The Q1 period can be a stressful time for vendors. This is 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. This blog will break down the terminology vendors will encounter and some tips for getting the best out of your negotiations for your Amazon vendor agreement.
Understanding your vendor agreements
When negotiating new or revised contracts for your vendor account, Amazon will push for a variety of accruals and allowances in addition to the cost of goods that you sell to Amazon. The agreements usually come in the form of a percentage discount off net receipts at cost price. This is typically deducted from monthly payments unless otherwise agreed. The type of agreements and percentage amount will vary by brand, product category, and marketplace. These are annual agreements that carry over unless you agree on different terms.
Amazon will have minimums they need to achieve for each account, and these benchmarks are constantly changing. The terms that are agreed to will impact the overall profitability of the account and can influence how willing Amazon is to invest in that specific vendor. Every year, Amazon will review its terms agreements with each account. If the account is not meeting those minimums, Amazon will ask vendors to make improvements and provide them with a further discount.
When you approach the renewal, 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 unfavourable. Or at least find a compromise that is win-win. You may get Amazon to drop their initial requests and meet you halfway. Consider these tips for getting the best out of your negotiations.
Preparation and strategy for Amazon vendor terms negotiation
First off, Vendors should be prepared to discuss terms with Amazon. This means knowing your data and having a strategy in mind. Can you demonstrate and provide the results of the investments you made in your business? Can you show how your business is on the correct trajectory for 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.
Terminology for Amazon vendor agreements
Vendors are bound to encounter a variety of terms when negotiating their agreements with Amazon. It is important to understand what each item means and how each may affect your business before agreeing to it. Here are the different types of agreements Amazon may introduce or that you may find you have already agreed to.
Marketing Accrual / Coop
Also known as Marketing Development Funds (MDF) or discretionary co-op. Amazon is not specific about where exactly this money covers, unfortunately. They do state that it supports the costs involved in helping cover activities that drive impressions and sales to products. This may include in-store promotions, PR pitches, merchandising activities (such as “customers who bought X also bought Y”), emails, associate referrals from external websites, basic site placement, and improvements in the catalog. This is usually in the form of a fixed percentage discount on the cost of goods. However, some large vendors might succeed in agreeing to a stepped rebate agreement to incentivise Amazon to order more and receive a greater discount.
Returns Allowance
This usually covers all returns and is in the form of a fixed percentage discount on the cost of goods. As a result of paying this additional percentage, Amazon will send you zero returns, including damaged products, excess inventory, customer returns, or goods damaged by Amazon at the warehouse, items that are defective, or out of date, etc.
Overstocks Allowance
Similar to a returns allowance, but instead it only covers overstocks. This inventory is in sellable condition but has not sold and now Amazon has too much stock of it. This allowance does not cover any damages, because that would fall within the damage allowance. Overstocks allowance can be in the form of a percentage discount or as a percent of the stock.
For example, you will allow Amazon to return back only 25% of the total stock purchased that quarter.
TIP: You should avoid a 100% overstocks allowance agreement. This would mean you allow Amazon to return any inventory they purchased during a specific time period and get a full refund.
Damage Allowance
This allowance should cover costs incurred by Amazon in handling damages, such as the cost of offering a customer’s free replacement, unsellable product storage, liquidation, or the cost of shipping the items back to the vendor.
This allowance does not include product recalls, items damaged on arrival, items with an unusually high defective rate, and products that do not conform to Amazon’s specifications and policies. In those instances, Amazon has the right to return the goods at the vendor’s expense. Amazon will typically look at historical data for those products or in that category and decide on what is an average returns rate for the account.
Freight Allowance
This allowance applies to vendors that have agreed for the stock to be collected and paid for by Amazon. This is known as Freight Collect or We-Pay. This allowance should cover the cost incurred by Amazon to collect the stock. Amazon will typically look at historical data for those products or that category to decide on what is an average shipping rate for these products.
