Did you know that even when shoppers discover a product they like on a retailer’s website, 90 percent of them still compare it with Amazon’s offerings or prices? It shows how bug Amazon’s influence is in the ecommerce landscape and why they strive to offer the best deals to their customers. However, if you’ve been reading the news, you likely know of the antitrust lawsuit that has brought Amazon under scrutiny.
Having spent many years as a seller on Amazon in multiple countries, I was very interested to hear more about it. The lawsuit accuses Amazon of using monopoly power to push higher prices for consumers, overcharge its 3rd-party sellers, and stifle competition. I would like to go through the key parts of the lawsuit, and reflect on what can be done to improve the situation for all stakeholders, including customers.
There are three points in the lawsuit I find especially interesting:
1 – The tactics Amazon allegedly uses to ensure third-party sellers don’t offer the same items on other online channels at a lower price.
2 – The accusation that Amazon shows preferential treatment towards its proprietary brands and makes shopping confusing for customers by bloating search results with sponsored listings. This would also forces sellers to heavily invest in advertising if they want to generate sales.
3 – The allegation that Amazon puts pressure on sellers to use its logistics and fulfillment services, resulting in Amazon getting half of the sellers’ total revenues.
These are all complex issues, and I would like to go over the first point and address the other two in future articles.
Battle for the Buybox: How Amazon Maintains the Lowest Prices On Its Platform
Every Amazon seller knows it well: ‘Having the Buybox’ on Amazon can make or break a business on the marketplace. The BuyBox is a very important section on a product detail page, where customers can directly add items to their shopping carts and make a purchase. If you have the Buybox, it means that whenever a customer will add an item to their cart, the sale goes to you. However, when multiple sellers offer the same product on Amazon, only one can have the Buybox at a time. Amazon’s algorithm will determine which seller wins the Buybox, based on various factors including price, shipping speed, seller rating, and fulfillment method.
Now, enter the recent antitrust lawsuit against Amazon, claimingthat the tech giant contributes to higher prices by manipulating this Buybox and taking it away from sellers who offer lower prices elsewhere. For example, if a company sells a product on both Amazon.com and its own D2C website for $49.99, everything is fine. The company may decide to cut its price on their own website. After all, they don’t pay selling fees to Amazon when selling on their D2C website and enjoy better margins. So they can afford a small price decrease, to attract more traffic to their website. Sounds like a reasonable move, right? Unfortunately, the day they decrease the price by even one penny on their website, Amazon will take the Buy Box away from them. That is a huge deal for sellers; it has been estimated that losing the Buy Box means losing 40% of revenues on Amazon.
According to Amazon: ‘[…] some of the businesses selling on Amazon might still choose to set prices that aren’t competitive. Just like any store owner who wouldn’t want to promote a bad deal to their customers, we don’t highlight or promote offers that are not competitively priced. It’s part of our commitment to featuring low prices to earn and maintain customer trust, which we believe is the right decision for both consumers and sellers in the long run.‘
However, while it makes sense not to promote a bad deal to the customer, consider this: what if Amazon’s practices inadvertently prevents sellers from offering great deals on alternative channels? In some niches, Amazon third-party sellers already operate on razor-thin margins. Due to various fees, the cost of advertising and logistics, they simply can’t afford to offer better prices to their customers on Amazon.
On the flip side, they may be able to offer better deals on other channels, but in fear of losing the Buybox on Amazon, they keep their price the same across all channels. You could argue that they could just quit selling on Amazon. But that isn’t an option for many sellers, for whom Amazon is a huge part of their revenues. As one business owner in Alabama mentioned in a mybnc15 article, ‘If you’re a third-party seller, there’s just no other marketplace. There’s no comparable marketplace.’ He recounted how, in the past, he relinquished 20-25% of his revenue to Amazon, but now, it claims a staggering 50%.
So, does Amazon’s approach truly benefit customers by ensuring lower prices, or does it inadvertently prevent its third-party sellers from offering better deals on other channels? Judging this without concrete data is challenging, but it’s undeniable that some sellers grapple with the complexities of staying competitive, securing the Buy Box, all while maintaining healthy profit margins. The cost of selling on Amazon continues to rise year after year, compounded by the influx of new competitors into the marketplace. While an industry group contends that many large retail businesses employ policies akin to Amazon’s, this particular aspect of the lawsuit has received favorable reception from consumer advocacy groups.
What Can Be Done to Improve the Situation for Consumers and Third-Party Sellers?
A clear conflict of interest emerges in the Amazon ecosystem, involving Amazon itself, customers, and third-party sellers. Both sellers and Amazon aim to maximize their profits and market dominance, while customers look for the best possible deals and shopping experiences. What could be done to improve the situation?
The first thing that comes to mind is getting Amazon to stop imposing its third-party sellers to have the lowest prices online on their Amazon listings. This would take some pressure off sellers, who would in some cases raise their prices on Amazon, resulting in Amazon getting more revenues in selling fees. However, loyal Prime customers would not be happy with the higher prices, and may start shopping on other channels, which would hurt Amazon’s revenues. Technology makes it easy for Amazon to monitor prices over the internet, and having the lowest prices on some items, in addition to the fast free shipping, contributed heavily to their success.
Lowering selling fees for sellers would certainly help them in the short run, provide relief and increase their net margin. It would certainly make a difference for customers, as sellers would have an opportunity to offer better deals. But not only would this strategy hurt Amazon’s revenues (Amazon reported third-party seller service revenue of $117.7 billion in fiscal 2022, according to FactSet), I believe the result would be marginal for many sellers. Those with desirable, unique items, and a strong brand would see their profitability increase in the long run if Amazon lowered the fees. On the other hand, in the many commoditized industries, lowering fees would trigger price wars, as sellers would lower their prices to attempt to gain market share.
Lastly, I believe there is a pressing need for more transparency regarding the Buybox attribution algorithm. Sellers need to know who is getting the Buybox, on what criterias, and what they should do to win it. The current opaque system can be very frustrating for sellers, and customers need to make informed decisions regarding who they are buying from. Amazon did a great job providing customers with a pleasant shopping experience, it is necessary that they provide their sellers with a less frustrating selling experience. If it becomes impossible for sellers to compete on the marketplace, this will push them away and limit opportunities for innovation.
How Will Amazon React to These Issues and the New Competitors?
This is obviously a very complex issue, and it is very difficult to find a solution that meets everyone’s best interest. Amazon is still by far the leading online superstore in the US, but the competition is getting tougher. Walmart, once a relative underdog in the online world, is improving its channels year after year. New Chinese competitors entered the market, such as Temu and its very inexpensive items, but also TikTok and its promising TikTok shops model. In this economy, cost-conscious customers won’t hesitate to shop around, and may become less loyal to Amazon. I think this antitrust lawsuit raised very valid points, and I will address the two others in further articles. As we look ahead, the ecommerce world will keep evolving, and Amazon will be a big part of it.