazon then lists the boots on their website, handles all aspects of the sale, including setting the retail price, and manages shipping and customer service. Your brand might be listed as “Sold by Amazon,” which can add credibility and attract more buyers.

Seller Central (Amazon 3P)

Conversely, in the 3P model, you sell your products directly to consumers through Amazon’s marketplace. You handle the inventory, set the prices, and decide how to fulfill orders. You can use Amazon’s fulfillment service (FBA - Fulfillment by Amazon) or handle shipping yourself (FBM - Fulfillment by Merchant).

You, as a seller, then receive the net revenue for the sales - gross revenue minus Amazon’s referral fee, fulfillment fee (if applicable), and other order-related costs- all transferred to you in a biweekly payout from Amazon.

Let’s say you’re still selling those hiking boots. With Amazon 3P, you’d list the boots on Amazon’s marketplace yourself. You have control over the product listings, pricing, and marketing. You can choose to use FBA, where Amazon stores your boots and handles shipping and customer service, or FBM, where you manage everything from your own warehouse.

Simply put, 1P and 3P have countless nuances but the biggest difference is whoowns the inventory.

Advantages of Amazon 1P

There are many advantages to having a direct relationship with Amazon through Vendor Central.

1. Familiarity: For thousands of retailers, 1P is familiar. It matches how they sell to their other retail customers - order processing and accounts receivable, trade term negotiations and wholesale pricing. 

Vendors are staffed for 1P.

2. Invoice Value: Vendors also benefit from how banks and financial institutions value accounts receivable (AR) balances for things like loans and working capital or lines of credit, especially when the receivables owed to the company are from a customer as large and deep-pocketed as Amazon. 

Banks like AR.

3. Amazon’s Growth Mindset: Some brands have benefitted from Amazon’s growth mindset and desire to supply everything possible to consumers, even when unit pricing or fulfillment costs make selling the product unprofitable. Amazon’s ability to stock items that act as loss leaders can be very beneficial to the company selling the products.

Amazon can afford loss leaders.

4. Increased Visibility and Credibility: When you sell directly to Amazon, your products are listed as “Sold by Amazon.” This can boost consumer trust and confidence, as many buyers perceive products sold by Amazon as more reliable and trustworthy.

Customers like businesses they can trust.

5. Reduced Competition for the Buy Box: Products sold by Amazon often have an advantage when it comes to winning the Buy Box, which is crucial for driving sales. If you’re selling popular electronic accessories, being a 1P seller can help you secure this prime position more easily, leading to higher sales volumes.

Higher chances of winning the Buy Box.

Disadvantages of Amazon 1P

Selling to Amazon through 1P does come with its share of disadvantages.

1. Eroding Margins: Sustaining product profitably can be incredibly difficult through 1P. Although the intense negotiating dynamics between a company and retailer are not unique to a company’s relationship with Amazon, Amazon has far greater leverage than most retailers. Amazon has established countless relationships with distributors and also benefits from the flexibility that resellers entering the 3P marketplace to sell the same items provide. Sustaining profitability has only become more difficult for companies over the last four years due to inflationary cost pressures of manufacturing combined with Amazon’s push toward greater profitability.

Most companies need Amazon more than Amazon needs the company.

2. Inflexible Operations & Opaque Financials: Selling to Amazon also requires complying with rigorous operational requirements and the burden of reconciling an extremely opaque and convoluted payment system. These challenges include everything from processing orders within 24 hours and shipping inventory within two or three business days, to reconfiguring product packaging to avoid chargebacks, and reconciling shortage claims to ensure full payment of open invoices by Amazon. 

‍Logistics and Finance are not set-it-and-forget-it functions with 1P.‍

3. Price Integrity: Amazon rarely commits to comply with company Authorization programs and Unilateral Pricing Policies (you independently set prices). This can result in aggressive price-matching tactics that can be very disruptive to a company and its other retail partners.

‍Even Nike severed ties with Amazon as a result of the lack of control.‍

4. Limited Data: 1P sellers used to have a more pronounced data advantage over 3P sellers with access to Amazon Retail Analytics, but while Amazon has expanded the data offered to 3P sellers, 1P companies have actually lost access to certain important information.

Today, 1P sellers do not have visibility into the source of user traffic the way that 3P sellers do. 1P companies only have total glance views to reference for each product while 3P sellers have data broken out by internet browser and mobile app traffic respectively. 1P brands also don’t receive order count data and instead only get units sold data through Amazon Retail Analytics. This makes calculating the conversion rate of products much more difficult and reduces the effectiveness of optimization efforts. ‍

3P sellers can make faster and better decisions based on the data compared to 1P companies.

Advantages of Amazon 3P

There are many advantages to selling directly to consumers through Amazon using Seller Central (3P).

