Brands on TikTok Shop face increased fees & an uncertain future

“It was just really, really good for a long time until it wasn’t,” said McIntosh.

There are a few reasons why sales have slowed down. For one, going viral turned out to be a double-edged sword as counterfeiters looked to sell cheaper copycats of his Cell Phone Seat. McIntosh once found 67 Cell Phone Seat listings when he checked eBay, none of which were his, he said.

What’s more, TikTok ads are less effective and getting more expensive to run, said McIntosh. That bites into a seller’s profits since TikTok ads fatigue much faster than those on other platforms. An ad that runs on Facebook and Instagram can run for years and still generate sales, whereas on TikTok an ad lasts only three weeks to four weeks, according to McIntosh. Meanwhile, some of the subsidies that lured McIntosh to the platform in the first place have been cut back as the company reduces spending.

All told, the TikTok Shop landscape has changed dramatically since McIntosh joined the platform as more sellers sign up, intensifying the competition, and TikTok looks to compete with the likes of Amazon.com. As the platform gets more competitive, fees to participate are only increasing. As such, brands and merchants on TikTok Shop are bracing themselves for when social media company will likely roll back benefits even more — all while a threat of an outright U.S. ban lurks on the horizon.

When TikTok launched the U.S. version of TikTok Shop in September, the social media company sent a message far and wide that its platform was no longer just a place for Gen Z to scroll for goofy lip-synching videos. TikTok had ambitious plans to crack the code of social commerce in the United States and become a retail juggernaut. (TikTok has already opened online marketplaces in Southeast Asia and the U.K.)

But seven months in, the social media app’s 170 million users are continuing to navigate the marketplace’s growing pains amid its murky future. 

As of April 1, TikTok charges sellers 6% of the price of each order, up from the bargain rate of 2% last year when the platform was relying on subsidies and other incentives to convince merchants to sign up. TikTok’s cut will climb up to 8% in July. By comparison, Amazon’s seller fees generally range from 8% to 20%. The fee changes – and the threat of more to come – have been exacerbated by recent legislation that has thrown TikTok’s future into jeopardy. 

On Wednesday, President Joe Biden signed a bill into law that requires TikTok’s Chinese parent company ByteDance to sell its stake in the app within 9 months to a year or face a U.S. ban. TikTok has said it plans on fighting a ban in the courts, calling the law unconstitutional. ByteDance is also reportedly considering selling a majority stake in TikTok to other companies, according to The Information.

The end of TikTok Shop’s “too good to be true” discounts to merchants represents a win-or-bust moment as the social media app tries to grow its commerce business beyond ultra-cheap knickknacks and Chinese dupes.

Last year, TikTok was struggling to lure brands to its marketplace, with fewer than 100 U.S. merchants selling products on the app, The Information reported. The app TikTok Shop merchants use to open an account on the platform — whether they’re independent sellers or big brands — has more than 240,000 active users in the U.S., according to Data.ai, suggesting that TikTok has been succesful at attracting more sellers. Indeed, ByteDance reportedly set its 2024 targets to as much as $17.5 billion in gross merchandise volume for its U.S. TikTok Shop business, per Bloomberg.

Now, TikTok has to prove if it can keep the sellers and shoppers it has brought on.

Mounting seller fees

The fee increase leaves businesses on TikTok with one of two options, according to Mary Pilecki, a Forrester analyst covering loyalty marketing. They can absorb the cost of the fee, reducing profitability. Or, more likely, they can pass the cost onto the consumer in the form of price increases, special fees or a change in loyalty program rewards. 

“Passing the fees on to the consumer in any form will likely have a negative impact on loyalty,” Pilecki wrote in an email. 

That could be a pain point for TikTok’s predominantly Gen Z user base. “Gen Z consumers tend to be price conscious, and very digitally savvy, so they’re the sort of people who would price compare,” said Daniel McCarthy, assistant professor of marketing at Emory University’s Goizueta School of Business whose research areas include customer loyalty. “If they find that other other channels offer better prices, they would be both incentivized and uniquely able to make that sort of switch.” Nearly 45% of TikTok users are Gen Z, according to data from Capital One. 

