Amazon and other marketplaces possess a big allure for sellers. Amazon alone puts brands in front of a vast audience of buyers. In 2023, shoppers spent $574.8 billion on the site, making it a crucial channel for companies looking to expand their reach.
Many retailers start as 1P sellers on Amazon for a variety of reasons: It’s more cost-efficient, provides better visibility, consumers may trust your brand more if it’s sold by Amazon, your items are eligible for Prime and you don’t have to handle operational tasks like customer service, fulfillment or marketing.
Businesses often reach a point where they want to transition from 1P to 3P selling. This is typically for more control and independence, higher margins and less reliance on Amazon. However, another critical reason brands must transition from 1P to 3P is because of Amazon's Vendor Central cancellations. The company announced in September that many 1P vendors will see their vendor relationship cancelled by November 9th.
Whatever reasons a brand has for moving from 1P to 3P, a successful transition requires a solid understanding of the difference between 1P and 3P, the resources to transition and the right strategies to do it effectively.
What is the difference between 1P and 3P?
In short, the difference between 1P and 3P is as follows:
1P (first-party seller)
- Sells directly to marketplace at wholesale prices
- Marketplace (like Amazon) acts as the retailer and sells items
- Marketplace handles logistics, fulfillment, customer service and returns
- Use Vendor Central
- Works well for: Sellers that can act as wholesalers and want to expand reach
3P (third-party seller)
- Selling as an independent seller directly to consumers through the marketplace
- Seller controls pricing, inventory, logistics, fulfillment and marketing strategy
- Uses Seller Central
- Works well for: Sellers seeking independence, higher margins and increased responsibility for operations
Why make the 1P to 3P transition?
Brands seeking more autonomy and flexibility often find benefits in transitioning from a 1P to a 3P selling model on major marketplaces like Amazon or Walmart. They can retain more control over business operations and potentially increase profitability. The shift can create more options: For fulfillment, marketing and expanded product offerings. Things to consider are:
Increased control
A 3P model gives sellers control over their business. This includes pricing, branding, content and product descriptions and ads. As part of vendor central (a 1P arrangement), the marketplaces often dictate pricing and branding decisions, which limits a brand's ability to differentiate itself. Transitioning to 3P, you can tailor your offerings and marketing strategies to reach your ideal audience and provide a stronger branded customer experience.
Higher profit margins
One of the biggest benefits of the 3P model is the potential for higher profit margins. Not only is there more pricing control, sellers don’t have to rely on wholesale pricing structures or intermediary margins, allowing them to capture more revenue per sale. Increased profitability allows your retail business to put more into marketing, product development and customer experience, all of which can help you spur growth.
Expanded product offerings
The 3P model lets sellers to expand their product listings quickly and experiment with new categories. As a 1P seller, you’re likely to face new product introduction slowdowns when face with approvals and logistics. 3P sellers have the freedom to add new products at their own pace. This flexibility can lead to more innovation and faster adaptation to market trends.
Flexible fulfillment
In a 3P setup, sellers have more control over their fulfillment options. They can handle logistics independently, use marketplace fulfillment services like Fulfillment by Amazon (FBA) or work with third-party logistics (3PL) providers, or use a hybrid order fulfillment approach. The flexibility of having control lets brands choose the most cost-effective and efficient methods for getting products to customers, optimizing both speed and cost.
Of course, transitioning from 1P to 3P may not be a choice. Either way, it's crucial to understand the challenges you may face and the steps for a successful transition.
Potential 1P to 3P transition challenges
Transitioning from a 1P to 3P can come with its own set of challenges. Vendors accustomed to the 1P model must adjust to new operational demands, pricing dynamics and logistical responsibilities. While moving to a 3P approach offers greater control and flexibility, brands must manage more operationally. Below are some of the key challenges brands may face when making this transition:
- Operational overhaul: During the transition, sellers are moving from an invoice-based wholesale model to a retail consignment model, which can post significant challenges. Brands may be used to the marketplace handling logistics, shipping, returns and customer service, which may be things they’ll need to take over depending on what marketplace services they’ll use.
