Hi, and welcome to another live episode of Marketplace Masters, sponsored by MerchantSpring, your go-to for marketplace analytics. We dive deep into the world of eCommerce, addressing the challenges and opportunities that Amazon vendors face in improving their commercial performance.
Paul Sonneveld
Today we're focusing on Amazon's Annual Vendor Negotiations, or AVN, a crucial aspect for any brand looking to succeed on the platform. Over the next 30 minutes, we'll be exploring the complexities, strategies, and nuances of negotiating with the world's leading e-commerce giant. To help me do this, I've invited Ashley to join us on the show today. Let me introduce him to you. So Ashley is the Managing Director of Podean Australia. Podean is a global Amazon agency and marketplace consultancy. And Ashley himself has worked in digital media tech in eCommerce for almost 20 years across multiple countries at both agencies, publishers, and a number of tech platforms. Actually, it goes without saying, thank you so much for joining today's episode.
Ashley Wales-Brown
Thanks so much for having me. It's really great to be here. And yeah, I'm hopeful that the topics that we cover off today will be insightful for your audiences. And look, as you mentioned, Amazon isn't just another retailer, it's a multifaceted giant encompassing everything from media and analytics platforms to physical locations. This, this complexity adds layers to the negotiation process. And so the Annual Vendor Negotiations or AVN is critical, albeit daunting at times, but a critical event for brands.
Paul Sonneveld
So that's a great sort of set-up here. So let's just jump right in. So our journey really begins with understanding Amazon on the flywheel, this concept is really central to Amazon's business philosophy. It's really important to understand that it's about increasing range, attracting more customers, driving volume, lowering prices, and the cycle continues. For vendors understanding this content is really vital in preparing for the Annual Vendor Negotiations. So, let me just sort of kick right off and let's just talk about your perspectives on kind of the importance of AVN for vendors.
Ashley Wales-Brown
Sure. Well, without stating the obvious, Amazon is the most successful eCommerce company in the world. And it's therefore a key sales channel for many brands across the globe. But, Amazon's success isn't just driven from innovation. They are ruthless negotiators. And, you know, I think they'll admit that themselves. And speaking bluntly, Amazon's negotiation tactics can be aggressive at times and they're not just looking to make deals to make the customers happy there.
They're looking to optimize their own KPIs a lot of the time. And sometimes this can be at the expense of vendors. You know, as you mentioned, Paul, the focus on the fly, you know, the focus is on the flywheel. So when it comes to AVN, it's a critical process for them to keep that sort of flywheel spinning. And this can often be very stressful for brands because a lot of the owners end up being on them. Additionally, Amazon is not just a retailer. It's a media provider. It's it's an analytics platform. It has physical locations. It has multiple websites that it owns or it's associated with. And a whole bunch of other complexities that other retailers take, for example, in the States, maybe Target or Walmart. They just don't have that or certainly not yet.
And so it's critical throughout the AVN process as a brand or an individual engaged in the process to not get emotional, like, like any decent negotiation, you've got to stay objective throughout. And just knowing kind of what Amazon will pressure you on and try and leverage you on really helps in preparation for that. You know, sometimes there might be threats, sometimes they're subtle, sometimes they're overt. But remembering like in a relationship, remembering that it's about them and not you can be really helpful and help to keep things grounded.
Paul Sonneveld
Yeah. That is a really super crucial insight. I mean, realizing Amazon's approach and how they look at things can really shape how you enter these negotiations. So, how are these vendor negotiations structured and how best would you recommend preparing for them?
Ashley Wales-Brown
Yeah. So look, I can only really talk in general terms. We look after a range of different brands both enterprise level through to smaller. And so this is very much based on our experiences and what we know about the market. But, the important thing to remember is, these AVNs are not, they're not just meetings. There's a whole strategic process that goes into incorporating all the different elements that might be leveraged throughout the process and get to an endpoint.
So if we break down what an AVN entails in its typical structure, and then we can look at how it impacts vendors at different tiers. Now, the different tiers is really important because I’ll talk about this quite a few times but it's critical to understand where you fit in with Amazon's own KPIs in terms of your value to Amazon. And so if you're a head mid or tail vendor and this is typically all done on the revenue that you generate, Amazon's approach to the AVN will vary. So understanding where you stand in that tiering system is essential for tailoring your strategy and also helping you to prepare for what might come.
