Understanding Amazon’s approach to annual vendor negotiations: NetPPM vs. FCF
Go beyond NetPMM to approach Amazon AVN with opportunities to grow and scale your brand.
How does Amazon view NetPMM?
Net Pure Profit Margin (NetPPM) is a metric that measures the profitability of a product sold on Amazon—calculated by subtracting total costs from total revenue and dividing the result by the number of units sold.
This metric is a starting point for Amazon to understand gross profitability at a manufacturing, brand and SKU level. And while contractual terms can influence NetPPM at all levels, when it comes to AVN, Amazon’s point of view is nuanced beyond the insights this measurement provides. Why?
Calculating for Amazon’s true goal: Free cash flow wins
Irrespective of NetPPM, Amazon’s goal during AVN is driving free cash flow (FCF) wins. FCF is a crucial metric for investors and management in assessing overall financial health, measuring a company’s ability to generate cash after meeting all its cash requirements.
At Amazon, FCF targets are evaluated at the vendor code level and adjusted based on the size of the vendor’s business. Because improvements in FCF represent incremental gains that contribute to overall profitability and financial performance, Amazon’s vendor managers aim to negotiate better terms each year.
These improved terms are intended to support the growth and scale of both Amazon and its vendors’ businesses, ensuring that Amazon can continue to operate efficiently while expanding its services and maintaining a competitive edge.
Negotiating better FCF terms for your brand
Amazon’s vendor managers aren’t assessed based on NetPPM. Instead, their performance is evaluated on their ability to generate Free Cash Flow (FCF) improvements through advancements in vendor terms. NetPPM is used by vendor managers as an incentive or motivational tool to engage vendors towards making changes that enhance FCF.
The primary terms they focus on to achieve FCF wins include:
- Damage allowance (DA)
- Freight allowance (FA)
- Marketing discretionary funds (MDF)
- Strategic vendor or account services (SVS/SAS)
It’s important to note that increasing your ad budget won’t create momentum to close AVN terms or contribute to FCF wins. While vendors often think of marketing funds as one bucket (advertising + MDF), Amazon Retail Vendor Managers don’t; retail & advertising are managed separately under distinct P&Ls.
