3P First

I was surfing the web one evening recently when I stumbled upon a tweet about Amazon by the investor Kanyi Maqubela (@km):

The tweet is a screenshot of part of an email Maqubela had sent to a friend a couple of days after Amazon’s massive Q3 2017 earnings call. Amazon’s outlook has never been brighter. While he is correct that Amazon has done well at “venture investing”, he is missing one key piece of information in that is central to Amazon’s business strategy: When Amazon experiments in new markets, particularly in retail, they practice “3P First”.

What is “3P First”?

3P First is when Amazon starts selling a new category of products in their marketplace, but all of the sales are priced, fulfilled, and managed by a third-party seller. By opening up new product categories exclusively to third-party sellers, Amazon gets a bird’s-eye view of market testing at the expense of third-party sellers, thereby absolving themselves from significant upfront capital expenses. When demand proves to be solid for its third-party vendors, Amazon moves forward with its own first-party fulfillment, otherwise known as the friendly words: “Ships from and sold by Amazon.com“. At this point, Amazon exerts maximum control over pricing and negotiates extensively with vendors to reduce their wholesale prices and provide additional sales incentives.

Still not convinced?

Take a look at the 3P First strategy in action: Amazon’s next big retail play is rumored to be the pharmacy business. One year ago, Amazon announced they were testing the waters in Seattle by partnering with the local pharmacy chain, Bartell Drugs. If history has a way of telling the future, Amazon will more than likely partner with an existing pharmacy or pharmacy benefit manager (PBM), such as UnitedHealth’s OptumRx, or the largest PBM in the U.S., Express Scripts. Finally, once Amazon is able to evaluate the third-party pharmacy sales, they will make the decision on whether or not to sell direct, which in this example includes navigating a complex federal and state by state regulatory process.

Know of other companies who practice 3P First? Let me know. I am curious to find other examples.

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John Marbach

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10 2017

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