Podcast transcript
James Dihardjo
Ruben, thank you so much for making time on your Friday afternoon after a long week, clearly. I just wanted to kick off by introducing the topic. So we're going to talk about how to change from a 1P model to a 3P challenges and disadvantages. Yeah. So really to get started, tell us why a brand may want to move from 1P to 3P, like why would that even cross their mind?
Ruben Alikhanyan
Absolutely. James, thank you for the invite. It's great to be here. Let me start from saying how much I love MerchantSpring. I wanted to get it out there. I think the world needs to know about that, especially Amazon sellers out there. For an agency, for a service provider, this tool, I've been through so many to the point that I almost paid a developer to build, but thank God I ended up, you know, I got to make you and your service and the people were great and been using it, you know, Tim cannot be more happy. So first of all, I want to thank you and I want to tell everyone who's listening to this to know how great the MerchantSpring is.
And the second to get to the topic for why would someone want to make a transition from 1P to 3P? There are various reasons. I've been few of them, but the most common that I hear is the fact that some of these brands, they do not have the control that they desire on a marketplace. Primarily focused when it comes to their pricing. So that's the biggest reason that I see brands why would want to do the change.
Also not being able to make, one of the other things that I've seen, proper product launches with a 1P that they would have with having a 3P. So those are the two common reasons that I can develop more on each topic, if you like. But yeah, that would be like a nutshell, good reasons to make a transition.
James Dihardjo
Got it. Okay. Well, just in that, I guess, still on the same topic, kind of, if they were thinking about, I'm sorry, can you give us some examples, I guess, when this has not been the great idea where you've said to someone like, okay, you're thinking about it, but actually don't.
Ruben Alikhanyan
Yeah. One of the reasons to that is what you do not have a good grip on your distribution and how the third-party sellers are operating. Because most common we see when the brand is operating under a 1P solution, basically work retail for the Amazon. When they do not have a tight grip on their distribution, there are third-party sellers who use that to purchase from distributors and sell it on Amazon, most commonly undercutting the pricing, which hits the Amazon algorithm and then their repricing tools to bring the prices below as well.
So that triggers the brand owners being like what is going on? Our MSR piece was not what we are seeing on Amazon and not having that control and not having that control leads back to you know make that decision, but if you do not have a good control, you know over your distribution so coming to 1P may not be a great reason.
If you're asking reasons why the 1P would not make a transition to 3P and the reasons for that, the one of them will be if you are not a manufacturer. If you're not really have a good control over what the pricing of the cost of goods are going to be, and then channel of logistics, I think it's a good reason to reconsider to make that move. Because a lot of times from what I see, the sellers do not know that even though you are operating under certain agreements with a 1P and you're selling them as a wholesale cost, there are certain co-ops or charges that Amazon also places on the top of the original wholesale price you are doing.
So understanding what your cost of goods and having the most control over it is very good reason to not to make that transition. So for that reason, a lot of third-party private-label brands do not use that. And, you know, nationwide brands, bigger brands who control them, that may be a good reason for them to do that transition.
James Dihardjo
Got it. So, let's assume that I have great control over my distribution. I'm a manufacturer. I have, you know, all these things that you just mentioned in order to make this transition actually successful, right? to go to the 3P as you say, what are some like other factors, like when I'm making the actual transition, can you, can you talk us other factors that would make it a success? Can you talk us through that?
Ruben Alikhanyan
Sure, absolutely. Yes, so one thing you need to consider that the Amazon, in this case, you know, if I make a very raw example, operates as an employer, right? So one thing you do not want to do, you just do not want to cut the ties with them completely and just like one day just be completely off.
James Dihardjo
Yeah.
Ruben Alikhanyan
1P operates in a basis of business practices, and you have a business manager that you're in talks with, you can negotiate a wide variety of things. So preparing them that you are exiting the business model, I think the best way to start a transition. Second thing that I would suggest is a gradual discontinuation of the SKUs that's been offered to the Amazon prior. For those who don't know, the way the Amazon 1P works, you add the SKU and then Amazon cuts a P.O., sends a P.O. based on a SKU and you can have either discontinued the SKU forever or there isn't coming back.
So having that gradual discontinuation and having giving the time ahead of time to the Amazon account manager, I think it's a first principles to transition. Because we've seen cases that some people may think that the Amazon will have some retaliatory actions against for transitioning this drastically. But when things are done properly in an etiquette of a business, that's the first principles to do it. And most of all most of them not the transition will be very successful. So Hitting the notification ahead of time to your business partner and gradually discontinuing all the SKUs and eventually all the SKUs are the first principles to do that and eventually closing the vendor central account if you wish to do so.
