Vendor Central: Terms and Negotiation

Business Model: Seller Central vs. Vendor Central 

There are two ways your brands can have a presence on Amazon. One is being a Seller, on Seller Central and choosing the fulfillment method that is the best for you: 

• Fulfillment by Amazon (FBA): 
  • Your products are stored in Amazon Fulfillment Centres, and Amazon fulfills all your orders.
  • Amazon deals with all returns, refunds, and customer service.
  • Offers are Prime eligible and are delivered within two days.

• Fulfillment by Merchant (FBM):

• • Your products are stored at your own warehouse, and you are responsible for fulfilling all the orders.
  • You deal with all the returns, refunds, and customer service: if you don’t monitor this closely, account health metrics can decrease and affect the sales by losing the Buy Box. 
  • Not Prime eligible, shipping time and delivery depend on your location and shipping method.

• Seller Fulfilled Prime (SFP: if you’re eligible): 

• • The same as FBM, except you, must ensure your account health metrics; otherwise, you will no longer be eligible to participate in this fulfillment type.
  • The difference between FBM and SFP is that your offers are Prime eligible, and customers get the same benefits as if Amazon fulfilled the bought products.   

    

This type of business model is also called 3P or Third Party. 

The other way is being a Vendor and selling your products directly to Amazon, also known as 1P or First Party. These products have the “Sold and Fulfilled by Amazon” messaging on the product pages. Amazon buys products from you on a wholesale, bulk basis, and each week you get a Purchase Order (PO). One significant benefit of being on Vendor Central is that Amazon buys your products in larger quantities upfront. However, how profitable this venture really depends on what terms you agree with when signing a contract with Amazon. 

Both business models have their advantages and disadvantages. Still, in this article, we will focus on the most common areas of Vendor Agreements and how to negotiate to get a better deal from Amazon. 

One important thing to mention is that you have to understand that Amazon is a business and a platform and that their goal is to make money. 

Selling on Vendor Central may not be a lucrative business model for your products. 

Vendor Agreement Types

There are many different types of agreements you sign when you get on the Vendor Central platform. These are charges which Amazon will deduct from the invoices. The fees are agreed between Amazon and the Vendor at the time of signing or renewing the contract.

The percentage that Vendors pay (listed above) are determined on a case by case basis. The numbers in brackets are the typical amounts. It’s best to negotiate with your Amazon representative the terms you are willing to operate under. Some tips on how to do it are listed below. 

• CoOp, Damage, and Freight Allowances
  • Accrued against net receipts into our fulfillment centers every month; the entire month’s accumulated balance is billed based on the schedule listed in the agreement terms.
• Straight Payment
  • A fixed amount negotiated between Amazon and Vendor
• Promotional Allowance (SPA)/FLEX Agreements
  • Promotional allowances based on orders placed and not canceled during the promotion period.
• Price Protection Agreements
  • Protects against a reduction in the value of the units currently on hand and in-transit.

 Most Vendors are required to pay:

• Market Development Fund (MDF) fees (13-22%)
• Freight allowance fee (2-5%)
• Damage allowance (2-11%)

Market Development Fund (MDF) fees 

These are also called MDF or Base Accrual Fee, and they are typically around 10% but vary between 5-22%. These funds are discretionary and are granted on a case by case basis. Amazon uses this money to: Invest in customer service, Increase visibility and discoverability of your products, and drive sales. 

One thing to remember about the MDF fees is that they are not result based. This means it makes it hard to understand them and to see where exactly this money was spent. There are no reports that will give you insight into how much money was spent and where. 

