Member Exclusive   //   May 16, 2024

Amazon Briefing: With rising fees, Amazon sellers are rethinking their Prime Day discounts

This is the latest installment of the Amazon Briefing, a weekly Modern Retail+ column about the ever-changing Amazon ecosystem. More from the series →

Amazon third-party sellers are bracing for a tough Prime Day as a slew of higher fees imposed by the e-commerce giant eat into merchant profits, curbing their ability to offer steep discounts. 

Many third-party sellers, who make up 60% of the sales on Amazon’s online marketplace, worry they won’t be able to discount as heavily as they have in the past during this upcoming Prime Day, one of the site’s biggest promotional days of the year. 

“Sellers are feeling the pressure mathematically to offer less deals,” said Jon Elder, CEO and founder at Black Label Advisor, which manages hundreds of brands. “The average seller is going to be looking at pulling back on discounts.”

The root of the problem, according to third-party sellers and the agencies that work with them, is Amazon’s new fee structure, announced earlier this year. For example, one fee that began in March imposes a levy on shipments sent to the company’s fulfillment centers if sellers don’t split up the inventory to be shipped around the country, a service previously done by Amazon for free. Another fee, which went into effect in April, charges sellers when their inventory runs too low. 

Amazon hasn’t announced the exact timing of when Prime Day will take place this year, but it’s slated to run in July. Amazon debuted Prime Day in 2015 to drive new Prime subscription sign-ups, a membership that currently costs $139 a year. Prime Day became so popular among shoppers that other retailers rolled out Prime-esque memberships of their own, all generally around the same time as Prime Day.

For sellers, it’s an event to raise brand awareness, boost product reviews and cement customer loyalty with exclusive discounts ahead of the crucial holiday season. But this year, that may be more difficult than usual for Amazon’s approximately two million merchants. 

Amazon has been ratcheting up seller fees for years, according to data from market research firm SmartScout, which analyzed Amazon’s FBA fee changes since the program was launched in 2006. For example, the FBA fees for standard-sized products have jumped 96% over the past 10 years, outpacing inflation. 

Such fee hikes have been big business for Amazon. The tech juggernaut earned $34.5 billion in revenue alone in the first three months of the year from fees it charges sellers, 16% more than the same period a year prior. Seller fees can eat up about half of the cost per sale, hurting merchant profits, according to Marketplace Pulse.

For SmartScout CEO Scott Needham, who is also an Amazon seller himself, the higher fees will translate to fewer discounts this Prime Day. 

“We just can’t go quite as low as we used to,” he said. Needham has already raised prices as much as 10% to help mitigate the fee increases. 

Needham isn’t alone. 

“Half of our clients are still going to be discounting, but in a more conservative way,” said Mark Power, founder and CEO of the agency Podean. “The other half may not be deploying discounting at all.”

To protect profit margins, some sellers are nixing discounts altogether, and instead investing more in social media channels to drive traffic during Prime Day, said Power. 

“Prime Day is an important sales driver for many businesses and we want to ensure sellers are set up for success,” Amazon spokesperson Kadia Koroma said in a statement to Modern Retail. “The majority of sellers will not be impacted by the low-inventory-level fee and our goal is to help those sellers who may be affected, evolve their business practices to avoid the fee entirely by maintaining sufficient inventory levels.” Amazon previously announced that it will provide an exception on low-inventory fees for products that are part of Prime-exclusive sales for the four weeks following Prime Day.

Bad news for bargain hunters
On top of the new fees, online shoppers are more deal-conscious than ever as sticky inflation pressures consumer spending power. American shoppers have been increasingly trading down to cheaper products across most categories, according to a report by Adobe that analyzed shopping data in the first four months of the year. 

Although recent data shows overall inflation has eased somewhat, separate data released Wednesday showed retail sales came in weaker than expected, a sign that high prices are hurting the American consumers’ purchasing power.

Bargain hunters may be disappointed to find that Amazon’s deals are less attractive than they were in prior years as merchants look to protect their margins. For sellers, that could lead to lost business. 

“Consumers are looking for deals, and that’s what Prime Day is all about,” said Dan Brownsher, CEO of the agency Channel Key. “The brands that offer deals are going to perform on Prime Day, and any brand that doesn’t – whether they’re worried about the additional fees or negative impact of their profitability – are the ones that are going to lose out.”

A new normal
In the lead-up, sellers are coming to terms with how higher fees will impact their overall business. 

Steven Pope, a seller who runs a retail arbitrage business, expects that Amazon’s new low-inventory fee will cost him about an extra $1,100 a month. 

Eva Hart, an Amazon brand owner and growth expert at Jungle Scout, who also sells coffee on Amazon, said her brand’s profit margins have slid as much as 8% in the last year due to fulfillment and storage fees imposed in 2023. That’s not even accounting for the new fees imposed this year. Hart said the barrage of new fees has pushed her to open a Shopify account, where the margins for her business are 115% better compared to Amazon. 

For some sellers, the fee structure has gotten too complicated, according to Gwen McShea, president of Lean Edge Marketing in Vermont, which has about 30 clients. In March, a pet care band McShea worked with exited Amazon’s third-party marketplace altogether because it couldn’t make a profit, she said. The brand could only afford to raise prices to a certain point, as Amazon penalizes sellers who have the same products listed more affordably on other web stores. 

All told, the burden of higher fees has had the effect of dampening sellers’ outlooks for this year’s Prime Day.

“I certainly haven’t had a lot of interest in Prime Day from our customers,” said McShea. “People’s appetite for it this year is pretty low.”

Amazon news to know

  • Amazon made its upfront debut to advertisers earlier this week, focusing mostly on content and less on ad tech.
  • The head of Amazon’s cloud computing arm, Adam Selipsky, is stepping down from his role.
  • Amazon is investing around $1.3 billion in its French operations.

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