- Revenue and cost impacts: Financially, transitioning to a 3P model can be challenging. Although a seller gains more control over pricing, they also take on additional costs for things like fulfillment, storage and advertising. These expenses can temporarily impact revenue as vendors adjust to the new cost structure. There are also upfront startup costs when setting up a 3P seller account, which can further strain budgets during the initial phase.
- Risk of account suspension: During the transition, retailers must navigate Amazon's verification process, which includes video interviews and extensive documentation reviews. Any discrepancies or errors in the documentation can lead to delays or, in some cases, account suspensions. To avoid any complications, sellers should plan on providing accurate and thorough information.
- Logistical complexities: Although the 3P model can still utilize services such as Fulfillment By Amazon (FBA), you may choose to manage warehousing, shipping and returns directly.
- Pricing competition: Third-party sellers face increased competition with other 3P sellers, which can create pricing pressure. The key is balancing competitive pricing and maintaining profitable margins. The ability to adjust pricing in real-time is an advantage, but it also requires constant monitoring to stay competitive while safeguarding profits.
- Regulatory and compliance requirements: A 3P seller is responsible for product compliance with marketplace regulations. This includes things such as safety standards and intellectual property protection. Staying up-to-date with changing regulations is critical to avoid penalties for non-compliance.
- Marketing and visibility: Marketplaces typically handle visibility in a 1P model. 3P sellers must take charge of their own marketing efforts. You must invest in advertising, SEO and other strategies to drive traffic to product listings. Building and maintaining product visibility takes consistent effort.
Steps to successfully transition from 1P to 3P
A successful 1P to 3P transition requires careful planning and execution. One of the first steps is to evaluate your inventory and supply chain. Implement a modern inventory management system that provides real-time information to help manage demand and avoid stockouts or overstocking, both of which can disrupt sales and profitability. Sellers must also decide whether to manage fulfillment independently or use marketplace fulfillment programs like Fulfillment by Amazon (FBA) or Walmart Fulfillment Services. Choosing the right fulfillment strategy and approach is key to balancing cost and efficiency.
A new pricing strategy is also essential. Sellers should thoroughly review their costs, profit margins and marketplace fees, ensuring their prices are both competitive and profitable. In Seller Central, fees such as referral and FBA fees can impact margins, so it’s essential to price products accordingly.
Sellers must also optimize their product listings.This includes creating descriptions, titles and images that improve visibility and conversion rates. An SEO strategy will boost rankings in search results, which helps to drive traffic to product pages.
Marketing and advertising are necessary to succeed in the 3P model. Consider marketplace-sponsored ads, pay-per-click (PPC) strategies and tools like Sponsored Products to increase product visibility. Finally, sellers must ensure compliance with marketplace regulations. Stay current with product safety standards, tax regulations and intellectual property laws. Compliance is essential for avoiding penalties, suspensions or other costly issues that could disrupt operations.
The benefits of partnering with a marketplace services agency
Partnering with a marketplace services agency can ease the 1P to 3P transition. These teams are experts and can set up and optimize Seller Central accounts. Their experience streamlines the 1P to 3P transition by implementing best practices for inventory management, pricing strategies and listing optimization from the start – and they can provide ongoing support, continuously monitoring data, analyzing performance metrics and making necessary adjustments to increase potential growth and success in the 3P model.
Marketplace services also help sellers navigate the nuances of fees, profit margins and fulfillment strategies, making sure products are priced to account for referral and FBA fees. They can also optimize listings with the right product titles, descriptions and images to boost rankings on marketplace searches. These experienced teams assist with advertising and often leverage Seller Central's suite of tools to increase visibility while carefully monitoring account health and performance metrics to maintain high customer service standards and avoid penalties.
Let the team at Cart.com streamline your 1P to 3P transition
Fuel your brand’s growth with Cart.com’s marketplace services, designed to deliver customer-centric experiences that drive success. Our team of seasoned channel experts works tirelessly to boost your revenue, expand brand reach and help you achieve long-term omnichannel growth. We combine advanced technology with strategic insights to create tailored plans that fit your unique business needs. Whether you’re focused on content optimization, advertising or scaling your marketplace operations, we have the tools and expertise to make it happen. From optimizing listings and designing campaigns for sponsored ads to managing inventory and logistics, our team ensures every aspect of your marketplace strategy is aligned for growth. Contact us today to learn more.
