TRANSCRIPT:

Brian: Welcome everyone to Friday 15 with Master B2B. We were in Atlanta this week at B2B online and we held a debate, 1P versus 3P selling on Amazon. Which is better for B2B? And this was a fascinating discussion. I’ll set us up a little bit in terms of the context of the debate and of course Andy that at my company ENCIBA we work with this issue all the times we work with B2B companies on Amazon. So Amazon business the first point of the matter is for B2B companies Amazon business is perhaps the most relevant element or reflection of how Amazon is addressing B2B industries and this year according to Bank of America they’ll do $83 billion. So this is an enormous enormous category and you made the point Andy at the conference that that’s significantly larger than Granger. Now, who would have thought that Amazon’s B2B business was generating as much revenue, nearly as much revenue as AWS? Yep. It’s incredible. So, it it’s really and it’s across many different categories. This isn’t just office supplies. Industrial and MRO products, for example, are one of the largest categories. And what’s driving a lot of this is customers, right? 60% of millennials say their Amazon is their most preferred shopping channel. Two-thirds make half or more of their online purchases from Amazon. And by the way, folks, millennials in Gen Z are now 70-75% of the workforce. Millennials are now entering their 40s, guys. So, we’re talking about a cohort here, which is an Amazon native cohort that are using this for their personal life and now increasingly using Amazon for their buying in their business. 

Andy: Well, and one other quick thing too about this, which just came out in the last week or two, one of the criticisms of Amazon has been that Amazon has not gotten on board with allowing the robots or the bots to scan its site and participate in the answer engines like Perplexity and ChatGPT, etc. Well, they’ve reversed course on that and they said they’re open to discussions about that. So, was there going to be a wall garden or not? It looks like there’s they’re going to at least allow some people to get in, which now addresses that issue. Like, is Amazon going to go to war with the answer engines or is it going to work with him? If it goes to war, that could be dangerous and risky. Now, however, it looks like they’re going to cooperate with them. So, they’ve even addressed that issue. 

Brian: Well, I mean, I think yeah, there’s a lot of reasons for that, but that wholesort of search landscape and such is really evolving so quickly. It’s going to be interesting to watch their play because they’re investing themselves in all the search as we talked about recently on another Friday 15 with the head of Amazon Business services. So, I suspect there’s some of that too, right? it’s going to be they need to make it reciprocal and these sites are going to block Amazon if Amazon blocks the sites. So, hey, we have to all get along, right? Exactly. So, if you’re a business, a B2B business, you have to make a decision number one – Amazon now is too big to ignore. So a lot of companies particularly manufacturers are saying to themselves well we need to sell on Amazon we need to take it a step to control this channel and then get close to it in the sense that there’s so much opportunity here that we we can’t ignore it and we want to sell on it because it is a legitimate distribution channel. So there’s different ways to do that. There’s what’s called vendor central which is wholesale selling. It’s also called 1P where you sell directly to Amazon on a purchase order. You ship to their fulfillment centers. Amazon takes ownership of it like a traditional distributor would. They price the product. They sell the product. And the other side of this is what’s called seller central. The other way to sell on Amazon. That’s also called 3P or third-party selling. And this is essentially a marketplace model where you’re selling through Amazon, not to Amazon. Amazon never buys the product. There’s no purchase order. It’s more of an e-commerce type transaction with Amazon as a facilitator. Amazon still processes the order. you can use something called fulfilled by Amazon to ship the product in a prime eligible way to the customer. So they’ll handle the shipping for you. But again there’s no sort of purchase of the product. So this was the crux of the debate Andy where we asked the question which of these which of these are better and this is some research we did at Inciba earlier this year our pulse report which said hey what are the biggest challenges we asked folks who are selling on Amazon one of the biggest challenges you face and what’s interesting is the top ones were all about channel conflict and control price erosion unauthorized resellers causing conflict with traditional distribution so that’s the crux that was the crux of our first round when we asked the question all about that. Now, we had two teams, Andy. You were team one, 1P is number one and I was team 3P or no P, meaning 3P or nothing. 

So it was a really great debate and our first question was which approach is better for gaining channel control and brand control on Amazon. Now this again being one of the key things controlling the brand quality and presentation but also controlling things like price and what goes on to Amazon. This was an interesting debate. Um, this particular one, what were some of the points that you guys made? 

