Amazon Vendor Contract Negotiations: What You Need to Know
When working with Amazon.com, Inc. ("Amazon") on the vendor side you take on the role of wholesaler. This means offering your products to Amazon at wholesale prices, as well as offering Amazon additional discounts in the form of co-op agreements and allowances.
Offering additional discounts off wholesale price is nothing new with large retailers. It is the type and level of discount Amazon asks for that becomes challenging for vendors. They are pushed to give Amazon their best prices without any guarantee Amazon will push their business. In the brick-and-mortar realm, businesses typically work off of rebates and build in a rebate structure to incentivize retailers to purchase more stock and take advantage of a greater discount. In most cases, Amazon avoids these rebate structures and requires a straight discount regardless of the amount they order – and often a lot higher than what other retailers ask for.
Despite asking for large allowances, Amazon’s margins can be tight on the retail side. Matching the competition, funding programs such as Prime and offering an outstanding returns policy are three practices that eat heavily into Amazon’s margin. One reason why Amazon asks for such high discounts is their expectation that vendors will help fund such programs.
When negotiating a contract for the first time, Amazon will typically ask for allowances. These are negotiable to some extent, and the level in which you can negotiate will depend on your size and the influence you have as a brand. Even if you negotiate, you must be prepared to agree to some level of allowance, because Amazon will not completely waive them. Here are the four main categories:
Base accrual is also known as marketing co-op, marketing development funds (MDF) or discretionary co-op. Amazon has stated in the past that this allowance helps cover activities that drive impressions and sales to products such as in store promotions, PR pitches, merchandising activities, emails, paid search and sponsored links to products, associate referrals, basic site placement and improvements to the catalog. In short, this allowance helps fund Amazon’s marketing initiatives and programs. It is typically around 10%, although I have seen vendors agree to more and even less. This is the allowance most vendors struggle to understand as it is not results-based and vendors do not see what they get from this.
With freight, the vendor can either negotiate Prepaid (They-Pay) whereby they pay for and manage the shipping or Collect (We-Pay) where Amazon pays for the shipping and shipments are made by Amazon’s third-party carriers. Freight allowance is more common in the US than Europe. Where Amazon pays for the shipping, the vendor funds this cost in the form of an allowance. The amount depends on the average cost of shipping for those products. The heavier and larger the items, the greater the freight allowance.
Amazon prefers to handle damages and dispose of these rather than sending them back to the vendor. To cover the cost of handling the returns and disposal, Amazon charges the vendor a damage allowance. This amount is typically similar to the average returns rate the vendor will have in the industry, although may be slightly higher factoring in Amazon’s favorable returns policy, where items don’t always come back in sellable condition. Vendors can also choose not to agree to a damage allowance and instead fund the cost of returning the item back to their warehouse. This is more common among vendors with high-value items, especially electronics.
Amazon will always push for the longest payment terms and the vendor will want the shortest payment terms. Payment terms typically range from 30-90 days, with the average being around 60 days. To incentivize Amazon to agree to shorter payment terms, the vendor can offer an early payment discount. This discount is usually anything from 1-3%.
Amazon may ask for some additional allowances to support initiatives such as, AVS (Amazon Vendor Support) aka SVS (Strategic Vendor Support), subscribe and save or get vendors to commit to a certain advertising budget. However, the four main agreements mentioned above (base, freight, damage, payment) are the ones you will undoubtedly need to address.
Editing Contract Agreements
While nothing is impossible, your chances are limited when it comes to renegotiating contracts in your favor. Unless you are a key vendor, in which case Amazon will do everything they can to keep you happy to avoid jeopardizing their relationship. Based on this, it is important you negotiate the best contracts from Day one.
Each year, Amazon will come knocking and ask for improvements to the current agreed-upon allowances. They will compare your account with comparable accounts to see if improvements can be made and will also review your overall profitability as an account. While you can negotiate these requests to increase the allowances, again depending on your size, you will find that you have to compromise slightly. Be prepared to have something in your back pocket so you are not bled dry and end up with an account that is no longer profitable.
When working with Amazon via wholesale, you need to ensure you have the margins to support this model and are including all allowances in your overall cost calculations. If you don’t, you might find out your account is not actually profitable and can no longer work with Amazon on the vendor side. The same goes with Amazon: You need to ensure you are offering Amazon good enough margins for them to remain profitable; otherwise, you may find Amazon canceling purchase orders and setting your products to obsolete.
Originally published on November 6, 2018, updated March 6, 2019
This post is accurate as of the date of publication. Some features and information may have changed due to product updates or Amazon policy changes.