Strategic Vendor Services (SVS) or Amazon Vendor Services (AVS)
A dedicated point of contact at Amazon who will work on a vendor account. Usually, they are from an entry-level or merchandising background. These employees will manage multiple brands, and it is a common Amazon offering during terms negotiations for larger brands. They assist in areas such as product management, merchandising, and operations. This comes at a premium cost and may be requested as a lump sum amount or percent-discount off the net receipts at cost price. At $100k+ per year, it is likely cheaper to hire an Amazon consultant or Amazon agency to build A+ pages, for you – but, if you need someone on the inside to resolve $100k+ worth of issues, then it could be worthwhile for your business.
TIP: Take a look at our services and let us know how we can help support your business.
Subscribe & Save
This is a customer program offered by Amazon, and as a grocery vendor, it is often a requirement in your terms (expressed as an accrual above, or percent-off invoice value). If your product is unlikely to be repeat purchased, you could use this as a bargaining tool or request it is removed; perhaps instead, you will offer lower costs/funding in other ways. If your product is a repeat purchase (e.g. tea bags or toiletries, etc.), Subscribe & Save is a worthwhile program. Please note, this percent-off invoice is usually across total sales and not specific to units sold through the S&S program.
Quick Pay Discount / Early Payment Discount
These discounts refer to payment terms when the vendor offers Amazon a discount off the invoice if they pay quicker than the standard payment terms agreed. For example, 90, 30 1.5% NET would mean Amazon could either pay within 90 days from the date of invoice or receive a 1.5% discount and pay earlier within 30 days. A quick pay discount does not always guarantee Amazon will pay earlier.
Amazon Advertising
Sometimes, part of terms negotiations will involve an investment into Amazon Advertising. For example, you commit to spending $150,000 in advertising that year. It can also be used as a bargaining point in exchange for something else if you would prefer to invest in Amazon Advertising vs giving away percentage points in your terms.
Other things to consider for terms negotiation
When negotiating, you should also consider the concessions Amazon can provide (or that 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, or product placement on category pages. If Amazon asks for more discount, what do you get in return aside from the ability to continue to deal directly with Amazon?
During your negotiations, you might encounter or find Amazon using terminology and acronyms you are not familiar with. To help you during these conversations, we will explain some of the typical language that may be used in the negotiations. You can gain a greater understanding of what exactly the retail team is talking about.
PCOGS or COGS: Product Cost of Goods Sold
This is the total sales out (units x your cost to Amazon). Sometimes also displayed as revenue. Amazon will often ask for lower cost prices during terms negotiations if these do not meet their minimum requirements.
Net PPM: Net Pure Profit Margin
When Amazon looks at the profit they make after excluding sales tax and the COGS. Amazon uses this to see how profitable your products are. When Amazon refers to Net PPM, it could be at an entire account level. It is worth asking for a breakdown if you don’t know so that you know which of your range is driving a lower profit margin. On some lines, you may find this shockingly low, this will highlight when Amazon has dramatically dropped the retail either to match the competition or clear through overstocks.
Contribution Profit or Contribution Margin
This metric refers to when Amazon not only looks at the net PPM but also accounts for other factors that will impact the product margin such as cost of shipping and coop agreements. When Amazon reviews profitability, they review it at this level, not the net PPM level.
CRaP: Can’t Realise a Profit
This is any item that is unprofitable for Amazon to sell at the current cost price. Amazon is going to be price followers, so if you offer other retailers’ promotions or lower costs and deny these to Amazon, they will know about it. They will know about it in the form of “CRaP” where your product falls into a group of products that are not sellable in the current conditions. Amazon will ask for a lower cost price that they deem enough to make it “worthwhile” to sell again.
Often these are extremely low, so get as much information as you can from Amazon about the details. Is the lack of profit due to competitor pricing, is it due to inventory issues, shipping (weight of the item, etc.)? Could you offer them a two-pack bundle, instead, that would resolve the issue? If the cost is not moveable, think about other ways you can help Amazon sell the item before going into the negotiation.
