Amazon is taking half of each sale from its merchants
Grappling with slowing sales growth and rising costs, Amazon. com is squeezing more money from the nearly 2 million small businesses that sell products on its sprawling online marketplace.
For the first time, Amazon’s average cut of each sale surpassed 50% in 2022, according to a study by Marketplace Pulse, which sampled seller transactions going back to 2016.
The research firm calculated the total cost of selling on Amazon by tallying the commission on each sale, fees for warehouse storage, packing and delivery, as well as money spent to advertise on a site where hundreds of millions of products jostle for attention. Paying Amazon for logistics services and advertising is optional, but most merchants consider these a necessary part of doing business.
Sellers have been paying Amazon more per transaction for six years in a row, according to Marketplace Pulse, but were able to absorb the increases because the company was attracting new customers and rapidly increasing sales. That abruptly changed when pandemic lockdowns eased and people began traveling and dining out again, sucking the oxygen out of online shopping. Last year, Amazon generated the slowest sales growth in its history.
Consumers are far more dealconscious than they were during the pandemic, so Amazon merchants are loath to raise prices. That reality, along with the steady increase in fees, means many sellers are struggling to make money - prompting some to handle shipping themselves and to spend less to advertise on Amazon’s site.
“For these small businesses, it’s getting harder and harder to be profitable because they are spending more and more money on Amazon fees,” said Juozas Kaziukenas, Marketplace Pulse’s founder and chief executive officer. “Amazon might be tempted to keep increasing fees because it’s in a tough spot, but you have to reach some kind of equilibrium.”
Amazon sellers choose to use its logistics services because, on average, they cost 30% less than alternatives from other shipping companies, and merchants are free to buy advertising anywhere, company spokesperson Mira Dix said in an emailed statement. The fees Amazon charges reflect the company’s own costs and investments, she said.
“Many selling partners have built and run their businesses without advertising,” she said. “If they choose to advertise their products, they have many service providers to choose from. Sellers are not required to use our logistics or advertising services, and only use them if they provide incremental value to their business.”
Maintaining profits as sales slow presents a major challenge for Amazon’s core online retail business. Without Amazon Web Services, the profitable cloud computing business, Amazon would have posted a $10 billion operating loss last year. CEO Andy Jassy is trying to restore the balance by cutting 18,000 corporate jobs and narrowing the company’s focus to key growth areas rather than investing in a scattered portfolio of new devices and services.
In response to rising costs, Amazon increased the annual price of a U.S. Prime subscription by $20 in 2022. Last month the company announced plans to levy fees on online grocery orders of less than $150. But charging customers more is risky. Merchants, many of whom generate 80% to 90% of their sales on Amazon, are less likely to rebel.
Chuck Gregorich, who sells fire pits and outdoor furniture, says turning a profit on Amazon is getting harder. One of his popular fire pits costs $200, of which Amazon takes $112 for its commission, warehouse storage, delivery and advertising. That leaves him with $88 to pay the manufacturer, ship the product in from China and cover his overhead. He expects his Amazon logistics expenses to increase up to 8% this year due to a new fee structure that took effect in January and additional changes scheduled for later this year.
“I’ll have to raise my prices and I already raised them a lot last year,” said Gregorich, who is based in Eau Claire, Wisconsin.
The higher fees have compelled Gregorich to do more logistics himself. Other carriers can deliver fire pits for $28, he said, or about half what he pays Amazon to deliver bulky items. Amazon’s delivery service often takes longer than the two days customers expect, so it’s no longer worth paying a premium, he said.