Typical examples of where this money usually goes are: 

• Automated emails to promote products
• Improved site browsing (frequently bought together) 
• 1-click ordering
• Off-Amazon marketing
• Catalog improvements

Freight Allowance

Freight allowance refers to the cost of getting your products from your warehouse to Amazon’s Fulfillment Centers. It typically ranges from 2-5%. During negotiations, you can choose whether you’d like to be paying: 

•  Prepaid Freight Terms (Vendors pay for and manage the shipping) or
• Collect  Freight Terms (Amazon pays for Amazon’s third-party carriers make the shipping and shipments)
  • Vendors fund this allowance
  • Deducted from Invoices
  • Calculated on average shipping cost 

Damage Allowance

Damage allowance is the cost that covers what happens to your damaged items and the handling of the returns or the disposals of your products. It typically ranges from 2-5%. During negotiations, you do not have to agree to damage allowance. In this case, Vendors are responsible for paying all costs associated with returning the products to their warehouse. This makes more sense for more expensive products, like electronics. In most cases, Amazon will most likely dispose of your products instead of having it return to you. So it’s best to consider upfront what you’d like to see happen with your damaged products.

Payment Terms

Payment terms refer to how soon you’d like Amazon to pay you for the Purchase Orders they place. The usual timeframe is from 30 to 90 days. Amazon will want the longest possible period, while you, as a vendor, will want to be paid as soon as possible. If you don’t mind waiting 90 days to get paid, you can leverage this to get other benefits or discounts on different terms. However, if you’re in a rush and want to be paid sooner, you can offer Amazon an early payment discount (1-3%). 

Negotiate

The perfect time to start negotiations with Amazon is either when just launching on Vendor or near the time your agreement is up for renewal. Typically, the negotiations don’t last a day or two. Still, they can drag on, so start working on your strategy three months before the contract expires, and reach out to your Vendor Manager around two months before the expiration date. Naturally, if you have a good relationship with your Vendor Manager, you will be in a better position to negotiate.

By signing this agreement, you’re essentially making Amazon the legal owner of your products, and any other products they order from you. This essentially means you have no say in what they do with your products or what will be the MSRP, for example. You can suggest your MSRP, and although Amazon will most likely accept it, Amazon is free to do with your purchased products whatever they want. They can give it away for free too. 

To ensure that you are getting a deal that you will be happy with, carefully review the terms beforehand. Before contacting Amazon and to have some wiggle room, create your

• Minimum offer
• Middle ground
• Solid bottom

Not everything on your vendor agreement is flexible. You are most likely to get somewhere in your negotiations if you ask for changes on 

• Cost price
• Allowances
• Accruals
• Returns
• Freight
• Payment terms

Any counter-proposal that you offer must remain beneficial to Amazon. Always remember to focus on Amazon’s benefits on those of Amazon customers. Otherwise, you’ll make no progress. Show Amazon that you bring value to the platform and how by offering: 

• Quality variations
• Unique products
• ASINs that are in high demand
• Good press coverage
• Participation in marketing campaigns
• Promotions 

Some arguments you can use: 

• The terms will force you to increase cost, ultimately the prices to customers.
  • Share any examples where a pricing issue caused problems for your products, customers, and Amazon.
• Let Amazon know you want to re-invest the money you gain.
  • Let Amazon know that you want to invest X amount of money for AMS, Promotions, like coupons, participate in Vine, etc.
• You can also ask Amazon about their return on investment policy and the value of the terms they are offering.
  • You can leverage Amazon’s response in your favor if you plan on investing more than Amazon. 

Final words of wisdom 

As mentioned at the beginning of this article, Amazon is a business whose goal is to make money. Using arguments like “This is just not profitable for me (as a vendor)” won’t get you anywhere. When negotiating, make sure that Amazon is also getting good enough margins. Otherwise, if Amazon is not profitable, it can quickly stop placing purchase orders for your products and set your products obsolete. 

But the same principle applies to you! Before you say “Yes” to selling on Vendor and renewing your contract, make sure that you include all allowances in your cost calculations and that you have the margins to support this model. If you don’t, you may realize your account is not profitable. If that’s the case, consider shifting to Seller Central. 

Good Luck! 

Get in touch with the BellaVix Team, a digital marketing agency, if you need a reliable partner on your Amazon journey to success.

 

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