Why You Should Transform Your Third-Party Sales into a First-Party Business
People often ask me, “Where are biggest third-party marketplaces after Amazon?” The answer isn’t always what they are expecting.
With Amazon continuing to grow as an international retail powerhouse, third-party sellers are finding it more and more challenging to achieve the same financial successes they could once rely on. The more sellers enter the marketplace, the fewer sales and profits there are to go around. It makes sense that sellers are increasingly searching for greener pastures.
However, what sellers should really be asking is, “What is the next biggest opportunity for sales beyond Amazon?”, not “where“.
The answer is first-party sales.
The difference between first-party and third-party sales
Third-party e-commerce businesses market and sell products directly to consumers through a channel like Amazon or eBay. Sellers pay a fee for the privilege – typically on a per sale basis.
In a first-party relationship, sellers become wholesalers. They sell their inventory to retailers like Amazon, Walmart, or Wayfair who then sell the products in their own retail marketplaces. These larger retailers set the prices and market the products as their own inventory.
There has been loud criticism of the wholesale model as an antiquated and dying form of retail. With the transition from brick-and-mortar stores to e-commerce and decentralized distribution, images of aisles and warehouses of retail goods seem poised to become the relics of a bygone age.
While that argument might make sense on paper, what people don’t realize is that conventional first-party business concepts (including wholesale) are actually gaining traction with both online sellers and larger retailers.
In a first-party arrangement, sellers can take advantage of more efficient and cost-effective distribution channels than third-party sellers can. At the same time, first-party vendors allow retailers to increase the variety of products available on their websites and in their stores so that they are better equipped to serve visitors’ purchasing demands.
As a result, selling as a first-party can often wind up becoming more reliable and profitable for an e-commerce business than selling as a third-party.
Why moving to first-party sales makes sense
- Higher margins
Retail marketplaces like Amazon and Walmart have become increasingly crowded with sellers of similar merchandise undercutting each other’s prices. This means sellers of the most popular products are often forced to sell at paper-thin margins to compete for customers. As such, sellers must sell at larger and larger volumes just to ensure a profit.
In contrast, it is possible as a first-party business to reduce the extra costs associated with third-party sales while also increasing margins and remaining competitive in the same online marketplaces.
- Diversified businesses carry lower risks
In most cases, businesses put themselves at risk when they rely on a single customer for more the 15% of their sales. For many e-commerce businesses, Amazon sales far surpass that threshold.
One problem with this is that Amazon’s policy shifts tend to make selling on their platform increasingly beneficial for buyers at the expense of sellers. With most third-party sellers already operating on slim margins, all it takes is a single change to the terms of service to make a once-profitable arrangement potentially unsustainable.
Transitioning from third-party to first-party sales is a great way to both diversify your potential customer base while also mitigating the risks associated with an over-reliance on a single retail channel like Amazon.
- Building a brand can lead to business growth
Many third-party sellers are effectively glorified middlemen. Customers seek out products on digital retail platforms and third-party sellers scramble and claw over each other to see who can fill the demand the most cheaply and efficiently.
In this model, the purchasers typically don’t care about the seller or the seller’s business – third parties are viewed as little more than nameless, faceless fulfillment resources on a per-sale basis.
In contrast, first-party sellers are much more than a means to some other company’s profitable ends. By assuming the role of the wholesaler, first-party sellers gain the ability supply their own branded, private label products to the marketplace in much the same way a traditional manufacturer would.
The script is flipped and the retailers become the middlemen. The large retailer, not the seller, is tasked with doing the work of marketing the seller’s branded products to consumers.
Meanwhile, each sale becomes an opportunity for the first-party business to both establish an identity and connect with clients as a company.
Savvy first-party sellers can lean on their unique merchandise and/or unique wholesale relationships to sidestep the ruthless third-party competition for the most popular products while also bolstering their own brand awareness.
First-party dropshipping is a viable pathway to growth
Transitioning from third-party to first-party sales may seem daunting. It used to be that becoming a wholesale vendor to a major retailer was a difficult and expensive proposition. Niche sellers faced seemingly insurmountable odds in pursuit of shelf space or website visibility.
Dropshipping has made it possible for e-commerce sellers of all sizes to serve as first-party vendors to some of the largest retailers on the planet. What’s more, the infrastructure to make this transition is already in place.
Simply put, dropshipping is a way for retailers to sell products to customers without ever having to hold the products as inventory. Instead, when a product is sold, the retailer buys it from a supplier and has it sent directly to the purchaser.
Successful internet sellers are in the perfect position to serve as dropship suppliers. The same reliable shipping infrastructure required to thrive as a profitable third-party seller is what major retailers look for in building their dropshipping networks.
For years, SellerCloud has been managing these types of Electronic Data Interchange (EDI) integrations on behalf of our customers. Back in 2012 it began helping customers serve as dropship suppliers for Wayfair and Overstock and soon thereafter expanded to include retailers like Target, Home Depot, and Kohls.
Historically, establishing EDI channels has been an expensive proposition. Smaller sellers in particular are priced out by long contracts, fees for enabling channels, and steep costs per file transmission or per kilo-character.
SellerCloud’s direct integration agreements with the aforementioned companies, and now with Amazon Vendor Central and Walmart DSV (Dropship Vendor), simplify the process for e-commerce retailers of all sizes. With SellerCloud, there are no extra EDI or value-added network (VAN) related fees to extend business into these strong sales channels. Instead, there is just a simple per-order fee – just like any other marketplace order.
Becoming a first-party seller is also a viable option for e-commerce businesses looking to diversify and strengthen their market presence beyond the online space. Several national retail chains like JCPenny and Sears’s have begun using their online dropship programs to vet new vendors for their stores. This means that businesses that establish themselves as reliable dropshipping suppliers for clients like these can see their products not only featured on popular websites but also featured on shelves in thousands of brick-and-mortar locations.
The first-party sales model is very much alive and well for those that know how to take advantage of it. Is your online retail business ready to make the leap from third-party to first-party? Contact SellerCloud directly to see how our platform can make the transition both painless and profitable.