Amazon vendor negotiation: Best practices for enhanced 1P profitability

Andy Foot
04 juli 2024
Enhance your Amazon vendor negotiation skills with strategic planning, data analysis, and mutual benefit exploration to boost profitability.

Annual negotiations with Amazon for those operating as first-party vendors are crucially important to the profitability, and therefore success, of your year. 

Have a robust strategy

If you approach an AVN (Amazon vendor negotiation) without a solid plan, you will stand very little chance of getting an outcome you’re happy with. It’s important to have clarity around your goals and limitations right from the start.

“Success in Amazon vendor negotiations hinges on preparation and clarity. Without a solid plan, your chances of achieving favorable outcomes diminish significantly."

Sam Craig,
Board Member, Retail Data Partners

No matter how much negotiating experience you have, you should take the Amazon annual meeting very seriously and prepare intensively.

Let’s take a look at what it takes to achieve a positive outcome from your Amazon Vendor Negotiation (AVN).

Contra COGS negotiation

The primary focus of negotiation will revolve around Contra COGS (Cost of Goods Sold). These are the fees Amazon deducts from the product's cost price. This aspect constitutes a significant portion of the negotiation, approximately 80%. Typically, cost prices are fixed, and Amazon calculates its standard product margin (from cost price to RRP) using historical data.

Amazon expects this margin to remain consistent and its system flags any attempts by vendors to alter the product margin for new items. Due to rising material and logistics costs, vendors seek to increase their cost prices with Amazon to offset these additional expenses.

Coop agreements

Joint marketing activities from Amazon and its vendors are through arrangements referred to as "coop agreements." Tracking your data in these agreements is important, though Amazon doesn’t make this easy.

Amazon shifts some operational costs to vendors through accrual agreements. These include fees for freight services, damage allowances covering product damages, and return allowances.

There are also fixed payments vendors make to Amazon for specific merchandising opportunities, such as securing spots on promotional landing pages.

Vendors can receive discounts for reaching specific sales volume targets, encouraging them to keep Amazon’s shelves stocked with popular products. The discount could be a fixed percentage or increase with higher sales volumes.

To secure better terms during annual negotiations with Amazon, vendors should focus on meeting or exceeding the benchmarks set by Amazon in previous agreements. Demonstrating consistent sales volume, maintaining stock levels, and ensuring product profitability can strengthen your negotiating position.

Prepare your offers and limits

Before entering negotiations, establish your initial offer, counteroffer, and the boundaries you’ll stick to before you engage in talks. This groundwork will help you steer the discussions to your advantage (or at least away from your disadvantage) and help you avoid making concessions under pressure. For example, if you’re negotiating the cost price of a product, know exactly how low you can go while still protecting your margins—and don’t budge from this. Finally, it’s always a good idea to be able to reflect and assess any proposals before committing to them.

“Never agree to an offer during a meeting. Take your time and see if it fully fits your plan..”

Bastien Littek,
Co-founder, Marketplace Maniacs

Review past agreements

When preparing the document, take into account any previous negotiation rounds with Amazon. What commitments were made? Were there any that weren’t honored? Knowing what’s gone before will help you inform your strategy and ensure you don’t face any unwanted surprises. It will also help you identify patterns in Amazon’s negotiation tactics and might provide insights into how they might approach future discussions. You can use this information to prepare strong counterarguments and reinforce your proposals.

Take the initiative

Amazon often comes prepared with extensive presentations and data points. This means you need to be proactive rather than reactive. Prepare your data and proposals well ahead of time. This will ensure you’re able to lead the discussion rather than just respond to Amazon’s points. Crucial to this is an understanding of your product's market positioning, competitor pricing, and Amazon’s retail analytics. By anticipating its demands and framing your responses around mutually beneficial outcomes, you will be better placed to steer negotiations in your favor.

Know your numbers

Understanding your data at a granular level is crucial for making informed decisions during negotiations.

“Expect Amazon to have 10x the amount of KPIs & granularity. Know your numbers and ensure they are rock solid.”

Bastien Littek,
Co-founder, Marketplace Maniacs

Track profitability at the ASIN-level

For first-party vendors, profitability isn’t just about the overall account; it's also about understanding your products’ performance. Know how to track your sales and profit metrics at the ASIN (Amazon Standard Identification Number) level. Knowing which products are driving profits and which are dragging down your margins will help you to make robust data-driven decisions. By regularly analyzing the profitability of individual ASINs, you will be able to identify your underperforming products and take any corrective actions, such as adjusting prices or renegotiating cost terms.

Some Amazon Vendor services can be difficult to use and somewhat inflexible. Consider using monitoring tools such as Retail Data Partners to identify pricing errors and understand Amazon's margin support requests.

Be thoughtful about your offers

Creating a robust negotiation strategy involves more than just knowing your numbers; it’s about making strategic moves to protect and enhance your profitability.

Consider the long-term impact of your negotiation offers and think carefully about how each proposed change will affect your portfolio's overall profitability. This approach ensures that any concessions made do not disproportionately impact your margins.

Trade cost decreases for strategic increases

It’s important to understand your profit margins on each ASIN. This approach helps you manage your overall account margins effectively, even when some cost prices need to change.

Negotiating cost price adjustments with Amazon requires a deep understanding of your product's profitability and a well-prepared case for negotiations. Amazon is likely to reject your suggestions so be ready to highlight how any adjustments can drive higher volumes, based on the profitability of individual ASINs to maintain or improve overall account margins.

Consider also bundling cost price increases to ensure a timely review and make sure you use the tools available to demonstrate your commitment to the cost change.

Minimize your direct cost support to Amazon

Direct cost support, such as giving discounts directly to Amazon, can erode your margins. Instead, focus on joint cost-saving initiatives. Consider negotiating bulk-order discounts or looking at logistics efficiencies that benefit both parties. Some proposals might offer mutual benefits, such as shared marketing initiatives or co-funded customer acquisition strategies. This can help reduce costs without directly impacting your margins.

Doing Amazon vendor negotiations well requires a clear strategy, data-driven insights, and a focus on mutual benefits. Key recommendations include:

  • Strategic preparation: Define your offers and limits, review past agreements, and take the initiative.
  • Detailed data analysis: Understand your profitability at the ASIN level and monitor ASP fluctuations.
  • Thoughtful negotiation strategies: Balance cost decreases and increases strategically and prepare to lead the negotiation.
  • Mutual benefit exploration: Reallocate promotional funding effectively and focus on joint cost-saving initiatives.

By putting these strategies into practice, Amazon vendors will be better equipped to enhance negotiation outcomes, protect margins, and achieve greater profitability.

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Published on 04 juli 2024
Andy Foot
Andy Foot is the Content & Campaign Lead at ChannelEngine. With over six years of experience in the ecommerce industry, Andy thrives on staying abreast of the latest industry trends and insights.
Andy Foot