In 2000, Amazon opened its doors to third-party (3P) sellers. 3P sellers utilise e-commerce marketplaces like Amazon, eBay, or AliExpress to reach more consumers. However, these 3P sellers are not directly affiliated with the channel.
This move ushered in a new era for Amazon, leading to the launch of the marketplace’s Fulfilment by Amazon (FBA) service. For the broader e-commerce sector, the move granted entrepreneurs and brand builders worldwide access to what would rise to become the world’s largest online marketplace.
Since Amazon introduced 3P selling, the 3P model has steadily risen to represent the bulk of the marketplace’s total sales. According to statista.com, in the fourth quarter of 2023, 61 per cent of paid units on Amazon were sold by 3P sellers.
As discussed in a previous GreyScout blog, 3P selling continues to rise exponentially year-over-year, creating an ultra-competitive landscape amongst sellers on e-commerce marketplaces. This high level of competition has seen e-commerce retailers selling brand-name products at considerable discounts to build their reputation with positive reviews, increase sales volumes, and manipulate the algorithm to win the ever-important Buy Box.
Naturally, consumers enjoy steeply discounted brand-name products. However, while low prices can be great for consumers, they can damage a brand’s reputation and how the market perceives its products. This sheds light on the issue of price erosion.
What Does Price Erosion Mean?
Price erosion occurs when a brand is forced to lower the price of its products due to market forces such as increased competition, changes in consumer demand, and other factors. When 3P sellers sell authentic branded products without the brand’s consent, the product’s perceived value can take a hit in the consumers’ eyes.
As 3P sellers undercut a product’s Minimum Advertised Price (MAP), the brand is forced to lower its prices to drive customers back to it.
The Rise of Unauthorized 3P Selling and Price Erosion
As e-commerce marketplaces take on more and more 3P sellers and competition grows fiercer, brands operating in the space become more susceptible to price erosion. Persistent price erosion can affect consumers’ perception of lower product or service quality.
While not all third-party (3P) sellers cause concern, potential bad actors can further trigger the price erosion on eCommerce marketplaces by listing products that could be parallel imports, damaged, or potential counterfeits.
While established brands are driven to develop quality products that build lasting credibility and trust with consumers, this is not the motivation of many 3P sellers in the e-commerce space.
3P sellers often do whatever it takes to move their products, including violating a brand’s pricing policies. This triggers a “race to the bottom” that shows products usually sold by authorised retailers at premium prices sold for pennies on the dollar by unscrupulous 3P sellers.
A great example of this type of potential price erosion was in 2020 when premium footwear company Birkenstock discovered that one of their products, typically priced at USD 135, was sold by a 3P seller for nearly half the retail price. Birkenstock responded by encouraging consumers to refrain from buying from unauthorised 3P sellers.
How to Protect Against Price Erosion
When a brand is experiencing price erosion of its products, it likely indicates an issue, or “leak”, within its supply chain and distribution strategy.
While e-commerce businesses can implement a wide range of brand protection strategies to limit unauthorized 3P selling, just one perpetrator can fall through the cracks and send the value of a product into decline. Price erosion is often a sign that a brand needs to take greater control of its brand, products, and distribution channels.
Brands should adopt a selective distribution model to select authorized retailers carefully. To avoid price erosion, brands should enter business relationships only with reputable sellers and manufacturers committed to maintaining brand standards. They should also establish pricing policies that are strictly enforced. 3P sellers should know that if they violate a MAP policy, they should expect to face legal consequences.
The Bottom Line
3P selling continues to represent most of Amazon’s sales as the number of 3P sellers rises yearly. It is inevitable that amongst these thousands of new 3P sellers entering the e-commerce game, many will be willing to violate pricing and distribution policies to undercut the competition and profit at the cost of a reputable brand’s image. By utilizing brand protection software like GreyScout, brands can establish a line of defense against the rising threat of unauthorized 3P sellers. With brand protection, they can track their products and distribution channels to ensure violations of pricing policies are identified and acted upon to avoid price erosion.