So in terms of sort of overall things to bear in mind, when you're entering an AVN, the first thing is time, take your time. There'll be pressure to rush you. But actually stretching timelines puts the pressure back on them. And so, be brave to push back and delay things, you know, especially if you're missing bits of information or data that you might need to work out whether something that's being offered is a value.
Prioritize what you need, like any negotiation, like have your priorities and know that you're going to compromise on some of them. But know your deal breakers as well. Getting prepared at a more granular level, really understand your ASIN level profitability. A lot of vendors don't do this either because they don't know how to, or they aren't being supported in a way that allows them to understand this data.
So, look at all the different things that make an ASIN profitable. You might be shifting thousands of units of one particular ASIN, but as far as Amazon is concerned, it's crapping out, it can't return a profit and therefore it's not that valuable. So having a really good understanding before you go into these meetings with ASIN by ASIN and take into account, you know, all the fees charges, penalties, damages, how much advertising you're spending for these ASINs and your overall operational costs as well. You know, depending on how you're doing your fulfillment and everything else.
Help yourself by understanding which areas they're going to tackle and have the data ready to support that. Some obviously Amazon is going to have a lot more data than you will especially if you haven't been alive for very long or anything else. But, and certainly category data, you won't probably have access to. So they will have the upper hand there, but at least you can prepare your own camp and be ready. And on that, don't be afraid to ask for data. And say, look I need to understand where I stand here. What is the ASP for this particular product in the category, whatever you might need in order to help benchmark. Where you stand as a brand and how your products are performing. And again, I'll talk about this a bit later, but don't be afraid to look at what 3P might look like as opposed to 1P.
So if you're a hundred percent vendor, what does shifting to a seller look like or a hybrid of the two? Again, backed up by data, having a really good understanding of the profitability across both models and what would work best for you because that could be a really interesting tactic to put forward at some point in the negotiations. All of that said, be careful with what you say and what you reveal. Again, like any negotiation, your knowledge is your power. So only really provide what's necessary to support your arguments and what you're trying to prioritize.
So, you need to weigh up the importance of Amazon as a channel for you and ask yourself questions like, are you just focused on top-line sales? Is it just revenue or is it profit? Are you looking for more exposure? Can your operations manage 3P with weekly replenishments, for example, if you were going to shift to either a hybrid model or a seller model. And do you have the resources, whether that's internal teams, agencies all of the operational side of things to actually deliver on what your Amazon aspirations are. You've got to be realistic about all this stuff.
Paul Sonneveld
Yeah. I mean, I think there's some really lots of key points here. I mean, I think the big one here is really around making sure your strategy, aligns with that tiered position, you know, understanding where you are and your overall business objectives.
Ashley Wales-Brown
Yeah, I, you know, preparation, like any negotiation, God, I sound like a broken record, but it's so true is just key. And don't rush into these, don't get blindsided because you're not prepared. Take your time, prioritize your needs, and understand things down to an ASIN level you know, profitability or whatever it might be. And data really is your ally. So, perform your analysis, understand your profits, and really don't hesitate to challenge Amazon with what you find through that process.
Paul Sonneveld
Yeah, look, that's such a powerful strategy given that Amazon is such a data-centric business themselves, using data to really inform and support your own negotiation stance back towards Amazon. Crucial. So before we look at some of the other strategies, can you talk a little bit more about the wider Amazon ecosystem and how a vendor might use it during these negotiations?
Ashley Wales-Brown
Yeah, sure. You know, as mentioned at the start, Amazon is not just a retail platform. It is a massive ecosystem that involves media and analytics and everything else. And so understanding these ecosystems is vital for negotiating an AVN effectively. Amazon's complexity, you know it can offer both challenges, but also opportunities. So from there from everything from the management rotation cycle through to the tiering system, every aspect can be included in your negotiation.
So a comprehensive understanding of this can certainly give vendors an upper hand, mainly through a greater understanding of what options you have. So again, depending on your size and objectives, not everything within the ecosystem will be relevant, but there could be an opportunity to invest in areas outside of retail media that helps support a reduction in PPM. So, for example, how could Twitch be used as a possible avenue to target new customers and create awareness at the top of the funnel? From a data perspective, consider how the Amazon Marketing Cloud or AMC can be leveraged to better understand how your promotional activity is delivering on sales. And if you're an enterprise-level brand and using AWS as your data platform, there could be an opportunity to splice your first-party data in with your advertising and promotion strategy. Taking this approach can develop a much more meaningful and targeted tracking strategy. It also helps to understand organic sales revenue as a result of your Amazon activity.
