How should you sell on Amazon: as a 3rd Party Seller (3P) or as Private Label (PL)?
Anybody who tells you that THEIR way to sell on Amazon is THE way does not appreciate nuance…and they’re probably trying to sell you something.
New sellers struggle with this questions because they have experience in neither, and are therefore at the mercy of the 1257892476584 blogs out there.
Current Amazon sellers are cursed with the gift of knowledge: they typically know either 3P or PL, and are scared of venturing into the unknown to expand their business. The problem is worse when their focus on day-to-day operations leaves them strapped for learning time.
We want to help reduce the risk by reducing uncertainty.
Here’s a strategic snapshot of both Third Party Selling and PL so you can determine which approach works best for building the business you envision.
Fort those starting to get their feet wet, some definitions.
- 3P is when you buy bulk product from major brands at wholesale prices and sell that inventory directly to consumers at retail prices on the Amazon marketplace.
- PL is when a manufacturer makes a product and it is sold under a specific brand name (e.g. your own brand).
Let’s dive in! 🤿
3P Seller Advantages ✅
1. The brand and its fans already exist
- By selling an established brand, you don’t need to go through the time and capital intensive process of establishing brand authority and recognition. You get to stand on the shoulders of giants.
- Because the inventory already exists out there, you have a significantly reduced lead time to launch. The process becomes super simple:
- Find a good deal.
- Pay the supplier
- Ship to fulfillment center (FBA or FBM).
- Sell it on Amazon.
- Factory recall, anyone? Legally, brand owners on the hook. You significantly reduce your risk while tapping into the power of brand recognition without the associated liability. Win-win.
2. More flexible logistics-ish.
- Distributors carry large amounts of inventory, so they are less likely to run out, or not have enough for your to order.
- Because the brand is established, the distributor network (e.g. more than one), so it is easier to find other suppliers if yours runs into a shortage or cannot give you the price you want.
3. Lower financial barrier to entry
- Finding deals takes less product research and analysis know-how. It certainly doesn’t require the extensive market research and design testing associated with private label. You can find great, time sensitive wholesale deals for lots that distributors and resellers are trying to get rid of.
- Smaller deals that have lower MOQs can sometimes help you bypass competing with bigger 3P sellers because they need larger inventories to continue scaling their business, and therefore gravitate toward larger deals or more expensive items.
- By jumping on an open listing, you can piggy-back on the search volume associated with the brand – on some listing, you don’t have to pay for advertising at all.
3P Seller Drawbacks ❌
1. You are building someone else’s brand, on someone else’s platform, instead of your own enterprise value.
- Make no mistake: the main ones who benefit from 3rd party selling are the brand owner and Amazon – NOT YOU.
- The profit margins may be PHENOMENAL, but the brand enterprise value (i.e. brand recognition) is not yours.
- Owning a profitable business that wholesales Nike shoes IS NOT THE SAME as owning Nike. As such, if you were to evaluate your business in preparation to sell it, you’ll see lower selling multiples as opposed to a private label brand of the same revenue level.
2. You are at the mercy of price wars
- When you sell the same thing as everyone else the only thing that sets you apart is price.
- If someone jumps on the listing who has lower Cost of Goods than you, they can undersell you at any time. What happens? Everyone races to ZERO. This is especially true if Amazon sells on the listing. Do you really believe that this trillion dollar company will favor you in the Buy Box over themselves?
- If you have a DTC website to which you drive paid advertising, you can quickly see yourself go into the negative.
3. Your expansion primarily relies finding more SKUs to sell
- For the reasons mentioned in point #2, raising prices to increase your margin is generally not an option.
- Because you don’t fully control pricing, the only way to grow is to constantly chase deals and add more SKUs to your catalog. Some wholesale contracts require high MOQs, so you may hit a sealing into you have larger sums to invest.
- Increasing your MOQ with your supplier may reduce your COGs, but that’s not going to lead to the exponential growth that only comes from full control of pricing.
Private Label Seller Advantages ✅
1. Creative Advantage = No More Price Wars
- With PL, you can provide value in a niche market that no one else sees in the way you customize your product.
- Because you have differentiation, you are no longer competing strictly on price. The game becomes: how well can you convey the value your product provides such that it justifies the your price point?
- Building a brand means that you build enterprise value. This makes it easier to sell at higher multiples.
2. Growth by adding platforms, instead of just adding endless, unrelated SKUs
- Your brand and business gain strength by expanding to different distribution channels such as:
- DTC website
- Affiliate network
- Other marketplaces like Walmart, Etsy, etc.
- You no longer have to scour for deals or go through countless Excel sheet rows. You are merely expanding the means why which you mean more of your target audience.
3. Survivability OFF Amazon
- Amazon ultimately owns the platform. If they think you have violated their policy, EVEN IF YOU KNOW YOU HAVE NOT, they reserve the right to suspend or remove you.
- When you own your brand, and you have expanded beyond Amazon, you can survive these types of hits.
Private Label Seller Drawbacks ❌
1. Higher Upfront Investments
- Because you have to do extensive market research, develop designs, test them, pay for larger inventory quantities, and budget substantially for advertising, PL is considerably more capital intensive than 3P to get off the ground.
- ~90% of new consumer products fail. Why? Because people designed them using their personal opinion and didn’t bother to validate their idea.
- Nickel and diming the product development process catches up to them when they waste thousands on inventory that won’t sell. Don’t let that be you.
2. Brand Awareness is on You
- Building the brand’s reputation and network, and all the other intangibles of brand building are completely on you.
- Branding takes much larger time and capital investments to build properly so that it resonates with customers to the point where they identify with it and recommend it to their friends.
2. Product Improvement and Operations are on You
- Remember how large companies got slammed when COVID shipping prices went up by 30,000% in just a few weeks? Yeah…that could be you. And you may not have Wall Street bankers lending you money to stay afloat.
- PL puts you in charge of listening to customer feedback and improving your product, as well as building flexibility in your supply chain.
How do you choose your strategy?
Ask yourself exploratory questions in each of these areas.
- Investment Capital and Time Horizon
- Take a look at how much you can invest, and the timeframe you’d like to move in.
- The Team and You
- If you have a team at your disposal, which model plays best to their strengths? Which one would you be best at?
- Access to Software Tools, Industry Experts, and Groups.
- How much software subscriptions do you have to help you paint a wholistic picture?
- Do you have industry experts in your network that you can reach out for advise?
- Are you part of seller groups where you can ask questions as you navigate one of these strategies?
The most important thing about this decision, is that it has to fit YOU. Do not let someone else make it for you.
P.S. 🍔 Food for Thought 🧠
Did you notice HOW this question is typically framed?
By putting as “Wholesale v. Private Label” it makes it seem like ultimately you should choose one.
Don’t fall prey to this limiting belief. Instead, learn when and how to use BOTH.