Andy: Yeah. Well, we made the point that when you’re selling 3P, which I was on the 1P team, so for intellectual honesty, I stuck with the 1P argument. And we’re critical of the fact that in the 3P environment, you don’t know who the hell is selling your product. Yeah. And you just mentioned that the top three issues were all around control, brand control, channel control. And so I think we did a pretty good job making this argument that it’s a bit of the wild wild west and your reputation matters a lot. Say what you will about 1P. If you sell directly to Amazon, at least people know where they’re buying this from. Amazon. Yeah. Yeah, that’s a good point. And in fact, I think, , the thing that was really , about the one piece side is that if you you will in general win what they call the buy box on Amazon on a listing, if you’re selling to Amazon, they’re generally going to win the sale versus other sort of unauthorized sellers of that product or other other resellers of that product. So, from a control of the buy box perspective, absolutely. 

Brian: We argued on the 3P side that it gives you the ability to control price. To set your price on Amazon when you’re selling. It also gives you more data back in terms of what’s what’s happening on the channel and it sort of gives you more control because with regard to kind of your presence on the channel because Amazon is a 3P model is more of a self-service model versus the one piece side. They’re taking control. So, we’ll reveal who won that round when we get to the end. 

Brian: Andy, our round two was all about which selling method is preferable from an operational perspective, meaning which , from a from a fulfillment standpoint and from a from a , finance and and and processing standpoint. Now, 1P operates like a traditional resale channel does wherein , you’ve got Amazon buying the product on a PO. They take the product inhouse. It it feels it follows a lot of traditional process. I mean that was really what you guys argued right Andy? 

Andy: Yeah. I mean essentially that’s what it waswith Amazon you ship the pallets you ship the trucks. You don’t have to handle the returns. I mean it was operationally it’s a lot more consistent with especially the way a brand manufacturer would operate. Yep. much easier for them to work with with Amazon operationally and logistically. And then the 3P team argued of course that you use what’s called fulfillment by Amazon in which Amazon handles all that last mile for you. they’ll take the product into their fulfillment center. They will do the last mile shipping. The product will be prime eligible and they take the burden off of the manufacturer. But there is still more to do. I think that came out on your side related to you’re selling now on 3P. you’re selling contingency orders or consignment should I say orders where the finance team has to do some things differently and so does the operations team in the sense that they’re not shipping against a PO so there’s there’s some differences in the fulfillment process as well and then our we’ll we’ll get back to who won that round at the end here and then of course our third round was about returns economic returns which one was superior from a financial perspective and it’s really the cost structure is different I made the point at the beginning of this round that when you’re selling wholesale, you get a wholesale revenue number. That’s 1P. When you’re selling retail 3P, you’re getting the whole retail number. So, you’re picking up that margin difference between wholesale selling and retail selling, but you have to pay some fees on the 3P side like a commission to Amazon, like FBA fees, like storage costs, and and and resourcing costs as well. What was your argument on this side, Andy, on one page? 

Andy: Yeah, this is a tough one because it’s kind of math. I mean, when you’re a wholesaler, you’re getting the wholesale price. When you’re the retailer, you get the retail price. The retail price is always going to be higher than the wholesale price. However, as Shelene pointed out, and I think quite accurately, is that maybe on a per unit basis, 3P is pretty obviously the winner here. But if you factor in the total cost of running that program, because you pointed out, so euphemistically you said what was the term you just used? You called it resourcing costs. Well, if I’m doing 3P, I got to have somebody’s managing that. I got to make sure that, somebody’s making sure that FBA is working. I make sure somebody’s not selling below MAP or etc. So, you got to factor that cost in, etc. So, there’s kind of a compliance cost. Um, but if you throw all that in, his feeling done both was that it kind of evens out. 

Brian: Yeah. I think ultimately what we see is the P&L on on these, unless your product is a really low price product, meaning your AOV is sub $10 in price point, the math usually works out in the favor of 3P, although, at the end of the day, it really depends on how you’re resourcing and other things. But if you have a high AOV, relatively light to ship product, it almost always pencils to be much more profitable and higher revenue with 3P. But I I mean it varies like Shelene was saying. I mean he was at GP Georgia Pacific and they sell toilet paper. I mean talk about a low AOV item and a bulky product to ship, right? So anyhow, I think it varies quite a bit.