1. Sellers Set Prices: Sellers are permitted to set the price of the products they are selling. This control and flexibility allows companies to adjust pricing to maintain margins, manage promotional periods more effectively, and can have the effect of stabilizing the price for products over time in a way that benefits other retail partners. Amazon does reserve the right to suppress the buy-box for what it deems an “uncompetitive price”, which can create headwinds if a company has different prices through different online retailers or marketplaces.

Owning the inventory allows 3P sellers to determine the price they sell a product for.

2. Flexible Operations & Transparent Financials: Companies benefit from the flexible operations and transparent financials available on 3P. When using 3P, companies can download transaction reports detailing each sale and analyze the revenue and fees for each order. Companies can also manage their supply chain and logistics process by deciding the specific amount of inventory to make available for purchase and send to Amazon’s fulfillment centers. These shipments to Amazon can be processed over two weeks giving warehouse teams more time and flexibility.

3P affords companies more flexibility with logistics and more transparent financials.

3. Data: Over the last four years, 3P sellers have benefited from an explosion in new data and insights provided by Amazon Brand Analytics, Business Reports, and the Payments Report Repository. This data can be used to analyze everything from search term performance and average order quantity, to specific data about traffic sources to optimize content for the majority of consumers.

More data gives 3P sellers more business insight.

Disadvantages of Amazon 3P

Operating as a 3P seller does have disadvantages.

1. Inventory Ownership: One of the biggest challenges is the liability of inventory ownership and the impact it has on company financing. Unlike when companies sell to retailers or through Amazon 1P and receive purchase orders and accounts receivable balances that act as current assets, owning inventory to sell individual consumer orders creates an entirely different financing framework for companies.

Many Chief Financial Officers (CFOs), when presented with the 3P strategy, are uncomfortable with the different risk profile of owning the inventory. This concern is particularly acute when companies use Amazon’s fulfillment network to process orders because it puts inventory, owned by the company, in a warehouse it doesn’t own or control, and can’t physically audit. 

Company CFOs are typically the least comfortable with 3P due to inventory ownership in distant warehouses.

2. Product Viability: Another challenge for a company selling through Amazon 3P is that not all products are financially viable for the model. Depending on the order fulfillment strategy used by the company the Amazon fees can be prohibitively high. Products selling for less than $10 or that have a low price to weight ratio- ie: heavy or bulky, that attempt to use Amazon’s fulfillment network can struggle to achieve profitability.

‍Selling a $3 candy bar or a bag of concrete on Amazon won’t be profitable on 3P.‍

3. Lack Experience: Many companies have found that the heighted responsibilities that come with the active management of a 3P account are outside the skill set of their staff. Amazon 3P is a unique and nuanced business that does not translate well to other retail customers making it difficult for companies to afford the necessary staff to maximize the 3P opportunity.

‍Many companies lack the internal expertise needed to thrive on 3P without external support.

At a Glance: Amazon 1P vs 3P Advantages & Disadvantages

Why are So Many Established Brands on 1P?

In the early years of its business, Amazon faced a significant challenge of convincing consumers to buy products online. Although there were other marketplaces like eBay, creating consumer confidence to buy the same items consumers usually bought at a local retailer was paramount to the long-term success of the platform.

Amazon addressed this concern by establishing direct relationships with companies to buy and sell the brands that consumers recognized. By having the products consumers wanted and delivering on the promise of fast and free shipping, Amazon slowly built the consumer confidence required to create the thriving platform Amazon is today.

Companies meanwhile saw Amazon, and ecommerce more generally, as a new way to grow their business and brand by reaching new customers. Selling to Amazon allowed these companies to build a national presence for their brand and many were rewarded with rapid and sustained annual growth year after year.

Why are So Many New Brands on 3P?

Today, the Amazon marketplace is dramatically different than what it was twenty years ago. It is estimated that Amazon has added over 5 million sellers since 2018.While almost any company can open and operate a 3P account, establishing a 1P relationship with Amazon is incredibly difficult. Amazon simply does not need to take on the inventory risk associated with a 1P company and knows the size of the consumer base regularly buying products on Amazon will draw in companies through the 3P business model. 

3P as a strategy to sell on Amazon is open for business, vibrant, hyper-competitive, and presents very minimal risk to Amazon financially. 

Due to the inventory risk Amazon carries when buying from companies, the 1P strategy is largely closed-off to new companies, relatively stagnant, and becoming more difficult for companies to sustain each year.

The Challenge Facing 1P Vendors

For companies working with Amazon through Vendor Central, there is tremendous uncertainty in the financial sustainability of the business. Many companies have not been able to get price increases accepted by Amazon in years and have seen their allowance deductions increase across COOP, freight, and damage. As a result margins for these companies have suffered.

