Amazon Business Relationships

Much of the beauty and personal care products sold on Amazon are not sold by Amazon. Meaning, Amazon is not acting as a traditional retailer. Usually when a product is purchased on Amazon, it’s being bought directly from a company that uses Amazon as a marketplace and pays Amazon a commission on sales. This is known as a 3P or third-party relationship with Amazon and is executed through Amazon’s Seller Central.

3P sales make up a growing share of Amazon transactions. In Jeff Bezos’ Letter to Shareholders 2019,  the founder and CEO of Amazon detailed that 3P sales grew from 3% of Amazon’s total in 1999 to 58% last year. In beauty and personal care, the percentage of 3P sales is significantly higher.

In part to support this growing business, Amazon has begun offering 3P vendors the option to be Fulfillment by Amazon (FBA). In FBA, brands can leverage Amazon’s logistics infrastructure to fulfill their orders and pay the retailer for the service.

In contrast to 3P, a small percentage of products sold on Amazon have a 1P relationship with the platform and are sold through Amazon’s Vendor Central. A 1P arrangement is similar to a relationship a brand would have with a traditional retail partner, whereby Amazon orders, takes stock, pays wholesale prices and directly retails the brand’s products to end consumers. In a standard 1P arrangement, orders are managed with Fulfillment by Amazon (FBA) at no cost to the brand.

In the past year, rumors have swirled about Amazon possibly doing away with 1P or Vendor Central. As a result, many brands that solely had a 1P relationship with Amazon have additionally set up a 3P or Vendor Central account on the platform to gain more control over and increase their presence on Amazon.

We’ve broken down the main differences between Amazon’s 1P or Vendor Central and 3P or Seller Central relationships with brands as well as the availability and cost of FBA and FBM options.

1P – Vendor Central

Handling about 8% of all beauty and personal care products on Amazon, Vendor Central offers a few key benefits to brands. The gated Vendor Central is invite-only and comprised of Premium Beauty, formerly Luxury Beauty, and Professional Beauty (for more information on the various specialty beauty areas in Amazon, please refer to Part 1 of our Beauty On Amazon series.) To the consumer, the difference between a product sold 1P or 3P is negligible, but the divergence in the structure of the business relationship between the brand and Amazon is significant. With Vendor Central, Amazon buys inventory from a brand as a traditional retail partner would.

Macrene Alexiades, founder of premium skincare brand Macrene Actives, sold her previous brand, 37 Actives, on Amazon Luxury for four years before eventually pulling her products from the platform, even though her Amazon business represented 10% of her company’s overall revenue. She chose to sever ties with Amazon because she found the platform’s Luxury Beauty program to be luxury in name only. “The marketing options for Amazon seem tailored for non-luxury brands,” says Alexiades. “It feels geared towards low-priced products that the seller can sacrifice blindly in large quantities to unknown target customers for review. Luxury products require a curated approach with a marketing partner who understands the luxury consumer and will work with the brand to target the proper population.”

According to an Amazon spokesperson, the purpose of having special areas is to create authenticity that resonates with consumers and brands. As the platform looks to work with more brands in the luxury and professional space, the more exclusive relationship could make brands hesitant to sell on Amazon more comfortable doing so. The divisions on Amazon mirror divisions between mass, professional and luxury in the beauty industry.

To date, the wholesale arrangements involve approximately 16,000 products, sold by and shipped from Amazon. Amazon’s retail pricing is aggressive—it often price-matches the lowest available price at other major online retailers. Amazon also insists on a larger cut of the pie, paying 15% to 20% less than traditional retailers. The net result is about a 40% return of MSRP to the brand, excluding discounts and advertising outlays.

PROS

• Products are sold directly by Amazon, giving brands credibility as trustworthy
• Product pages optimized by Amazon’s merchandising team
• Benefit of Amazon’s 100% positive seller rating

CONS

• No control over how brand is presented to customer
• Little to no brand-building capabilities
• Additional account service available is expensive
• Lower margins than other retail partners
• May make brands less desirable to specialty beauty players, e.g. Sephora

3P – Seller Central

Most beauty and personal care products on Amazon are sold through Seller Central. While to the customer the difference between a product sold 1P or 3P is negligible, the structure of the business relationship between the brand and Amazon is significant. With Seller Central, Amazon does not buy inventory from a brand. Many brands that are sold through Seller Central are happy with Amazon and report significant revenue coming from the platform. “We are very pleased with our Amazon business, it’s been an opportunity to reach a new consumer and build incremental business,” says Kelley Martin, CMO of Skyn Iceland, a skincare brand that’s been selling on Amazon for over three years. “[We’ve had] double-digit revenue growth in past year, with acceleration post-COVID. Amazon is one of our priority growth channels.”