Paul Sonneveld
Thank you. I can't help but notice that even as we're talking about some of the broader picture things, we're starting to use acronyms, AMC, AWS and I can imagine that during the vendor negotiation process in particular, Amazon will use unique language in terms that may not even feature in the day to day management of your Amazon vendor account. You know, can you share you know, what are the terms that you've most come across the most or do you think are most useful to be across during these conversations and of course, what they mean.
Ashley Wales-Brown
Yeah, definitely. Yes, you're right. There are hundreds of terms. And we have a whole glossary actually on our website, which we update regularly, to kind of help brands understand it as best as possible. When it comes to negotiation, there are certain ones that are used more than others. And understanding this will give you such an advantage.
Basically, more in the sort of cut and thrust of the negotiation itself so that you're not having to take a step back every time and say, sorry, I don't know what that means and then have Amazon have to explain it to you. So, I think some of the key phrases to know and I'm sure a lot of your audiences know these already. But, yeah, things like CRAP, which is Can't Realize A Profit, regularly used in negotiations. It's, you know, as I mentioned before, you might have an ASIN that's doing really well from a top-line revenue, but profitability-wise, it's just not working.
Lost buy box. So you know, not winning the sale and there's a whole bunch of factors that contribute to whether or not that and then other terms that are used quite a bit. So Replenishable Out Of Stock or REPOS. This metric is used by Amazon to measure the availability of a product for sale on their platform. And it indicates the percentage of time that a product is out of stock and unavailable for purchase on Amazon's website. So it's quite a straightforward metric, but it's a key one. It's like, great, you're offering all this, all these different products, but actually for half the time, they're not even in stock. So why should we focus on these, you know, that sort of stuff.
Another one is Freight On Board. So FOB, this is the point in the shipping process where the responsibility for the goods being shipped transfers from the vendor to Amazon. So it's kind of a critical point of responsibility. And then following on from responsibility, you've got things like prepaid freight terms, which is they pay. So this is when vendors manage and pay for the handling of shipping of their products to Amazon. Or conversely, there might be collect freight terms, which is we pay when Amazon handles the cost of shipping and the logistics with third-party carriers. And then deducts the freight allowance from the vendor's invoices based on the calculated average shipping.
VIR, Volume Incentive Rebates. I'm sure a lot of your audience have come across this. So again, can take many different forms. So incentives or rebates, they're either fixed or based on a tiered percentage that Amazon negotiates with the vendor for buying additional volume. So these are often offered to vendors to incentivize them to increase their sales volume. Which essentially benefits both Amazon and the vendor. So, the exact terms and conditions of these incentives can vary. Again, depending on your size and importance to Amazon, but they may include rebates, discounts or other financial incentives based on the volume of products sold by or purchased from a vendor.
And like I say, that's just a very small selection of some of the terms used, but it's important to remember that each term has specific implications and mastering this language is akin to unlocking a strategic advantage in your negotiation and saves a lot of time on both sides. And it also means you're less likely to be put offside during face-to-face meetings, as I mentioned before, because you've taken the time to you know, understand this kind of unique language. That's part of Amazon as well.
Paul Sonneveld
It's like deciphering a code, right? To better understand Amazon's strategies. Certainly worth maybe in the show notes, we'll put a link to that glossary that you have on your website, because I think it's certainly super useful. Lots of terminology there. There's sort of day-to-day and then there's AVN terminology. It's a whole new game. So now that we have a really good overview of the structure and the language as well as the broader ecosystem. Maybe can you help our viewers and our listeners understand, what Amazon's objectives might be and what leverage as your vendor you might have in addressing them?
Ashley Wales-Brown
Yeah, definitely. So I, again, I can only speak generally to this, but understanding Amazon's objectives and then identifying your leverage points are crucial. So Amazon seeks vendor margin improvements and the addition of programs that create Free Cash Flow or FCF. Your leverage as a vendor lies in product selection, participating in Amazon programs, and how you manage your operations, and these are your negotiating chips. So tailing your strategy around these leverage points can yield significant results. Amazon Vendor Managers, you know, they neither manage nor promote the vendors themselves. Instead, they manage their respective profit and loss of the category under which the vendor's brands fall.
