At the end of March, you may have received a notice from Amazon about a fee increase that will go into effect May 16, 2014. If you have any tenure in e-commerce, you know fee increases are par for the course and not just an Amazon move. However, what you may not have seen is that this update increases the minimum referral fee for an item sold on Amazon to $1.
Amazon has announced this change for 21 categories (see below for the full list.) This fee update is an extension of similar minimum fees the company instituted earlier this year in the Electronics Accessories, Beauty, Health & Personal Care and Jewelry categories (Jewelry has a $2 minimum fee). Depending on the category, this notice changes referral fees from 6% and 15% with no minimum, to a minimum fee of $1 and the same 6-15% above that.
Let’s say you’re selling a $3 binder clip, in the Office Products category. Previously, you would have incurred a fee of 45 cents. With Amazon’s changes, you’d now incur a $1 fee, or a 222% increase. The lower the item’s price point, the higher the percentage impact. This fee change should cause many retailers to pull out their profit/loss data and their calculator and lock themselves away for a few hours to run numbers.
Sellers who play in the low-price product spectrum operate in a volume business, and many have efficient systems in place to make it work. Drop-shipped products, prepackaged items for quick fulfillment, free shipping for a low “all in” consumer cost and other strategies ultimately help these sellers turn items over at lightning speed to stay within their razor-thin margins. Absorbing fees at their current rate is likely a challenge, but with a $1 minimum fee, profits might come into jeopardy. This may send some sellers into serious discussions about the viability of their business.
A Summary of the Fees-Increase Changes by Category
Next Steps for Retailers
So what do you do if you find yourself affected by this change? Here are five strategies that should be top of mind before May 16, when the fee changes go into effect:
1. Multiple Item Case Packs: This is likely the first and easiest strategy that you can implement to minimize the impact of a minimum referral fee. The goal would be to increase the costs of the packaged quantity to above the Total Sales Price thresholds listed above. For example, let’s say you sell baby products and stock Infant Safety Q-Tips for $4 in the Baby category. Rather than selling one box at $4 and incurring a $1 referral fee, sell two boxes in a case pack for $8 and incur a $1.20 fee. The single-pack item has a fee payout of 25%, but the two-pack item has a fee payout of 15%, which is the category percentage.
Also be mindful of how case pack listings are displayed. Sometimes multipack listings can be crossed with individual listings if they share a UPC. Some sellers use the Item Package Quantity or Size attributes to set up a variation listing where sellers choose the case pack option from a drop-down list.
2. Product Bundles: Similar to the strategy above, you can bundle complementary products so your average selling price will fall above the threshold for the minimum fee. But if you sell in a category with a required UPC and you don’t have an available UPC exemption, then you may need to purchase UPCs for this bundled product in order to get the products listed on Amazon.
3. Marketplace Expansion: Another prudent step would be to consider which alternative marketplaces have fee structures that are favorable to low-price items. You’ll run into a similar problem on Rakuten.com Shopping, which also has a minimum fee per item (99 cents), so you’ll have a similar profitability problem. Shop.com has a flat fee of $1 per order as well. EBay could be a favorable destination, but run numbers on how listing fees and your conversion rates will add additional expense. Newegg and Sears both have percentage referral fees for sold products, so they’re great destinations for products with low prices.
4. Sourcing: After you’ve run numbers comparing your current margins to your new margins with the Amazon fee increase, you may realize you have to pull some low-price products. For many businesses, this means scrambling to find a replacement revenue source, meaning sourcing new products and product lines. Start with the vendors you already work with: Are you selling their entire catalog, or are there other items you can pick up?
Then pursue distributors and manufacturers in your category that you’ve passed over before; it may be time to work with them now. If nothing works, then seek new product lines within your category. ChannelAdvisor surfaces product suggestions for you within our Amazon Insights view, which shows you top-selling products, the Buy Box price, the amount of competition and the UPC, so you can take that information into account to source new SKUs. You may find that an opportunity awaits with a vendor that offers drop shipping, enabling you to use a software suite like ChannelAdvisor to automatically process the drop-shipped inventory and post it to Amazon, reducing your selling costs. Sourcing new revenue streams may be key to long-term survival.
5. Amazon Product Ads: I’ve saved the best tip for last — this is probably the best strategy you have for continuing to sell low-price items on Amazon. To take advantage of Amazon Product Ads, simply offer your low-price products on your website, where your fee structure is low to none. Then send Amazon a feed of Product Ads that will show up on item detail pages under the header “Product Ads from External Websites.” Product Ads operate on a cost-per-click (CPC) model, charging you a fee when a customer clicks through to your website.
Assuming you have good conversion metrics once the customer is on your own website, Product Ads could be more cost-effective than stocking the product on Amazon and paying the minimum referral fee. Plus, on your website you have the opportunity to sell other items and establish customer loyalty. Product Ads aren’t available in all categories, so see this Amazon page for more information on availability and fees. For many categories, Product Ads are only 20 cents per click for products priced under $20 (those affected by the referral fee increase), which could provide a more economical and advantageous route for capturing the sale of a low-price item. ChannelAdvisor can help automate your Amazon Product Ads feed, and if you haven’t yet established a standalone website presence, ChannelAdvisor offers webstore options that are integrated with our platform to make that step easy.
The Bottom Line
We hope you take these tips back to your team to help you plan your updated strategy. Ultimately, Amazon is a great opportunity for most businesses. The marketplace is still experiencing enormous year-over-year growth. It has an increasing customer base that’s active and loyal. Plus, they offer some great incentives, such as Prime and Fulfillment by Amazon. There are ways to adapt and still succeed in the face of these new referral fee changes. To find out how ChannelAdvisor can help, please contact us at firstname.lastname@example.org or call 866-264-8594.
Blog post by Rachel Miller, ChannelAdvisor Product Marketing Manager
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