Vendor Negotiations with Amazon: A Conversation with Adam Ziemba and Vraj Dharia

Every year, Amazon Vendor Negotiations (AVNs) generate anticipation and challenges across the ecommerce landscape. Seasoned brands seek fresh inspiration for innovative strategies, while newcomers navigate the challenge of the negotiation process!

Our recent webinar dives into this discussion, with the aid of industry experts Vraj Dahria, Associate Director of Customer Success at CommerceIQ, and Adam Ziemba, Director of Ecommerce at Hamilton Beach Brands, Inc.

The article below highlights key lessons and audience questions addressed in this insightful conversation.

Amazon’s core incentives

Amazon has changed significantly over the past couple of quarters. The shifting core incentives are crucial during negotiations, and brand owners in the midst of AVNs need to explore how Amazon’s current focus differs from past years.

To this point, Adam referenced Amazon’s CEO Andy Jassy’s shareholder letter. Despite the changing priorities over the years, there’s currently a strong focus on –

• Profitability: evident in cost-cutting efforts related to reducing labor and optimizing inventory;

• Enhancing customer experience: with ongoing testing of new algorithms and Generative AI to make consumer purchases easier;

• Regionalizing the fulfillment network for faster deliveries; and lastly,

• Innovation: for both end consumers and vendors.

 

In negotiations with Amazon overall, brands should treat negotiations as conversations, not confrontations. There’s a lot of common ground to make both sides successful in those conversations.

Reaching common ground with Amazon

When asked what has been the hardest for brands to come to common ground on, the answer was clear – the experience of navigating Amazon’s frequent promotional events. Events like Big Deal Days and T11 are always a challenge, particularly in terms of allocation of marketing budgets. 

Amazon’s focus on driving visibility and traffic creates opportunities, like the football game during Black Friday offering prime promotional slots for products. Post-Turkey 11, managing inventory overload becomes crucial, considering Amazon’s commitment to profitability under Andy Jassy’s leadership. 

Vendors should anticipate conversations with vendor managers about moving inventory before year-end during this year’s negotiation cycle.

When it comes to reaching common ground with vendor managers, leveraging the SCORE framework (by Martin Heubel) is useful:

• S (Study Metrics): understanding your metrics, objectives, and Amazon’s focus, particularly on profitability;

• C (Create Alignment): finding common ground with vendor managers by aligning objectives and goals;

• O (Own Negotiations): taking a proactive stance, leading the negotiation rather than being passive;

• R (Resolve Problems): addressing issues and finding compelling numbers or arguments to support your agenda; and

• E (Enhance Conversation): continuing dialogue with vendor managers beyond negotiations to explore opportunities throughout the year.

Negotiations on marketing events

Navigating the challenge of limited data sharing from Amazon on marketing event results is a shared concern among brand owners. Despite running somewhat blind on the outcomes, brand owners face the critical task of strategically allocating marketing development funds. Insights on approaching negotiations on specific marketing events is important, balancing the need for support and investment without concrete performance data. Access to quality data, whether internally, through Amazon Vendor Central (AVC), or through services like CommerceIQ, is crucial!

The willingness to take risks aligns with Amazon’s emphasis on testing. Not all initiatives would succeed, and taking risks is a business decision to be taken within the team.

Retail media in the negotiations

A key challenge for brands is aligning brands’ marketing dollars with Amazon’s dual perspective in terms of P&L. While brands see one budget, Amazon separates it into retail and advertising P&Ls. 

Increased advertising spend won’t swing negotiations. Instead, the spotlight is on core terms and the Marketing Discretionary Fund (MDF) for tentpole event promotions. Additionally, vendor managers might propose smaller-scale investments beneficial for both parties during negotiations as Amazon’s business portfolio expands. Acknowledging the diverse industries and unique contexts of each brand,  brands should test various initiatives and observe what resonates best for them.

Balancing marketing and negotiations

AVNs involve the intricate balance between marketing spend, investment promotion, and inventory and cash flow management. In this context, it’s crucial to consider the impact on the Buy Box. Presenting Amazon with data on Lost Buy Box (LBB) instances and discussing how to feel supported and confident in the Buy Box (especially when its high), is a fair conversation.

Prioritizing objectives and budget allocation is key. Approaching 2024, brands should focus on initiatives that drive growth and profitability, while negotiating with Amazon.

Core metrics

While Amazon has different metrics for profitability, vendor managers are focused on PPM.  The priority is probably on keeping net PPM at least flat, if not growing year over year.

Depending on the segment, while brands commonly focus on net PPM, vendor managers negotiate for incremental free cash flow wins. Aside from recognizing Amazon’s unique incentives, adopting a three-figure approach provides clarity and strategic direction in negotiations. Here’s what it entails:

• Assessing the past year’s performance, including marketing package participation, ROI, and future targets

• Focusing on core terms, such as damage allowance, freight allowance, and SVS (strategic vendor services)

• Exploring additional opportunities, like improving supply chain efficiency and participating in bulk buys or Born to Run orders.

Fulfillment network participation

Fulfillment network participation is a crucial element in the landscape of AVNs on Amazon. It’s vital for vendors to recognize its significance as they engage in negotiations. That will help them gain insights that shape their relationship with Amazon.

Before delving into supply chain optimization, address outstanding shortages or chargebacks. Proactively submitting an open settlement template for these issues and initiating discussions with the vendor manager prior to negotiations provides leverage. 