LBB: Lost Buy Box
LBB is when another seller is winning the “add to cart” or “add to basket” button, possibly due to selling the item cheaper, with strong performance metrics, inventory, and Prime delivery message. This is a frequent occurrence on large brands where the supply is extremely open (anyone can buy wholesale quite easily or cheaply). The best way to reduce LBB is to review your distribution strategy and how you control your supply chain. If Amazon can’t compete with small sellers who pay 20% in seller and FBA fees, then there is an issue.
REP OOS: Replenishable Out of Stocks
This is an item that is marked as orderable, but that went out of stock and what % of sales were lost due to it being out of stock. This usually happens when a PO is declined, or late, or Amazon has tried to order it but for some reason, it was not in stock or delivered. If you have a high REP OOS, then your products are often out of stock when Amazon wants them.
FTGV: Fast Track Glance View
FTGV refers to what percentage of the time a customer viewed the product page when Amazon (you) had the Buy Box, with a Prime shipping option. The goal is to always be in stock with a Prime offering, every time a customer views the page. If you are not, it will show up here – it will often align with OOS or LBB, either because someone else is selling it cheaper (not on Prime) or because you ran out of stock, and it is not available at all when someone wants to buy it. Or it can be a combination of both.
KPI: Key Performance Indicator
This is a metric that Amazon measures vendors on or track as part of their account analysis. These are usually things like REP OOS, Lost Buy Box FTGV, etc.
GV: Glance View
This refers to page views to the page. This metric is used to identify how many eyes reach your products, whether it makes a sale or not. This is an important metric, although not used hugely in negotiations it is important to know what it means. If you have high glance views, but low conversion (below), then it would be worth reviewing your pricing and content to ensure customers are having all their questions answered and not just leaving the page to go to a competitor.
Conversion
Conversion is the percentage of views that result in a sale. This varies massively between product categories. Don’t be alarmed if your conversion percent is low, especially if your product has a high price point or is a considered purchase. The goal is to have conversion high, which means a customer views your page and wants to buy the product right away.
FOB: Freight on Board
This is when Amazon purchases in container shipment quantities. This is often a good one to use when a high-volume item is identified as CRaP or Amazon is asking for cost prices that you cannot afford to offer. FOB is used by Amazon a lot in negotiations for this reason, although it is rarely proposed by them directly if the vendor does not bring it up as an option.
VPC: Voucher Promotion Code
Refers to coupons, deals, multibuys, etc. This acronym might show up on your invoices, or Amazon may suggest that you fund X number of promotions in replacement of new terms. For example, if Amazon is asking for lower costs on one of your products, you could try offering to fund a voucher/coupon instead.
Overstocks
Where Amazon or the vendor has sent in products that did not sell through at the expected rate, therefore Amazon has been left with high levels of inventory sitting in the warehouse that is not selling. During a negotiation, Amazon may request a lower cost price or funding to assist in clearing these out.
Direct Fulfillment
Direct fulfillment is filling orders directly from your warehouse instead of shipping to Amazon, on a customer-order level. This is often discussed in negotiations as an alternative for large products that cost Amazon a lot to ship, and as a result, they are asking you for a lower cost price. For example, furniture, large baby gyms or toys, heavy or bulky home products, electronics, etc. Direct Fulfillment helps save Amazon the shipping cost and could be suggested to help them reduce costs, instead of lowering your pricing.
Final advice and additional help
Every year, Amazon evolves and changes, investing more profit into delivery speed and other projects. It’s clear that vendor negotiations have 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.
As a vendor, it may be difficult to get your questions answered. While Amazon continues to dominate the e-commerce market, more than 50% of 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 business, 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.
For additional help, please reach out to our team of Amazon consultants who can offer tailored help for your business.
