The close of 2023 saw Amazon introduce sweeping changes to its FBA (Fulfillment by Amazon) fee structure. This sudden announcement surprised the millions of small and medium-sized businesses (SMBs) on the platform, prompting them to reassess their profit margins and re-evaluate their business models.
What Is Open Commerce?
Open commerce reduces entry barriers for new competitors, fostering innovation and increasing market competition. It also offers lower fee structures compared to traditional e-commerce platforms like Amazon, allowing SMBs to focus more on product development.
Amazon has emerged as the clear beneficiary of its fee restructuring. Revenue from its FBA services reached $34.6 billion by March 30, 2024, a 36.5 percent increase from two years earlier. The SMBs, in contrast, are faring considerably worse. With FBA sellers experiencing a 95 percent failure rate to begin with, the new fee adjustments threaten to be an extinction-level event for many.
Some SMBs are certainly attempting to adapt but in light of the tight constraints imposed by Amazon, many may be looking to migrate to a more permissible marketplace — one that espouses the open model of commerce.
What Are Amazon’s New FBA Charges?
Amazon takes a cut for each unit sold on its platform, with sellers typically paying 50 percent of their sales in FBA fees. The late 2023 FBA fee overhaul adjusted existing fees and introduced new charges. A quick rundown of these changes:
Referral Fee
Amazon charges this commission to sellers for providing the platform.
FBA Fee
Sellers using Amazon’s FBA service pay Amazon a fee that covers the costs of storing, packing and shipping their products. Recently, Amazon has decreased these fees by an average of twenty cents per unit for standard-sized items and by 61 cents per unit for large and bulky items.
Inbound and Outbound Fee
This new fee shifts the burden of distributing inventory to fulfillment centers to sellers. Amazon is open to reducing or waiving this cost altogether if the seller sends their products to multiple Amazon inbound centers.
Low Inventory Level Fee
Sellers falling below a 28-day supply minimum inventory threshold could face per-unit fees that range from 32 cents to $1.11.
Returns Processing Fee
Sellers exceeding a specified threshold for product returns now pay a penalty fee for each additional returned item.
In summary, the FBA fee restructuring reduced two existing fees while adding three new separate fees. With the new costs in place, Amazon estimates that the average seller will pay an additional 15 cents per unit sold.
Of the five fees mentioned above, SMBs particularly take umbrage on two: the inbound and outbound fee and the low inventory level fee.
Effects of the Inbound and Outbound Fee
The inbound and outbound fee can pose a veritable catch-22 to sellers. Smaller businesses lacking the high sales volume to justify shipping their products to multiple inbound locations are stuck absorbing the added per-unit cost.
For example, if a product has a regional customer base, the seller may only distribute it to a single inbound location. Assuming that this product weighs 2.5 pounds and the seller moves 50,000 units a year, they will incur $20,000 in inbound and outbound fees. Factoring the 24-cent-per-unit reduction as stipulated by the adjusted FBA fee for a product of this size, the seller will face a net loss of $8,000. Given that Amazon already takes nearly 50 percent of sales revenue, an additional $8,000 in fees can be crippling.
Businesses opting to spread out their distribution streams in an effort to dodge these fees might not fare any better, as this approach simply leads to higher shipping costs. Only businesses profitable enough to have multiple inbound locations from the start are unaffected by the inbound and outbound fee.
Effects of the Low Inventory Fee
The low inventory level fee is severely affecting SMBs as well. Because Amazon also charges sellers for holding excessive inventory in their warehouses, the fee essentially forces them to walk a tightrope in managing their inventory.
Putting this into practice is no simple task, as the upfront cost in maintaining sufficient inventory can be difficult for some businesses to bear. Merchants selling perishable or seasonable goods may find it impossible to stock up even if they wanted to. SMBs with lower profit margins will likely have to simply take the hit.
Backlash from SMBs has been fierce, forcing Amazon to implement a grace period in early 2024. Contradicting Amazon’s own projections, SMBs claim that the new charges will push the retailer’s shares of their sales revenue past 50 percent, a significant increase.
How the Fees Affect Innovation and Competition
The increased costs of operating on Amazon are detrimental to the long-term health of SMBs, which account for 60 percent of sellers on the platform. By lowering their profit margins, the new fees encourage sellers to adopt a survival mindset centered on short-term gains and cost management. Growth-oriented activities such as product innovation may take a back seat.
An example of this phenomenon is a San Francisco seller who had to shorten the yoga sticks he was selling by an inch just to break even. Earlier this year, shipping costs for his product increased from $10 to $26 after Amazon bumped it up a size tier. To avoid losing $3 per sale, the seller had no choice but to offer an inferior product. The seller announced in May that he plans to scale back his Amazon business.
In addition to actively impeding innovation, these costs undermine competition by raising the barrier to entry for new businesses. Smaller companies may hesitate to launch their products because they lack the capital to trade on Amazon. As a result, customers have fewer options to choose from, and larger players have fewer incentives to improve their products.
Sellers quickly realized that Amazon’s purpose behind the fee hikes was to incentivize them to enroll in its warehousing and distribution service (AWD), launched in September 2022. This became evident as signing up for the service would waive both the inbound and outbound and low inventory level fees.
However, for many SMBs, the AWD is an imperfect solution for several reasons:
- It remains unclear whether Amazon offers more advantageous terms compared with third-party logistics companies, which have traditionally fulfilled warehousing and distribution roles.
- AWD does not accommodate a wide variety of products, including jewelry, shoes, watches and products with an expiration date.
- Granting more control of the supply chain to a single corporation raises its own risks.
By tightening profit margins and hindering innovation, Amazon’s recent surcharges have created a challenging environment for SMBs. Businesses feeling the squeeze may conclude that Amazon is no longer the optimal vehicle for their commerce.
In contrast, marketplaces that embrace an open model of e-commerce may become increasingly alluring in the future. The lower fee structures typically associated with these platforms give SMBs more peace of mind to focus on developing top-quality products while lowering the entry hurdles for new competitors in the market.
