According to the FTC, Amazon now takes nearly half of every dollar in sales from sellers who use its fulfillment services. Wow, that is quite a bold statement, and I can’t help but picture a high school bully stealing lunch money from scrawny kids. But is the situation really this dramatic? In the final part of my FTC lawsuit review, I’d like to go over the allegations concerning Amazon’s FBA (Fulfilled By Amazon) program.
Is Amazon Really Overcharging for Order Fulfillment?
The FTC also notes that Amazon has has raised its fulfillment fees by about 30% between 2020 and 2022. When you read these allegations about Amazon’s fulfillment services, it may seem like selling on the platform is a pretty bad deal for sellers. I try to be as objective as possible when expressing my opinion on these issues. While I can get behind the FTC’s stance on the Buybox issues, or the ever increasing cost of advertising, I tend to somewhat disagree with the allegation against Amazon FBA program.
First, the fact that sellers using the FBA program pay Amazon close to half of their sales in Amazon fees might be true. But that includes advertising, selling fees, order fulfillment, product storage, shipping, and part of customer service. When a company decides to fulfill the order themselves, they still need to cover shipping costs, fulfillment, packing materials, storage, and more. The difference is the money goes to other vendors, but these costs are real. And logistics costs sharply increased in the US over the last few years, not only at Amazon, but also major carriers and 3rd party logistics companies. Amazon still offers competitive rates when it comes to shipping and storage fees. Many small businesses would pay a lot more in fulfillment if they had to go with another carrier, because they can’t get the same UPS or Fedex rates as Amazon.
I think the real challenge lies in the Amazon prime model, and its fast free shipping on almost every item, no matter its size or price. Customers want low prices and hate paying for shipping. For example, a seller selling a 1lbs item for $15 will pay $5.40 for shipping, and about $2.25 in selling fees. That is already 51% of the sale price paid to Amazon, and excludes advertising, storage, labeling, or inbound shipping.
As the marketplace is becoming saturated, many products, once innovative and unique, turn into commodities. Price wars ensue and are killing many sellers’ profit margins. The area where I think improvement could be made is for larger multi-units orders. When a customer orders multiple units, Amazon charges the individual item fee times the quantity ordered. This prevents FBA sellers from making economies of scale. Amazon also makes it difficult to create multipacks (multiple units of the same products bought at once), which is one of the main ways 3rd party sellers can save on fulfillment fees. Both sellers and customers could benefit from a better policy for multi-units orders.
A World Without Amazon FBA?
After hearing about the lawsuit, I like to wonder what Amazon would be like without its FBA program.
The first thing that comes to mind is a significant reduction of the number of third party sellers on the platform. Only 6% of sellers make more than $100,000 per month in sales, with 56% earning less than $10,000. Many of the smaller sellers who don’t have their own warehouse or ability to work with a 3rd party logistics company may leave the platform. Others would need to invest in setting up their own logistic network. Such a massive drop in the number of competitors, and the potentially increased costs for sellers, could potentially drive prices higher. On the flip side, less competitors could bring the cost of advertising down for the remaining sellers.
Customers would be impacted as well. Items fulfilled by Amazon are known for their swift shipping and on-time delivery. Amazon is great at order fulfillment, which is key to its success. Without FBA, a Prime membership could lose some of its value, as customers might experience variations in shipping times and quality. Ultimately, this could cause Amazon to lose some of its loyal customers, who shop there for convenience and fast free shipping.
The FTC lawsuit raises some very valid points, although I hold some reservations about the claims regarding the FBA program. It will be very important to follow how Amazon will react. Massive changes in the way Amazon works with its 3rd party sellers can have a major impact on the ecommerce landscape. Customers will also be heavily impacted. With new large companies entering the ecommerce space such as TikTok and Temu, we can expect to see interesting developments happen in the next few years.