TikTok isn’t doing away with subsidies entirely. The social media app still pays for shipping on orders over $20, for example. New customers are also eligible to receive 50% off coupons on their first order when they open the app. Plus, discounts abound during holiday promotions.

But as seller fees are creep up, it’s a sign that TikTok may eventually do away with other benefits, such as covering the costs of shipping, said Cell Phone Seat’s McIntosh, a subsidy that has been a lifeline for a small business owner such as himself.

TikTok did not respond to specific queries from Modern Retail, including whether other subsidies, such as free shipping, are on the chopping block. 

“When you’ve got a $29 product and shipping costs five bucks, that’s a massive margin on your product,” said McIntosh. “If they stopped paying for shipping that would almost eliminate my ability – based on the current margins – to run most of our ads that we run.”

A changing TikTok seller strategy

While McIntosh said he doesn’t plan to raise prices – he has actually been experimenting with lowering the cost of his Cell Phone Seats to as little as $19.99 per unit to drive sales – the fee changes may force him to advertise even less on TikTok, McIntosh said. That would be bad for business as TikTok videos drive sales to his Amazon storefront. 

“The closer TikTok gets to being like Amazon, which they want to be, the less I’m going to focus on TikTok,” said McIntosh. “For every one unit we sell on TickTock, we sell two on Amazon.” McIntosh said sales from TikTok Shop account for 30% of his overall revenues, while the rest comes from his Amazon storefront.

Even with subsidies, it isn’t cheap to run a TikTok Shop, according to Yuriy Boykiv, chief executive officer at Front Row Group, an e-commerce agency that works with brands on their TikTok Shop strategies. That’s largely because the business model relies heavily on sending samples to influencers to hawk products in videos that will hopefully go viral. In other words, the demand is unpredictable. 

“You have to send your products to thousands of affiliates to drive meaningful business,” said Boykiv. “Whereas, on Amazon for instance, Amazon’s fulfillment is perfected. Demand is planned for you in most cases.”

The combination of paying influencers, warehouse fees and advertising to sell goods on TikTok Shop can total around 50% to 60% of the product’s retail price, said Boykiv. 

It’s an expenditure Cell Phone Seat’s McIntosh knows all too well. In lieu of running TikTok ads, McIntosh has focused on getting his product out to as many affiliates as possible to generate more awareness and sales. “You really need hundreds of videos per month posted — either by you or affiliates — to generate sales,” said McIntosh. “Every once in a while you’ll get a unicorn video that goes viral, but that is extremely rare.”

A top-grossing electronics seller on TikTok Shop that spoke to Modern Retail on the condition of anonymity said their business has found success on the platform. (The person declined to provide specific sales figures.) Yet as a tighter margin business selling lower-priced items, the squeeze on their revenues is being felt, the person said. As such, the company has raised prices on some products. The merchant also cut back on what it pays influencers. 

Even though TikTok’s revised 6% seller fee is still less than competitors like Amazon, that’s not accounting for the platform’s affiliate program, which provides much of a seller’s revenue, the person said. That affiliate rate is billed to a seller when TikTok doles out payments. 

“That 6% seller fee is not actually 6%. It’s 6% plus the affiliate rate that we’re setting, and the affiliate rate has to be attractive, otherwise that large proportion of sales is at risk,” the person said. “I think the rate right now is a little higher than Amazon, which is a little scary.”

For some brands, the fee change is simply the cost of doing business with TikTok. That’s the perspective of Lisa Guerrera, an influencer and the founder of TikTok-viral beauty brand Experiment. 

“Look, an increase is an increase, so I’m not super excited about that,” said Guerrera. “But the reality is it’s not something that would scare me away because I think the upside of TikTok Shop is pretty exciting.”

Guerrera isn’t alone. 

“This is TikTok’s opportunity to capture market share and ultimately become like a retailer, so they will play like the retailers play,” said Jeremy Lowenstein, chief marketing officer of makeup brand Milani Cosmetics. “At some point, brands will have to absorb whatever the fee structure is to play.”