James Dihardjo
Do you ever have to like where can it go wrong with telling the business manager like is it can it actually still go wrong at that point? And where?
Ruben Alikhanyan
Well, it's a good question. And to my experience, I never had it that it significantly went wrong or something that had an impact to the level that I could just kind of bring it up as an example. But one thing that is very difficult, and I made it sound that easy, but the communication with an Amazon, especially Vendor Central, and we all know how difficult it is to communicate with an Amazon. Standard customer support is difficult.
So having that communication is actually one thing that could go wrong. Establishing the right, you know, finding the right people you can talk to. Again, if you have the business manager, I think this easiest way. But the most difficult part with that transition will be that communication, setting everything apart and also closing the accounts.
You have to remember that as an 1P, you have an account receivable, account payables. So all of that have to close has to close well before all the transactions can conclude. Because in one example, I remember that the account payables for the 1P account had balance that was not paid to Amazon.
Because of the actions they took, that balance was not paid and Amazon account payable was not responding because there were things that were closed, POs that were closed and account was closed and that balance was there. So it took us actually very long time to contact within account payables, negotiate that and get those balances paid. So having rush activities can lead to that. So, yeah, like having that communication set up and do it well, I think that's the, it's a challenge, just put it that way.
James Dihardjo
Yeah, for sure. I mean, the more I'm asking questions at you, the more you're revealing and the more complicated it certainly sounds like. This is, I guess, just a side question. Is there a way to straddle 1P and 3P? Because, you know, you're talking about doing it one or the other, but can you do both?
Ruben Alikhanyan
You can do both, and I'll give you one reason, particularly in my case study, why would someone want to do both, especially when it comes to the product or a brand that does new product launches, right? So when you do a new product launch, especially larger organizations, larger brands, they have a certain expectation, launch plan for a product. And that goes across the board. That goes to wholesale, that goes to the direct-to-consumer, and that also goes to Amazon.
So guess one place you do not really have much of a control how you can launch your product. It's the Amazon. Because the way Amazon 1P works, you add a SKU, And based on the algorithmic reading of the sales capacity, Amazon will send a PO when you're a 1P. So when you're a new product launch and you're a 1P, you do not really have those ways to create that traffic so that Amazon can send a PO.
So in my case studies, I've had when we would use the 3P to launch a product because you have much control to that and then eventually transfer it to 3p when we will receive an Amazon wholesale orders. So to that segment you can do that and there's also a lot of things that are concerning when it comes to that because again, I mentioned something that Amazon being retaliatory So I've seen accounts being shot down because of there's a two models are working. So it's a very difficult thing to manage but there is ways to do it. There are ways to kind of, you know, make them work together.
James Dihardjo
Interesting. Interesting. Next question, Ruben. So let's say someone has made the transition from 1P to 3P, we're six months down the track after doing that. What does that look like? Is it typically like rainbows and money flying everywhere or is it actually still very much a challenge after six months and you still need to be careful, like there's things you need to do? What does that look like?
Ruben Alikhanyan
So the first thing I'd like to clarify that the transition is just an act. It's just an action that you are completing. The actual selling process of a brand and how it will operate still relies largely on the principles of a managing well the brand when it comes to the 3P. So it means you'll still have to make sure that you have an inventory. You still have to make sure that you are running an ads because you may get a lot of organic traffic. It's also something that I cannot confirm, but I heard that the traffic will start kind of decreasing when you're making that transition.
So the success or the next six months will largely depend how much you've prepared as a 3P partner to start operating. So how it will be a rainbow or it will be dark, it will be depending on that. So taking up the normal case of how to restart a 3P business model, I think it's a great way to kind of approach to that.
And if everything's done well, I would really suggest to boost up your traffic almost right away through the paid ads. Especially when you had that organic coming in from the vendor central, it will be only beneficial for you. And that money goes back to Amazon. So that will be appreciated for sure.
So making sure that everything's set up properly for your launch on a 3P version, and then advertising to push that traffic. I think those are the best It's just, and you can have it both ways, right? You can have it a rainbow and you can go to the sideways, but it does not really depend on the actual transition. It depends on the practices you use, how to sell on Amazon.
James Dihardjo
Got it. That makes sense. That makes sense. So still on the same, like, you know, six months out, probably leaking, moving over to a year after the transition. In terms of business performance, what can they expect? Should they be looking at this and going, oh, actually, this is a road we're going towards more profitability now that we're on a 3P? What are some kind of, not Amazon-specific, but general business things we can expect here?
