The Q1 period can be a stressful time for vendors. It’s the time of year when Amazon reviews and renegotiates annual vendor agreements. Experienced vendors may be more comfortable and able to get the most out of the negotiation process. Inexperienced vendors should understand the terms, and how the system works before jumping in. Be aware that your revised agreement could mean higher percentage allowances for marketing, returns and other related terms. Remember, this is not exactly a list of demands, but a negotiation that you can effect. Vendors will never get better terms, but can instead avoid agreeing to revised terms that are more unfavorable. Or at least find a compromise win/win, whereby Amazon drops their initial request and the vendor meets halfway. Consider these tips for getting the best out of your negotiations.
Preparation and strategy
First off, be prepared to discuss terms with Amazon with your data and strategy in mind. Can you demonstrate and provide results of the investments you made in your business? Can you show how your business is on the correct trajectory for Amazon growth? If so, you may be in a better place to negotiate more vendor-friendly terms.
You may want to have any marketing plans and data from the previous year. What was your Amazon Advertising investment? How has that investment grown your business and benefited Amazon? Use the tools and metrics available on Vendor Central and in Amazon Ads to demonstrate your progress. Vendors should know the health of their business and be able to prove that the vendor account is profitable and generating a positive net margin with strong potential for further growth.
Other things to consider during negotiations are the concessions Amazon can provide you or you give Amazon to help come to the best possible agreement. Concessions to Amazon might include deal placement, advertising spend, increased selection and product exclusivity. Concessions that you can request from Amazon would include Amazon Vine credits to help ramp up the customer reviews, product placement on category pages or access to ARA Premium (ARAP), although with the launch of Brand Analytics that might soon be a standard service. If Amazon are asking for more discount, what do you get in return aside from the ability to continue to deal directly with Amazon.
What are the terms?
Vendors should go into negotiations with a full understanding of what Amazon is proposing. Amazon will typically focus on the following areas when requesting improvements:
These terms typically vary from 30 to 90 days net, or end of month (EOM) with an early payment discount. Amazon pays less attention to this unless your payment terms are very short. Amazon has recently started trying to incentivize vendors. This means Amazon will give an early payment discount in exchange for shortened payment terms.
Freight allowance is more common in North America than in Europe. This covers the cost of Amazon collecting the shipment from the vendor’s warehouse and delivering it to the Amazon Fulfillment Center. The percentage amount will vary depending on the size and weight of the vendor’s products. This is one of the easier allowances to measure. Vendors should already have an idea, on average, how much shipping costs and what percent that is of the COGs of an average shipment. Therefore, if Amazon is asking for a crazy percent allowance, you should be able to spot it. Amazon will often give vendors the choice to increase it, or to manage your own shipments. If the allowance is way above your average shipping cost and you aren’t successful in your negotiations with Amazon, you might want to consider shipping the inventory yourself.
This allowance covers the cost of any damages and customer returns, including any expired product. This is also an easier allowance to measure. You should already have an idea of your percent returns rate. If Amazon then asks for a percentage way above your average, this should raise alarm bells. Although, note that Amazon does have a very customer-friendly returns program. You may find the returns rate is slightly higher than on your own website, for example. If Amazon asks for a significant jump that looks unusual to you, it may be that a couple of products have a high returns rate because of an issue that can be easily resolved, e.g. incorrect product image or info.
If it seems too high and you aren’t successful in your negotiations with Amazon, you could manage the returns yourself. Keep in mind you do need to pay for the return of the inventory, and this only makes sense on high-retail products that can be resold or refurbished.
Marketing allowance is also known as discretionary coop and marketing development funds (MDF). This can be a hard allowance to calculate, unlike shipping and returns, as you have nothing to compare it against. This allowance helps cover activities that drive impressions and sales to products. These include in-store promotions, PR pitches, merchandising activities, emails, paid search and sponsored links to products, associate referrals from external websites, basic site placement, and improvements in the catalog.
In addition to these allowances, depending on the size of your account, product category and country, you might find that Amazon requests some more specific allowances such as Subscribe and Save, Overstocks, Volume Incentive Rebate (VIR), and Amazon Vendor Services (AVS) or Strategic Vendor Services (SVS).
Think about your options and have a potential plan B
As Amazon evolves and changes and invests more profit into delivery speed and other projects, it’s clear that vendor negotiations will become more conservative. Most vendors will not even be in contact with an Amazon vendor manager. Instead, they will have to negotiate with Vendor Support, who have limited authority to negotiate. It may be difficult to get your questions answered. While Amazon continues to dominate the ecommerce market, more than 50% off the products sold on the platform are third-party sellers. If Amazon continues to be persistent in pushing for revised terms that are not financially viable for the busines, you may want to think about your strategy, and whether switching to the seller side makes sense for your business, or perhaps diversifying and changing your product assortment if you haven’t already.
If you want more information and tips on negotiating with Amazon, you can watch our pre-recorded webinar hosted by ex-Vendor Manager Carina McLeod, talking about “How to get the best out of your annual terms negotiation with Amazon.” Also, feel free to contact us for other resources and direct help.