These same companies are also regularly hearing complaints from their other retail customers about the detrimental impact of price volatility on Amazon.

For these reasons, reduced profitability and growing disruption of other customers, companies have reached an inflection point.

Maybe now is the time to evaluate 3P.

Where to Start if You’re Interested in Exploring 3P

If a company has reached the point where its 1P business is no longer sustainable, it is critical to start analyzing the opportunities of 3P. This analysis should begin with unit economics to ensure a hypothetical transition would improve the sustainability of the business. 

Taking the wholesale price of an item sold to Amazon through 1P less the allowances (COOP, damages, freight, etc.) will give a brand a “net revenue” for each until sold. 

Companies should then take the same item and calculate the “net revenue” if it were sold through 3P using this FBA Revenue Calculator.

If the “net profit” produced by this calculator is higher than the “net revenue” a company receives from Amazon 1P, this indicates the initial financial viability of the product on 3P and an expanded analysis of the companies product portfolio should be executed.

Standards for Brands Selling in the Amazon Store (SBSAS) Policy

Although the effort and expertise required to successfully sell through 3P compared to 1P is difficult and unfamiliar to vendors, almost all stand to benefit from doing an evaluation to know their options.

Through this evaluation process vendors should be aware that Amazon reserves the right to enforce a policy called the Standards for Brands Selling in the Amazon Store.

When enforced, Amazon has shown a willingness to prevent a vendor with a 1P account from selling directly on 3P. This possible outcome has led many companies to partner with separate 3P resellers to realize many of the benefits of selling on 3P without the risks and staff requirements involved in directly changing to a 3P strategy.

Amazon vs Walmart

Alternatively, you may consider switching over to Walmart if selling on Amazon is too expensive and restrictive for your business. However, choosing between Amazon 1P vs 3P and Walmart 1P vs 3P involves careful consideration of various factors tailored to your unique business goals.

Here are some tips to help you navigate this decision-making process:

Amazon 1P vs. 3P

Control Over Pricing and Branding

• 1P: Amazon controls pricing and branding, offering less autonomy to sellers.
• 3P: Sellers have more control over pricing and branding, enabling greater flexibility in strategy execution.

Logistics and Fulfillment

• 1P: Amazon manages fulfillment, simplifying logistics for sellers.
• 3P: Sellers handle fulfillment, providing more control over inventory and customer experience.

Access to Marketing Tools

• 1P: Sellers may have access to Amazon Marketing Services (AMS) for enhanced marketing efforts.
• 3P: Sellers can leverage external marketing channels and tools to drive traffic and sales.

Profit Margins

• 1P: Profit margins may be lower due to wholesale pricing and fees.
• 3P: Sellers can potentially achieve higher margins by selling directly to consumers at retail prices.

Customer Reach

• 1P: Products sold by Amazon may gain more visibility and trust with customers.
• 3P: Sellers can build direct relationships with customers and tailor marketing strategies accordingly.

Walmart 1P vs. 3P

Brand Visibility and Trust

• 1P: Products sold by Walmart carry inherent trust and credibility with customers.
• 3P: Building brand recognition and trust may require more effort and investment from sellers.

Pricing Control

• 1P: Walmart controls pricing, potentially limiting sellers’ flexibility in pricing strategies.
• 3P: Sellers have more control over pricing, enabling dynamic adjustments to market demands.

Fulfillment and Logistics

• 1P: Walmart manages fulfillment, simplifying logistics for sellers.
• 3P: Sellers handle fulfillment, allowing for customized shipping solutions and inventory management.

Access to Marketing Opportunities

• 1P: Sellers may have access to Walmart's advertising and promotion opportunities.
• 3P: Sellers can explore external marketing channels and strategies to increase visibility and sales.

Profitability and Fees

• 1P: Fees and margins may vary, depending on the agreement between Walmart and the seller.
• 3P: Sellers can optimize pricing and operations to maximize profitability, considering platform fees and fulfillment costs.

Choosing the Best Platform

• Amazon 1P: Ideal for sellers seeking streamlined operations, less involvement in logistics, and access to Amazon's vast customer base.
• Amazon 3P: Suitable for sellers prioritizing control over pricing, branding, and customer relationships, willing to handle fulfillment and marketing independently.
• Walmart 1P: Best for sellers aiming for broad market reach, leveraging Walmart's reputation and resources for brand exposure and sales growth.
• Walmart 3P: Suited for sellers looking for more control over pricing and operations, willing to invest in building brand trust and visibility on the platform.

Ultimately, the best platform depends on your priorities, resources, and long-term strategic objectives. Conducting thorough research, assessing business needs, and considering platform-specific advantages and challenges can help you make informed decisions that meet your goals.