Ruben Alikhanyan
Yeah, so to answer that question, I think you have to start from very scratch. Which means what was the main decision that pushed them to make that transition, right? What was that goal? And then measure the success based on that. So if your goal was to be able to control your pricing, as I mentioned, and you had that traffic and you had that sales and you had that brand awareness, and now you have that control in your hands, after let's say that six months when the inventory within the 1P had depleted, that will be a successful transition, right? You measured that by the factor of that you were able to control your pricing.
If you had products that were desired at the beginning to launch on a 1P, but because you mentioned the issues, for example, Amazon not cutting a PO because the reviews are not coming fast or your traffic is not coming fast, you're not getting enough sales and you've already having a production thousands of units. And this kind of a feels flop. To be able to use a 3P and strategize the way to launch that product using an Amazon Vine, using the advertising strategies with the right team behind, you can grow that sales, you can call that a success as well.
So the success, how good it will be, will largely rely on the first step, which is why I'm making that transition. And if you have, if you made up your mind, these are the reasons, and if you use them right, the success is going to be behind it. So I did not get a direct answer, but I want to give a right picture in terms of how that success can measure and how that growth can measure.
We've seen in the case of a very famous sunglass brand, I cannot disclose, that they had boost of their sales significantly. Due to the fact that they took the control completely on the catalogue and the skew line that they were providing, and increasing the sales on the new launch product that came to replace the old product that were completely discontinued, or similar models. So for them, it was an absolute success because that's what they were the final goal for them.
James Dihardjo
Got it. OK. Well, that is very, very clear. And certainly, it sounds like, if I'm to sum this up, it sounds like what you're saying is assess the intention. Manage like if your intentional lines like a good reason to move and you've got all the things correctly, you know, you got all the checkboxes, then manage the transition. And then basically just invest and monitor, you know, in the early stages after the transition. But again, it all comes down to does it even make sense for you?
Ruben Alikhanyan
Absolutely.
James Dihardjo
So that's what I'm getting from this. Because my last question was going to be, is this a feasible way forward for people? I mean, for brands, sorry. And it sounds like yes or no, right? Based on what you're saying.
Ruben Alikhanyan
Well, yes or no is a good answer. But measuring the fact how the 3P overpowering with the time, the 1P as of today, like it was a 68%, I believe, the third-party sellers. And that number obviously changes. If you recall, Amazon started being only 1P and now 68% being 3P. That transition is significant and it grows. But in terms of will that make sense for all the brands that are operating 1P? Absolutely not.
There are brands that are growing under 1P. There are brands that are making the transition to 1P and they're very happy with in terms of how it works for them. Dominating and the major answer is yes, there are more 1P and more transition to 1P. But it means the 3P, does that mean the 1P is wrong or it's, you know, you have to ditch it? It's not.
One thing I want to say, and I had this to talk this topic in a couple of other podcasts. You have to have a very good evaluation of the business and measure the pros and cons and understand the details and nuances that goes within that transition. It's not that easy to just say, hey, you know, let's say even the fact that I do not have a price control right now, let's make that transition because there are many other factors.
Literally, when you're making a transition from a 3P to 1P, you have to weigh into the factors, the additional co-ops you're going to pay, the fees that Amazon is going to put on top of it if you were late on deliveries if you did not, additionally, they're going to charge you 2% extra if they pay you back within the 30 days. So these are the nuances that both ends have to clearly understand and measure within their capabilities before making that decision.
So it largely depends from business to business. And I believe it will stay that way until there's a drastic changes coming in the both sides, which I think is going to come in soon. But yeah, in overview, that's kind of a reality at the moment for the 1P and 3P transitions.
James Dihardjo
Yeah, got it. Interesting. Yeah, I certainly feel like 1P will continue to play a role, especially from a technology perspective. We can see that the way that Amazon's investing in 1P data and all that kind of stuff that's available by API, I definitely get the sense it's definitely here to stay. And as you say, it's even growing in some regions in the world. The transition from 3P to 1P is very much a thing as well. So Ruben, thank you very much for your time. We've just hit 20 minutes. I will look forward to seeing you in Seattle, I guess, later this year.
Ruben Alikhanyan
Absolutely, yes. I cannot wait. I missed it last year, so I'm even more stoked to be this year there and meet so many friends that I met friends within the Zoom and online and never met in person. And this will be a great way to make that in-person transition.
James Dihardjo
Cool. Thanks, Ruben. I'll see you then. Absolutely. Take care, James.