Open to any brand that wants to sell on Amazon, the number of beauty products sold through Seller Central beauty has grown to about 197,000. Within the third-party relationship, brands have two order fulfillment options: Sold and shipped by merchant (FBM) or sold by merchant and shipped by Amazon (FBA) using storage units in an Amazon fulfillment center (FC). In either case, the seller and brand controls the price, which in turn can result in a return of approximately 65% of MSRP excluding discounts and advertising outlays. Maintaining a proper selling rating is a pre-requisite for FBA shipping, and also critical to maintaining consumer confidence when the products are shipped by the merchant. To meet Amazon’s standards and performance targets, the order defect rate must be less than 1%, the pre-fulfillment cancel rate needs to be less than 2.5% and the late shipment rate cannot rise above 4%.

PROS

• Access to hundreds of millions of Amazon shoppers
• Seller has control over how brand/products are presented to customers. Seller can set up its own branded “storefront.”

CONS

• Amazon’s hands-off-the-wheel philosophy means brands must navigate the Amazon backend on their own with a call center as a resource.
• Brands don’t have the benefit of Amazon’s 100% rating they receive via Vendor Central. Therefore, they must maintain their own high seller score.

Considerations

There is a growing number of ways beauty and personal care brands can leverage the Amazon opportunity. To navigate the opportunity, it’s important to determine exactly what Amazon has to offer a brand. Its offer can be boiled down to three main areas: Access, Awareness and Fulfillment.

ACCESS With over 100 million Prime member shoppers, Amazon is arguably one of the largest B2C e-commerce portals on the planet. A fair portion of Amazon customers routinely use the retailer’s site as the first port of call to search and browse for products, and only leave the platform to Google something if they cannot find it on Amazon. Access to millions of shoppers is a key reason to be present on the portal. BUT . . . just being one of the millions of brands on Amazon across hundreds of different categories can make a brand look like a commodity. Amazon’s beauty offering, in particular, lacks exclusivity or curation, and these shortfalls cause many brands—especially prestige brands—genuine concern.

AWARENESS Just because a brand is sold somewhere doesn’t mean shoppers will notice it. Ask any brand that’s been relegated to the bottom shelves of a supermarket aisle. The same principle applies to Amazon, where there are arguably far more brands to be found than on the aisles of the largest physical supermarket. Except that, on Amazon, brands can advertise, and deploy smart key word and review strategies, and dynamically impact their chances of being discovered. BUT . . . While Amazon’s platform is great for transaction processing, especially when shoppers know exactly what they want to buy, the platform does a poor job of supporting discovery and education. Sure, videos and value-added content can be posted on Amazon, but the site’s one-size-fits-all structure catering to everything from paperclips to novelty underwear can seem simplistic and uninspiring to discerning beauty shoppers, especially in comparison to speciality beauty and wellness sites. The Everything Store approach can hinder discovery and education, and disproportionately penalize new or specialty brands.

FULFILLMENT With any e-commerce operation, consistently getting orders accurately filled and shipped to customers in a timely fashion can be a real challenge. If executed poorly, this seemingly simple and unsexy function can ruin a customer’s experience, and undo the hard work and investments made in everything that came before it such as product development, packaging, promotion and customer education. The FBA option allows brands to leverage Amazon’s world-class logistics system to fulfill orders and removes fulfillment as a barrier to growth. BUT . . . FBA isn’t cheap and only makes sense if there is enough volume to support the setup and ongoing maintenance costs. Also, average order dollar size for orders has to be high enough to cover fixed picking and packing costs per order.

Clearly, Amazon is a source of opportunity, but one that poses obvious challenges. For some brands, the cost of doing business on Amazon may not be worth the potential benefits. For other brands, the cost/benefit trade-off may be favorable, but Amazon may not fit in its brand-building strategy, and how the brand wants to be positioned and perceived.

