If you’re selling on TikTok Shop, or if you consider doing it, you’ve probably heard the big news: Referral fees will increase from 2% to 8% per transaction. TikTok Shops will also cut some of the subsidies they previously offered. While some immediate reactions following the announcements were dramatic, with people claiming the death of TikTok Shop, I feel that most people still see the platform as a viable channel.
My opinion is that TikTok Shop is a unique channel, with a strong value proposition. The lower fees were a tactic to increase the number of sellers on the platform and grow the marketplace. However, it isn’t for every business and some will be more impacted by the new fees than others. I also believe that the importance of the subsidies cut was downplayed, and will have significant consequences this year.
Let’s see how these fees compare with other marketplaces and what I think will be the consequences for businesses.
TikTok’s Announcement and How Referral Fees Compare with Other Marketplaces
Let’s start with the announcement, for those of you who may have missed the news. As you may know, TikTok Shop is working towards scaling its US business to a projected $17.5 billion. The recent announcement from TikTok stated that starting July 2024, the fees will increase from the current 2% to 8%, with a temporary hike to 6% starting April 2024. This gradual increase aims to ease sellers into the new structure and reflects TikTok’s strategy to align its fees with industry standards, ensuring value continues to be delivered to customers. TikTok Shop is expected to take substantial losses despite high consumer spending within the app. The fee increase is part of their plan to improve financial performance.
No one likes to hear about taxes increasing, I get it. But how bad is it really? Several sources reported that the newer fees are aligned with industry standards. I looked at referral fees across various platforms, and it seems like even with this hike, TikTok Shop is still quite competitive. For most product categories, Amazon, Walmart, and eBay charge 15%. For others, the standard is 8% or 12%. In a few cases, and for Etsy, the fees can be at 6.5% or lower. But Amazon and Walmart charge 20% for some product categories.
What Sellers Will Be the Most Impacted?
To be fair, this fee increase was expected. It is typical for marketplaces to start with lower fees to attract sellers, then gradually increase fees over the years. The first obvious consequence for sellers is that their profit margin will decrease. The options for them will be to 1 – Have a sale price that is high enough that they can work with healthy profit margins, 2 – To ensure advertising costs and costs per conversion are low enough, or 3 – A combination of both.
Strong brands who can afford to sell their products at high prices will have an advantage. Selling commodities and off-brand items will become more difficult to sell, as there are frequent price wars on marketplaces when the only differentiator versus other products is the price. When customers value other things than just low pricing and free shipping, brands will have a significant advantage. Conversely, to stay competitive when fees are increasing, companies will need to optimize their expenses and the cost of sales. This makes organic traffic a lot more valuable, rather than relying on paid ads or influencer marketing.
Essentially, a strong brand and value proposition is more important than ever, and a brand with an organic following will have an advantage over competitors that can’t attract organic traffic.
TikTok Shop’s Cuts in Subsidies Will Impact Many Companies’ Strategies
Beyond referral fees, I believe the cut of shipping costs and deals subsidies was downplayed by several sources, but it will have a strong impact on sellers’ strategy in 2024.
Heavily discounted shipping rates did not only help sellers’ bottom lines, but it also encouraged experimentation with the channel. TikTok Shop is still relatively new. While some brands enjoyed success quite early on the platform, in industries like fashion or beauty, TikTok Shop is still exotic to many brands that sell on established channels like Amazon. Addressing a new channel is taking a risk, but reduced fees significantly decreased this risk. Brands were a lot more likely to generate a profit, and evaluate the potential for long-term success on TikTok Shop, once the fees are at a more normal rate.
I have a feeling that this announcement will discourage companies in more conservative industries from attempting to sell on TikTok Shops, as the risks will be higher. Everything is moving really fast, and there is no reliable benchmark yet on TikTok Shop. Making the decision to sell on TikTok will become more difficult, but the first mover advantage can be real on marketplaces and social media. The data and experience those who joined TikTok Shop early gained will be valuable to make future decisions.
In conclusion, the recent changes in TikTok Shop’s fee structure and the reduction of subsidies were expected by sellers, but still represent a major change. Data shows, however, that the increase in referral fees from 2% to 8% aligns TikTok Shop more closely with industry standards.
The transition may pose challenges, especially for new businesses or those selling lower-margin products. It is a good reason for brands to strengthen their value proposition and focus on building a solid organic following. Experimenting will become riskier with the increased referral and shipping fees, but I believe TikTok can still work for many businesses.