The True Cost of Selling On Amazon

Amazon has undeniably taken over the e-commerce landscape, establishing itself as the go-to marketplace for both buyers and sellers. They built the original online marketplace category and have since dominated the e-commerce market with their comprehensive services, which include:

• Amazon Marketplace:  Allows third-party sellers to list and sell new or used products directly on Amazon's website, giving them access to Amazon's vast customer base and fulfillment services. It operates alongside Amazon's own retail offerings, providing customers with a wider selection of products and competitive pricing options.

• Fulfillment by Amazon (FBA): A service where Amazon handles storage, packaging, and shipping of products on behalf of third-party sellers, leveraging its extensive logistics network to streamline the fulfillment process. Sellers send their inventory to Amazon's fulfillment centers, and Amazon takes care of the rest, including customer service and returns management.

• Amazon Prime: A subscription service that offers members benefits such as free two-day shipping on eligible items, access to streaming of movies, TV shows, and music, and other exclusive deals. 

No other retail channel offers the unique combination of low prices, fast delivery, and generally sufficient quality that Amazon provides to end customers. This makes it a formidable force in the commerce industry.

Additionally, Amazon offers multiple built-in features that you’d otherwise have to pay for on platforms like Shopify:

• Subscribe and Save: Encourages repeat purchases, especially on consumable items (paper towels, protein powder, etc). The Shopify equivalent would be solutions like Recharge and Ordergroove

• Cross-Sells and Upsells: Recommends similar or additional products based on advanced data science (if you buy a brownie pan, Amazon will recommend a whisk). The Shopify equivalent would be solutions like Yotpo and Shogun

• Customer Reviews and AI Summaries: Enhances product credibility and transparency. The Shopify equivalent would be solutions like Gorgias and Okendo

Based on all of this, it’s safe to say that when it comes to your e-commerce presence, it’s Amazon vs. everyone else.

So, why not run all of my business through Amazon?

Many brands adopt an Amazon-centric strategy, and it can work well for them. However, we generally recommend diversifying your retail channels for a few key reasons that we will outline below.

The Costs of Selling on Amazon

There’s no doubt about it, Amazon can be incredibly costly. To break down the costs, let’s look at the six types of fees that you can expect to encounter by breaking down the costs of selling one package: 

As you can see, all of these fees can quickly add up, resulting in a total “Amazon” commission that could exceed 50%, depending on your product category!

This is particularly striking when you consider that Amazon Prime customers pay $140/year to participate in free shipping. Both the brand and the consumer end up bearing the full cost of shipping. It’s no surprise, then, that Amazon Marketplace collected a staggering $140 billion in revenues in 2023.

But what if I’m selling a lot on Amazon?

Amazon can indeed be an excellent strategy for many brands, and if it works for you, we say keep at it! However, there are drawbacks beyond the cost.

Customer Ownership and Data

When you sell on Amazon, you don’t own your customer. This may not seem very important until your customer purchases from a slightly cheaper competitor, uses and returns your product unethically, or you find yourself unable to track their purchase habits to recommend additional products from your catalog.

While on one side you are paying a high fee to be discovered and let Amazon run your business, once you are discovered, paying up to 50% of your revenue in fees can hinder growth. When you own the customer and have a direct line of communication to them, and aren’t subjected to high per transaction costs that eat at your already thin margins. Said another way, when you own the customer, you are able to drive a high profit margin, making your business more robust. 

Establishing a personal connection with a customer allows a brand to gain deeper insights into their needs and preferences on a human level. This highlights the importance of not ‘outsourcing’ this channel to someone else. Imagine how much more you could learn about your customer if they ordered from you directly, whether the customer is an individual consumer or even a retailer placing bulk orders.

Lack of Control Over Fulfillment

Another big downside of using Amazon to fulfill your product is you often don’t know how your product will be treated on its way to your customers. If your product is sensitive to heat, or has an expiration date, it can be difficult to ensure that it reaches your customers in the best shape possible. And unfortunately for you, your customers won’t know the difference, and will review your product in the state they received it, not in the state that you shipped it. 

You also can’t control the packaging process–this could mean your product is packaged in a way that’s not optimal to prevent breakage / spillage, or simply not presenting your brand in the best light possible. Although Amazon generally covers the cost of damaged goods, frequent damages could hurt your customer reviews and reputation. There will be no handwritten notes, custom inserts, or special packaging with Amazon FBA. And if you need to quickly pull an item for quality issues, or ensure your inventory levels match Amazon’s, this process can be cumbersome and time intensive.

Additionally, Amazon owns the customer data (see above) and returns will not be in your favor (see fees, loose policies). And worst of all, Amazon can increase their fees at any time, which can affect you if you’re fully dependent on their platform.

Managing Amazon Channel Growth

You might think, “I can manage these downsides as long as my Amazon channel is growing.” And that’s true—to a point. However, consider that while your Amazon channel might grow in the short term, it will likely slow down eventually. When that happens, you will start to spend more on marketing and Amazon sponsored listings just to maintain the same revenue levels.

As we’ve explored, every retail channel eventually reaches a point where growth levels off. This plateau can result from various factors, such as market saturation, heightened competition, or rising customer acquisition costs as you gain a larger market share. Relying solely on one channel for retail expansion can restrict your brand’s potential and increase its susceptibility to market volatility. Examples of market volatility when it comes to Amazon include:  

• Market Headwinds and Brand Association Even Amazon isn’t immune to market headwinds. Consumer opinions of Amazon’s quality have decreased in recent years due to fraudulent products and the increase in third-party international sellers. Amazon may make sense for now, but if quality continues to slip, is this the marketplace you want your brand associated with? Similarly, one of the greatest strengths of Amazon is the number of visitors that they drive to it, which acts as a great discovery path for your brand. But what if Amazon starts attracting fewer site visitors? You are stuck paying a high commission to be listed on an eroding marketplace.  

• The Potential for Future Fee Increases: Who’s to say Amazon won’t increase their fees in the future? When you are reliant on a platform for growth, you are also subjected to their rules and regulations. So if they raise their fee structure, you can do nothing about it, except pay that toll. A better move might be to leverage an omnichannel strategy, using multiple retail channels to diversify your revenue streams.

If you are interested in learning more about how Vanik can help you grow your retail business by owning your retail customer relationship, set-up time to chat with us.