Additionally, a brand may feel pressure to sell on Amazon to protect against unauthorized third-party sellers selling its products on Amazon’s gray market. Unauthorized selling has become such a pain point for Amazon and brands that the company has rolled out a Brand Registry program designed to help brands protect intellectual property, and create an accurate and trusted experience for customers on Amazon. Any brand can participate in the Brand Registry, whether or not they have plans to actually sell on the platform—it just has to set up a 3P account.

How can a brand draw a conclusion on the Amazon conundrum out? Below is a simple process to help brands think through whether Amazon is right for their business right now. Of course, both brands and Amazon will evolve, so this question will need to be revisited on a regular basis.

At the most basic level, two key factors determine the attractiveness of the Amazon channel: brand price and expected volume. Why? Because by simply multiplying these two figures, it’s possible to quickly determine the gross opportunity on the platform and that, in large part, determines the fit. Here are three simple examples to illustrate the point.

1- Low Price and Low Volume: A niche artisanal product in a mass category. This business represents the lowest possible opportunity for the brand and Amazon. Amazon is highly unlikely to select this brand for their 1P program because the sales volume is simply not there. So, the brand is left with a 3P option, where it has to effectively build itself on Amazon. With a low price and low expected volume, it is unlikely that the brand can afford to advertise or pay for Amazon consultants, which means it will probably languish in the lower rungs of the search screen.

Finally, with low price points and volume, there is little appeal in Amazon’s FBA program, so the brand might as well self-fulfill orders. In this situation, Amazon isn’t a particularly appealing option and the brand should instead prioritize its own direct-to-consumer channel and seek speciality retailers that can help it increase volume and awareness. But, like with any rule, there are exceptions. In this case, if the brand contains a unique ingredient or process that organically trends high, then it may do very well on Amazon.

2- High Price and High Volume: A well-established prestige brand. Here, at least on the surface, the numbers are much more favorable. For Amazon, the brand may be a good option for its 1P program, which may result in the brand being invited to join one of the specialty sections. Alternatively, the brand can participate in the 3P program. In either case, due to the high volume and value of the orders, the FBA option could work well for the brand.

While the math may appear to be simple, the decision to go on Amazon is complex. A brand has to consider the impact on consumer perception and on the brand’s relationship with other retail partners. For a prestige brand, market perception—the idea of a special product sold in a special way at a particular retailer—is critical to supporting premium pricing.

A prestige brand may opt out of Amazon because its carefully crafted luxury consumer experience is impossible to recreate on the platform. Many luxury beauty brands have stayed off Amazon out of fears it will cheapen consumers’ perceptions of their offerings or,  just as worryingly,  siphon off replenishment orders from other retail partners and/or the brand’s own DTC site. However, if consumer dependency on Amazon continues to grow and Amazon develops a better luxury experience, this could change.

3- Medium Price and Medium Volume: A mid-sized, reasonably affordable brand. Here, Amazon can be a very attractive option. Amazon could be a shot in the arm to open up a substantial new pool of potential customers for the brand. Since the brand will likely have access to some discretionary resources, it can afford to invest in advertising on Amazon and building a team to focus on optimizing the channel. Finally, should the brand experience high growth, it has the option to leverage FBA to support its growth.

A real-life example is Adina Grigore who, according to Vogue Business, pulled her brand S.W. Basics from all retailers except Amazon and the brand’s e-commerce site. Its line is large for an independent brand, and products are priced from $9.99 to $52, with most products falling between $12 and $20. S.W. Basics made the switch in May and plans to have 40 products for sale on Amazon by the end of the year. The sizable range of products coupled with the demand that will be diverted to Amazon from the severing of S.W. Basics’ other retail partnerships should allow the volume side of the profitability equation to compensate for the lower price points per unit.

Next Up In Our Beauty On Amazon Series

With over 200,000 beauty and personal care products for sale on Amazon, it’s easy, especially for emerging brands with lower name recognition, to get lost on the platform, missing out on the sales a company was expecting. Next, we lay out the advertising options offered by Amazon and compare those options to the promotional opportunities offered by other retail partners.