How Amazon brands are adjusting to a new normal as fee changes squeeze margins

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Amazon sellers are under pressure this year, as they are feeling squeezed by a variety of fees.

Earlier this year, Amazon unveiled changes to the fees it charges its third-party sellers. The fee changes impact sellers that utilize the tech company’s service Fulfillment by Amazon, also known as FBA. In exchange for various fees through FBA — which can include charges for listings, inventory storage, shipping and advertising — sellers get access to Prime shipping, which makes their products all the more enticing to customers. 

Another fee that began in March imposes a surcharge 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 free of charge. Yet another fee, which went into effect in April, charges sellers when their inventory runs too low. In fact, it sparked such outrage among sellers that Amazon implemented a grace period for the fee to help merchants adjust to it, Modern Retail previously reported.

To help offset some of the increases, Amazon actually lowered some of its fees, including the cost to fulfill orders. But it only partially balances out the fee changes, according to Rob Hahn, COO at e-commerce accelerator Pattern. He cited a West Coast supplement client of his, which saw shipping costs go up as much as $0.55 per unit, while the FBA fee reduction was only $0.17. 

“That might not seem like a lot, but for some of these sellers, that’s their entire profit margin,” said Hahn.

All told, frustrated sellers and the agencies that work with them say Amazon is increasingly placing the burden of its operating costs onto small business owners. As a result, more Amazon brands are figuring out how to adjust to this new normal. From switching up their product offerings to testing out new platforms, sellers are scrambling to offset the new fees and protect their bottom line while positioning for future growth.

“Where we have made some targeted interventions through new fees, we are also seeing sellers adapt and benefit from the changes,” Amazon spokesperson Kadia Koroma said in a statement to Modern Retail. For example, sellers that have higher levels of inventory have seen an increase in unit sales, Koroma said. Moreover, the introduction of Amazon’s inbound placement fee gives merchants more control to reduce fees while enabling the company to distribute inventory closer to customers.

“Collectively, on average, this year’s fee changes are significantly less than those announced by other major logistics service providers, and many sellers will see a decrease in the average fees paid to Amazon per unit sold,” said Koroma.

Still, customers are paying the price. Craig Leslie, founder of The Bean Coffee Company gradually raised prices by about $2 per pound over the past five months. Like many merchants, the cost of raw goods — in Leslie’s case, the price of coffee beans — has gone up alongside Amazon’s FBA fee changes. Thirty-five percent of 2,000 Amazon sellers surveyed by Jungle Scout cited increasing cost of goods as a top concern in 2024. 

“We were forced to raise prices, which was not just because of Amazon, but it helped us absorb that additional fee increase,” Leslie said. 

But for many merchants, raising prices isn’t enough to keep business afloat. At a time when shoppers are more cost-conscious than ever, brands are trying to hold the line on prices by trimming expenses wherever they can. 

One way brands are doing that is by whittling down their catalog of products to simplify operations. 

“If a brand has a lot of different product SKUs, they might need to narrow down their assortment for Amazon because the inbound placement fees are very expensive,” according to Lori Fields, founder of digital marketplace agency Jay Street Partners. 

A California-based hospitality brand, which asked to remain anonymous to preserve their relationship with Amazon, said it’s gotten too difficult to figure out the new fee structure, especially when it comes to managing inventory levels. As a result, the business is trimming down its offerings from 300 to 200 items to help take out some of the guesswork.

Catalog sizes have been shrinking for smaller businesses. In 2023, the number of sellers listing just one product on Amazon increased more than 300% compared to the previous year, according to Jungle Scout.

To Fields, the FBA changes could also deter sellers from introducing new products, especially food and beverage merchants or anyone who sells products with frequent inventory replenishments.

“Let’s say you have five flavors. Maybe you’re just going to do three flavors because you just can’t support all of that inventory and all of that cost,” Fields said. She added that some of her food and beverage clients are trying to circumvent the inbound placement fee by switching to Amazon’s Fulfilled by Merchant, or FBM, for slower-moving products. It’s a trade-off because those products won’t get Prime shipping, which oftentimes can lead to a decrease in sales.

Merchants that peddle heavier goods on Amazon will disproportionately feel the brunt of the fee changes, said Lesley Hensell, a co-founder of Riverbend Consulting, which advises Amazon sellers. A New York-based home goods client of Hensell’s is scaling back on selling heavier items through FBA. Even though the brand expects such products to see a 50% drop in sales, it’s still cheaper than operating business as usual due to higher fees for bulky items.

According to Rob Hahn, COO of the e-commerce accelerator Pattern, more sellers may turn to other platforms for relief. For example, a Florida-based sports and outdoor goods client, which sells products that tend to be on the bulkier side, recently started selling items on TikTok Shop, where the seller fees are comparatively less expensive

“It very, very quickly racked up hundreds of sales,” Hahn said. “It’s a pretty large product and at a higher price point, so it was a surprising lift on something that I would not have pegged as being super successful on a platform like TikTok Shop.”

Twenty percent of Amazon brands said they plan to expand to TikTok Shop in 2024, according to Jungle Scout. More broadly, Amazon businesses said expanding to more e-commerce platforms was a top priority for them this year. 

Still, to some sellers, the FBA fee changes are just the cost of doing business on Amazon’s marketplace. They might even be beneficial for helping Amazon businesses optimize operations.

In fact, for The Bean Company, raising the prices led to more sales than before. “I thought we would get some blowback, but we actually saw the opposite, I think because we were a bit underpriced to begin with, so we’re starting to see more units sold,” Leslie said.

As he put it, “It’s a headache in the beginning to figure out, but ultimately my business will run smoother and that’s going to make the customer happier.”