Don’t Have Vendor Central FOMO
This is the second article of the series “Launching & Scaling on Amazon” by Betsy McGinn and Jeannie Stamberger. Betsy McGinn (founder of McGinn eComm) scaled Seventh Generation eCommerce from $0 to millions and now prepares major Brands for success on Amazon Jeannie Stamberger runs The AmaZone, an Amazon Brand Management Agency that has facilitated over $100M+ in Amazon sales. We pull on our extensive backgrounds preparing, launching and scaling sales on Amazon, to bring you tactical tips and tricks to sell on Amazon. It is primarily for Food and Beverage Brands and the US marketplace (Amazon.com), but most tips apply to other CPG Brands.
We sometimes work with Brands who view selling on Amazon through the Vendor Central (VC) model, as a panacea and a sign that they have “made it” and life in the Amazon ecosystem is going to be easier to manage.
To be clear, both models have their merits. Vendor Central is a traditional retail model where Brands simply sell to Amazon like they would any other retailer. This works for Brands that struggle to adapt to Amazon’s Seller Central 3rd party platform even with the convenience of Amazon’s fulfillment component through Fulfillment by Amazon (FBA).
Having worked extensively with both models, we can confidently say we have seen it all and would like to provide some perspective on the struggles and successes for Brands. For starters, we work mostly with Brands that use the FBA model and now nearly 60% of product sold on Amazon is through FBA. Over the years, we have even transitioned Brands from VC to FBA as the frustrations of VC have driven them from this selling model. And here’s some reasons why:
VC Spending Rates: Amazon Vendor contracts include three variable rates: freight, marketing co-op and damages. These rates vary wildly across contracts but typically add up to around 30%, and are renegotiated every year for higher spending rates. Amazon rate negotiations can kill a business as we have seen massive profit drops as Amazon changed freight rates from a percent to the Brand paying for all freight, but requiring shipping on Amazon’s schedule. Don’t let the term “marketing coop” fool you – all specific marketing activities are additional pay to play.
Amazon Sets the Retail Prices: Pricing may be higher or lower than the suggested retail price and can change moment to moment as Amazon price matches the market. Sometimes this price mapping is flawed and wreaks havoc with a brand’s carefully crafted pricing strategy. Additionally, the brand will be asked to compensate Amazon for the delta created by pricing matching, regardless of current contracts and other promotional spending. In FBA, the Seller sets the retail price of products with the goal of a fair price to consumers and a profitable business for the Seller.
Purchase Order Chaos: For growing food and beverage Brands to thrive it is essential to strategically scale production, balance expiration dates, product demand, and manufacturer scale/production schedules. VC challenges every one of these notions with inconsistent pace and size of purchase orders. Additionally, Brands are typically asked to ship to a massive number of Amazon Fulfillment Centers (FC) that are ever changing. One client was shipping to 32 FCs with changes every week.
Price Increases: Or Not! Amazon is notoriously known for refusing price increases from Brands, even as ingredients, transportation, and general costs of doing business skyrocket. If after weeks and sometimes months of negotiations new pricing is accepted, the increase is typically capped at 5%.
Cost of Marketing: VC Brands are required to spend additional marketing funds on a variety of programs from site sponsorships to special discount programs, in addition to pay-per-click advertising on the Amazon platform that most Brands understand is essential for success.
For these reasons, Vendor Central is typically reserved for the largest CPG companies with deep pockets and the clout to negotiate when needed. So, if you manage to wrangle an invitation to become a Vendor to Amazon, approach the opportunity with eyes and wallet wide open.