Over the past few years, Amazon has recognized that selling products via Vendor Central (also called 1P selling) is often costly and less profitable for the marketplace giant. Vendor Central, as you may recall, is basically a traditional wholesale relationship with Amazon, where a brand or manufacturer wholesales their products to Amazon directly, who then warehouses and sells those products in its marketplace. Essentially, Amazon acts as a traditional wholesale distributor or retailer under the Vendor Central model.
In today’s highly competitive Ecommerce market, however, many of the product categories historically dominated by Amazon using this selling model have become commoditized, driving margins down for the company. At the same time, the costs of holding inventory and staffing needed to manage these vendor relationships have grown over recent years.
As a result of these factors, Amazon has gradually been pushing sellers to transition from Vendor Central to Seller Central (also known as 3P selling); in many cases, Amazon has simply terminated Vendor Central accounts. This has been ongoing at Amazon for several years, and we believe this trend is accelerating. Today, more than 60 percent of Amazon’s transactional volume is completed via Seller Central (3P), across both B2C and B2B.
So why is Amazon shifting its focus from 1P to 3P selling on its platform? In addition to the profitability push highlighted above, the other answer lies in productivity of its Vendor Central teams. Simply stated, by reducing the number of suppliers managed by each team, efforts can be more effectively focused on brands that Amazon deems to be strategic. Today, account managers working in the Vendor Central unit can manage up to 40 accounts, which is an enormous amount of work managing content, assortment, and retail prices, as well as the overall supplier relationship. By reducing the number of brands managed through Vendor Central, Amazon aims to streamline its operations and improve profitability. The fewer 1P suppliers they have, the easier it is to manage their accounts and make them highly profitable.
By contrast, Seller Central (3P) offers a more profitable model in most cases for both Amazon and brands, as it requires lower inventory risks and operational costs while allowing sellers to manage their accounts more effectively. The 3P selling model puts the seller in control of pricing, inventory, and content, and typically generates 2-3 times higher revenue and profit for brands versus the Vendor Central model. A good deal all around.
Want to know the difference between 1P and 3P selling on Amazon? Check out our blog post that examines the two approaches.
At Enceiba, we anticipate that Amazon will continue to terminate 1P accounts, potentially impacting thousands of Vendor Central accounts over the next one to two years. In the past, 1P account terminations have come as a surprise to many suppliers, who then find themselves in a crisis when they stop receiving purchase orders from Amazon.
However, unlike previous waves of account terminations, which were done without warning, Amazon now appears to be providing a 2-month notification period for affected suppliers. While a transition period is helpful, our experiences at Enceiba is that this is too short of a runway for businesses to set up a new Seller Central account, navigate the Fulfillment by Amazon (FBA) process, and allocate resources to manage a 3P account effectively. If you’re a 1P supplier, you need to understand what types of 1P accounts are most likely to face termination and to start to plan for it well in advance.
So how do you know if your Vendor Central account is at risk of being terminated? There are a few criteria that we believe Amazon uses:
Overall Revenue: If your revenue is under $1 million, there’s a good chance Amazon will terminate your account. However, some sellers with up to $10 million in revenue have been terminated in the past, so even larger 1P accounts are at risk.
Sales Growth: Are your Amazon sales growing, or are they stagnating or declining? If they’re growing fast (25% YoY growth or more), your 1P account may be safe. However, if your sales are flat or declining, there’s a higher probability that Amazon will terminate your account.
Vendor Manager Relationship: If you don't have a Vendor Manager (an actual person) who you work with, and are currently only receiving orders electronically, you're more likely to be terminated. Although Amazon wants to reduce the number of accounts its Vendor Managers handle, not having that relationship often signifies that your sales volume is so low that even Amazon isn’t interested in maintaining the relationship or they don’t consider your brand strategic.
Assortment Breadth: In the 1P selling approach, Amazon decides which products to purchase for resale on its site. Generally speaking, the larger assortment of products it buys from a supplier, the more sales Amazon is generating. Thus, if Amazon is only buying a small portion of your overall assortment, it can be an indication your account is at risk.
Distributors: If you're a distributor or reseller using Vendor Central, you're likely to be terminated. Amazon has an ongoing push to work directly with manufacturers, where the supplier has higher profit margins, enabling a deeper relationship that can more effectively leverage all of Amazon’s programs and services, including Amazon Business.
What should you do if you receive an account termination notice?
If your Amazon Vendor Central account is terminated, you will typically have a wind-down period of about two months. During this time, Amazon will encourage you to transition to the Seller Central model. This shift is often advantageous, as the 3P model offers higher revenue and profit potential, allows your products to maintain Prime eligibility through Fulfilled by Amazon (FBA), and provides greater control over assortment and pricing. Additionally, the 3P model aligns better with Amazon Business for B2B selling and offers more data and analytics on customer purchases.
Of course, transitioning from 1P to 3P has its own challenges. Most companies selling through Vendor Central are not equipped to manage the more intense demands of Seller Central, which requires more resources and closer channel management. The two-month transition period is typically an insufficient amount to fully complete a transition, as setting up a Seller Central account and ramping up can take three to six months.
If your company fits the criteria above and feel that your 1P account could be in jeopardy, the best course of action is being proactive. Start setting up a 3P account as soon as possible to ensure a smoother transition. By taking early action, you can better manage the adjustment period and continue selling on Amazon without significant disruptions.
And if you need help, Enceiba is here to offer expert guidance. Schedule a call with our Amazon specialists who can help you understand your opportunity on Amazon and strategize how to capture it.