Surviving the Matrix: Amazon's Marketplace Evolution Demands Smarter KPIs

Key Takeaways for Ecommerce Brands:

1. Amazon is shifting away from first-party (1P) relationships, with 3P sellers now accounting for 62% of units sold. This strategic pivot allows Amazon to maximize revenue through seller fees and advertising while reducing inventory risk.

2. Traditional marketing metrics like ROAS and blended CAC cannot measure true profitability on Amazon. Brands need to adopt more sophisticated metrics like POAS and nCAC to accurately assess marketing effectiveness.

3. As the cost of advertising on Amazon continues to rise, brands must implement accounting solutions designed for ecommerce to maintain sustainable margins in this marketplace. 

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It was framed as an optimization measure. “We’ve made the decision to stop sourcing products from your company as part of our regular review of product offerings, and a strategic realignment to optimize our operations” – this was the message Amazon sent numerous Vendor Central sellers (1P) last September, notifying them that the termination will go into effect on November 9, 2024.

In the same email, Amazon's team encouraged brands that relied on its Vendor Central program to transition from being a 1P vendor to a 3P seller on Seller Central. Fast forward five months – and the dots are starting to connect. According to Amazon’s latest earnings report, 3P sellers accounted for 62% of units sold in Q4 2024, an all-time high since the ecommerce giant launched its third-party marketplace 25 years ago.

The share of paid units sold by third-party sellers on Amazon has increased significantly over the years. Between 2013 and 2016, third-party unit share grew by a percentage point per quarter for eleven straight quarters. By the end of 2020, 3P sellers were responsible for 55% of Amazon’s sales. Now, as 3P sales are on the verge of a two-third share, Amazon's decision to terminate first-party relationships can be understood as part of an overall strategy.

“This is another step in Amazon’s ongoing strategy to shift smaller Vendor Central (VC) accounts toward Seller Central (SC),” said Dan Brownsher, Executive Chairman at Channel Key, an Amazon marketplace consulting agency. “This allows Amazon to focus its VC resources on larger brands, while pushing smaller vendors to SC, where Amazon avoids inventory risk. It’s a clear indication of Amazon’s evolving priorities in how they service brands.”

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How Amazon's Revenue Priorities Are Impacting Brand Profitability

Amazon's top priority appears to be collecting seller fees and advertising revenue. Together, these two revenue streams are becoming the core of Amazon’s ecommerce operation. Per data from Marketplace Pulse, an ecommerce intelligence firm, third-party service fees and ad revenue combined are expected to overtake Amazon’s first-party revenue as a percentage of overall revenue within three years. 

Advertising, in particular, has been a boon for Amazon. The company's last earnings report revealed that:

• 2024 was the first year that Amazon’s ad revenue topped $50 billion, reaching $56.2 billion – up from $46.9 billion in 2023.

• Amazon projects ads will drive $69 billion in revenue in 2025.

• Amazon’s advertising business is growing faster than the company’s overall growth; in 2024, ad revenue grew 18% year-over-year compared to an 11% year-over-year growth from overall net sales.

The growth in ad revenue is mainly a result of increased cost-per-click (CPC) and cost-per-mille (CPM). This is where it gets tricky for brands. “By definition, when you increase the cost-per-click (CPC), the return on your marketing investment decreases,” said Erik Lautier, an ecommerce expert at global business advisory firm AlixPartners. “In some cases, that may mean it becomes unprofitable, and that can be highly impactful for retailers.”

Recalibrating Your Financial Compass for Amazon Success
Preventing a situation where your marketing investment becomes unprofitable requires in-depth knowledge of ecommerce accounting. Most DTC marketing agencies use two predominant metrics to measure the effectiveness of ad spend:

• Customer acquisition cost (CAC) – i.e., the amount a brand spends, on average, to acquire a new customer.

• Return on ad spend (ROAS) – the revenue generated by an advertising campaign relative to the amount spent on that campaign.

Unfortunately, many DTC marketing agencies continue to emphasize ROAS improvement. This approach has one drawback: ROAS doesn't translate directly to profitability. It's entirely possible to achieve an impressive ROAS while generating minimal profit or losing money on your advertising campaigns. This can happen because ROAS doesn't consider the cost of goods sold (COGS), overhead expenses, and various operational costs.

When these essential costs aren't factored in, your break-even ROAS –the point at which you break even on acquiring a customer – can't be accurately calculated. Another issue that often gets neglected is the lifetime value (LTV) per SKU, which may result in excessive spending on attracting customers who buy the least profitable SKUs.

To assess the profitability of their advertising spend, brands should prioritize POAS (profit on ad spend) over ROAS. In other words, they need to determine how much profit they add to their net bottom line (or at least per their contribution margin) for every $1 spent on advertising.

Additionally, brands must consider the appropriate type of CAC to address scalability. There are two primary types of CAC:

• Blended CAC (also known as normal CAC) – i.e., the costs of acquiring new customers as well as retaining existing ones.

• nCAC (new customer acquisition cost) – focuses solely on the expenses incurred in acquiring new customers.

Brands should consider tracking their nCAC to gauge the effectiveness of their paid advertising investments.

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Protecting Margins in the 3P Era: Why Advanced Accounting Is Now Non-Negotiable

Amazon’s shift toward a 3P-dominated marketplace, fueled by seller fees and ad revenue, is making it increasingly expensive for brands to acquire new customers. As advertising costs continue to rise, brands that still rely on outdated metrics like ROAS and blended CAC risk seeing their margins erode. Instead, a profitability-first approach – one that prioritizes POAS and nCAC – has become essential for long-term success on Amazon and beyond.

This is where ecommerce accounting solutions like Finaloop play a crucial role. Providing real-time insights into a brand’s financial health, Finaloop enables businesses to track profitability at a granular level, ensuring that every marketing dollar spent contributes to sustainable growth. By leveraging such solutions, brands can confidently adjust their advertising strategies to maximize returns, and position themselves to weather Amazon's seismic shift.