So essentially the ultimate goal of a Vendor Manager revolves around growing the top-line and bottom-line performance of the entire product category. So that's, you know, in terms of success for vendor managers, it would mean securing the best possible terms for Amazon by increasing the percentage of terms annually, when negotiating with vendors. Now this isn't the absolute hard and fast rule, but it's kind of the general approach which Amazon takes. So just kind of knowing that at the back of your mind going into this is very helpful to kind of clarify what might be happening.
Paul Sonneveld
Yeah. So that sort of talks about the framework, the objectives and where the points of leverage may be for you as a vendor. What about the specific tactics, right? We sort of hear a lot of these sorts of things and rumours and anecdotes. But you know, what about the tactics being used by Amazon and how a vendor might counter them?
Ashley Wales-Brown
Yeah. Again, the most important thing is to stay objective. And have a really good understanding of or have a very strong view on what your ceiling and what your floor is, because that's the premises you've got to work within. Amazon will use many different negotiation tactics such as rejecting first offers and anchoring high. So it's crucial to understand Amazon's approach and prepare cash strategies, as you say. So if they anchor high, you need to anchor low. And then focus on finding the zone of possible agreement so that middle ground. Like any negotiation, as I said, always know your floor and your ceiling, but also be mindful of the longer-term impact of the negotiations as well, because there might be something that you know, it's a quick win for the next quarter, but what does that look like in 12 months time? Because these are annual, this isn't set and forget what it kind of is, but it, you know, only for 12 months, if that.
So take a balanced approach, maintain firmness whilst also aiming for mutual benefit and, you know, words of Stephen Covey, win or no deal. And it is like that. Don't think you're going to win all out. And as I've said throughout, always be realistic about your actual values for Amazon and therefore how much room for negotiation you can play with. If you're a small player, don't expect to be dictating terms, also don't be a pushover.
And if you find yourself in a position where you can't negotiate any further and the proposed terms are just unfeasible for you as a business, consider other options, such as switching to 3P or a hybrid of the two models.
Paul Sonneveld
Yeah. I'd love to dig into some real-life scenarios in terms of this Annual Vendor Negotiation, I'd love to sort of get some thoughts from you and your experience in terms of what do you see is what have you seen in terms of successes and perhaps some of the challenges that are faced by vendors as they navigate this process?
Ashley Wales-Brown
Sure. So managing Amazon's asks will vary due to the focus of the AVN for that year. And their focuses and objectives change every year. So, it could be an increase in damage allowance, or freight allowance, or price reduction. You know, for a specific subset of ASINs to close some profitability gaps.
So, there's a whole range of different scenarios. But one that we'll look at today would be taking a look at what damage allowance might look like. So, in this scenario, Amazon's asking for a 3% increase in damage. Now, what do they really need? Well, most likely they want to fill a financial gap between the current damage allowance and the actual damage costs. And then it's like, okay, well, what would they consider swapping? So maybe operational improvements are designed to reduce damages and returns. Maybe a modified return rights so that Amazon's no longer responsible for damaged products or a reduced increase in the requested accrual.
Again, this is where analysis and your approach is critical. So, first point is to ask Amazon for the data. Ask them to provide actual damage rates by ASIN. Pull returns data by ASIN from Vendor Central for trailing 12 months. And then with that, calculate the approximate financial impact of the ask, so you can understand it in dollar terms. And then move your focus to the items with the highest rates and amounts from number one down. For example, if ASIN X had a damage rate of 20% and ASIN Y had a damage rate of 8% but makes up 30% of total damages and ASIN Z has a damage rate of 40% but makes up 2% of total sales. That is really useful data.
So then, you know, negotiate alternative actions on these SKUs in place of the accrual increases to find where Amazon may be willing to focus instead of the full accrual increase. So for example, propose moving ASIN X to a drop shift offer to reduce the likelihood of damages mainly by reducing the number of operational touches in the normal inbound receipt process. Alternatively, propose packaging improvements for ASIN Y to qualify for SIOC, so Ships In Own Container, to reduce the likelihood of damages during normal inbound receipt outbound process all of that. Or, you know, another option might just be to discount ASIN Z to eliminate its impact on damages.