This approach positions vendors in a win-win scenario—clearing backlog issues in exchange for testing Amazon’s supply chain efficiency projects. This strategy benefits both parties and fosters a more constructive negotiation environment. Shortages are not only a minor convenience as they impact every vendor and manufacturer working with Amazon. Proactively pushing Amazon for resolutions is critical, since they will impact the business.

Audience questions 

Q: Have you found ways to navigate the conversation to be able to claw back on terms in general?

The context behind this case involves a new Amazon team working to improve unfavorable terms inherited from their predecessor. Their goal is to renegotiate past agreements to better align with current business needs. 

While AVNs typically revolve around short-term objectives, renegotiating previously agreed terms requires a strategic approach. Convincing data is key, else Amazon may impose penalties on vendors delaying AVNs or resisting terms. The right strategy is to explore alternative offerings or concessions to incentivize Amazon to reconsider or amend previously agreed terms, fostering a mutually beneficial resolution. – Adam

Q: How would you frame up the net PPM being down when your actual margin dollars are up? Does that even matter at the end of the day? If it does, how do you get a win out of that?

If net PPM is declining, vendor managers might use it as a negotiation point to urge participation in specific programs as a counter.

However, if your margin dollars are increasing despite the net PPM decline, it suggests factors beyond  PPM percentage are contributing to profitability. It may be linked to significant price matching, possibly through liquidation on platforms like Warehouse Deals, highlighting the impact of channel pricing dynamics. – Vraj

Q: Is negotiating discounted bulk buys perceived positively, or is it considered counterproductive due to potential conflicts with profit margins and inventory targets, especially within specific categories?

While discounted bulk buys can create tension due to conflicting targets on profit and FCF, negotiating for them can be highly beneficial. While managing the office supply space during vendor negotiations at Amazon, securing bulk buys was a strategic move, especially during high-demand periods like back-to-school seasons. 

This approach helped Amazon secure inventory at reduced prices and compete with major retailers like Walmart. Born to Run, although modified, remains a valuable avenue for negotiating Amazon’s investment in specific inventory, presenting brands with strategic negotiation opportunities. – Vraj

It may all depend on the category, so it’s important to have collaborative conversations with vendor managers. The future of bulk buys on Amazon is also uncertain. It’s unclear whether Amazon will continue placing larger upfront orders at discounts, or shift to regular replenishment quantities at reduced prices. These unanswered questions will likely unfold in the coming years, with the outcome varying across categories. – Adam

Q: Payment terms: Can you provide insights on negotiating SAS/SVS percentage accrual versus flat fees, particularly considering the dependence on COGS?

When negotiating SAS/SVS (Strategic Vendor Services) percentage accrual versus flat fees with Amazon, it’s crucial to recognize Amazon’s preference for the percentage model. This helps scale contributions with business growth. 

However, focusing on a flat fee might be more beneficial, especially if you anticipate business growth in the upcoming fiscal year. Keep in mind that the SAS/SVS package is lucrative! Discussions around the vendor manager’s continuity can also be valid points to address during negotiations, considering the substantial financial commitment involved. – Vraj

Q: Has anyone had success moving to either a hybrid account or 3P account if new terms cannot be agreed upon during AVN?

Many brands are restricted by brand gating, making it challenging to engage in 3P business, especially if they’re already in a 1P relationship with Amazon. Amazon’s stance seems firm, generally not permitting 1P brands to engage in 3P. – Adam

Leveraging a shift to a hybrid model in negotiations with Amazon is tricky. Negotiations primarily center around generating free cash flow, so the situation is challenging. While discussing a hybrid shift may initiate talks, executing it proves complex. Some CommerceIQ clients engage in a hybrid model, blending 3P and 1P business. However, clear success stories in negotiating this with Amazon remain scarce. – Vraj

Q: How does Amazon view the Canadian market versus the US market when it comes to AVN and overall day to day profitability? How do you view geographies and performance in geographies and how that affects your overall negotiations?

Amazon tailors negotiations based on market specifics, especially in emerging markets like Canada. The Canadian market is smaller but growing, with Amazon aiming for 10 percent of the US market size. In negotiations for Canada, the sourcing of products is crucial. They can be domestically sourced or through the North American Fulfillment Network (NAFN) from the US. 

Emphasizing domestic sourcing in Canada is vital for profitability, as it impacts the Canadian P&L positively. Vendor managers may explore shifting sourcing from the US to Canada for specific SKUs, influencing negotiations during the AVN process. – Vraj

Q: Vendor Flex is also something to consider if particular SKUs are generating shortages. It’s quite rare to see shortages from a Flex node. Why do you feel like that’s become more important to them? How is it benefiting Amazon more this year than in past years in terms of participation in that?

Vendor Flex is integral for Amazon as it eliminates the need for them to stock inventory. Instead, the products ship directly from the vendor’s warehouse. It enhances profitability and cash flow for Amazon, with faster delivery and an improved consumer experience. While Amazon may incur labor costs in certain instances, vendors may also bear some of these costs, adding to the overall profitability benefits for Amazon. – Adam

Q: In terms of SVS, we struggled with quality in the program. Has anyone negotiated that in a way to ensure it is truly a value-added program?

Negotiating for improved quality in the SVS program with Amazon can be challenging due to the decentralized nature of vendor management. Success may hinge on building a strong rapport with Amazon’s manager and leadership team. However, the outcome remains uncertain, as addressing concerns about the program’s value may be challenging within Amazon’s structure. – Vraj

 

Watch the full webinar here!