Paul Sonneveld
That is great practical advice and just picking one scenario and working through that. Really, I appreciate that practical perspective. Actually, thank you for that. You know, learning from these experiences and learning from how others have gone about it can be extremely beneficial for vendors and our audience. Thank you for that.
So, as we look to the future. You know, particularly 2024. I'm sure in the minds of many of our viewers and listeners, what's your read here? How might AVN and Amazon's strategy evolve? And perhaps more importantly, how can vendors stay ahead of the curve?
Ashley Wales-Brown
Yeah, the curve being the operative word there, because there are many curveballs that are thrown from Amazon without any warning. But yeah, like I said at the start, based on what we know of the brands that we work, with we have a fairly good idea of what might be coming up and how best to navigate it. But ultimately the overall digital marketplace is ever-evolving and staying informed of macro trends trickling down to micro and adapting your strategies accordingly is definitely the key to long-term success.
In Australia specifically, we've noticed the shift towards a much greater emphasis on profitability and range as Amazon becomes much more established in the market. With profitability, this can take the form of much more direct demands of increased PPM, Pure Profit Margin, or looking at other ways overall profit can be subsidized, IT, i.e. retail support, e.g. brand weeks or co-funding deals, etc.
Another point in negotiation is to review how products are bundled up and sold, as well as looking at Amazon exclusives. So, we've seen really positive results for brands who are willing to be more flexible in how they bundle up products. Typically minimum order numbers or combining variants, or offer Amazon exclusive access to a product. With the emphasis on profit, there's also been a shift on the attitude and approach, which has become increasingly direct and less flexible, especially now that Amazon has established itself as the leading marketplace in Australia.
So I've talked about a few times before, but consider your options. Consider what works for your brand and your products for the long term. So consider how these shifts in strategy from Amazon side are going to impact you. And so whilst it might work for this month, for this year, what does next year look like? And, you know, is being a vendor the right path moving forward, or is it a hybrid or a seller model or something between the two. But all of that needs a lot of careful planning and execution and a lot of data to help support that decision.
Paul Sonneveld
Yeah. And as you say, keeping a finger on the pulse of these changes is crucial indeed. So as we were about to hit the 30 minute mark. So as we wrap up, I just want to remember that negotiating with Amazon does require preparation, a really clear understanding of your goals and a strategic approach. It's about, as Ashley said, it's about finding that balance where both parties can find success.
Ashley Wales-Brown
Yeah, definitely. And you don't have to do this on your own either. So, if you need guidance, don't hesitate to seek expertise. Preparation is the absolute key to success for this. And just asking Amazon for information as a start point is great, but then looking at how you can engage expertise to support you is a game changer, especially in these high-stakes negotiations.
Paul Sonneveld
Absolutely. Well, that's a great point to finish on before we head off, actually, I just want to thank you for your participation today. Thank you for your generosity and willingness to share practical tips and insights and for bringing a really unique perspective to the conversation today. I'm sure a lot of our viewers and listeners who will listen to maybe catch up on our on-demand episodes will find this extremely useful. I always ask one question at the end of every episode, and that is to ask you for those viewers and listeners who would love to explore some of this more, maybe looking for some support or advice, what is the best way to get in touch with you?
Ashley Wales-Brown
Yeah. So various different ways, obviously got a website, podean.com. And then through LinkedIn, my details and all the other founders are on there as well as the rest of the team we're pretty active on LinkedIn, so yes, you would find it hard not to be able to contact us I think through the sort of traditional channels.
Paul Sonneveld
Excellent. Thank you so much, Ashley, and I look forward to catching up with you in the new year.
Ashley Wales-Brown
Thank you.
Paul Sonneveld
Thank you so much everyone for joining us on this rather comprehensive journey through Amazon's AVN, or Annual Vendor Negotiations. Stay tuned for more insightful episodes on mastering your e-commerce performance in the digital marketplace, especially Amazon vendors. Until next time, keep navigating the eCommerce world with confidence and strategy. And for those of you gearing up for Black Friday sales and Cyber Monday, I hope the selling season is very strong for you. Until next time, take care.