Any sound business plan will take rising costs into account, but Amazon is putting its sellers’ cost projections to the test with their recently announced fee increases. While it’s true that you can’t expect Amazon to keep their fees the same while the cost of everything else is increasing, there’s been some backlash against the company in the last few months. Third-party sellers of all sizes are pointing out that Amazon’s fees were already high to begin with, and if they increased, that could cut deeply into their profit margins.
Part of the reaction could be from the fact that Amazon really isn’t making this adjustment easy for the sellers. There were already several fee categories, some of which were further broken down into other categories or tiers. It’s possible for sellers to do their own research and get an accurate picture of how all the fees affect profits, but there are also services such as Shopkeeper.com that will do all the leg-work for them. Whatever tools they use, however, one thing is certain – Amazon isn’t doing any favors for its third-party sellers.
If you’re a seller with Amazon, the first step will be to consider the changes for each fee category separately. Yes, they’re mostly increasing, but there’s a huge amount of variation from one category to another. Plus, a lot of the fee increases are based on the size of the items, so some sellers will be more affected than others.
With that introduction, let’s dive into the particulars.
Referral Fees
It isn’t much, but there is one fee that actually isn’t increasing in 2022. Most referral fees will remain as they are, but a select few are decreasing. Referral fees for snow throwers and lawnmowers are going down, as are the referral fees for any item whose total sales price is above $500 (from 15% to 8%).
FBA Fulfillment Fees
Here’s one of the heavy hitters. Amazon sellers who use FBA (Fulfillment by Amazon) warehouses are already paying quite a chunk of change for the service, but with the new increases, they may need to rethink their selling strategies. There are price hikes in every fulfillment fee category, ranging from 2% to 12%. Given the often narrow profit margins on Amazon items, this particular fee increase spells bad news for a lot of people.
Here’s how this might work for a Small Standard package. Say the item has a price tag of $10, and the gross margin is 20%. An 8% increase in the fulfillment fee for this size item would mean that now, the gross margin is just 10%. This is the kind of scenario that many Amazon sellers are facing, and they aren’t happy about it.
Of course, they don’t just have to accept a 10% profit margin; there are other ways of addressing the problem. One possible solution is to cut out the less profitable items and focus on the ones that still have a decent margin. In some cases, however, sellers may simply have to come to terms with lower profit margins.
FBA Storage Fees
Now let’s talk about the storage fees that sellers pay regardless of how long their items are in storage. Starting February 1st of 2022, storage fees from January to September will increase. Standard-sized items will be $0.83/cubic foot instead of $0.75/cubic foot, and oversize items will be $0.53/cubic foot instead of $0.48/cubic foot. The fees during peak months (October to December) won’t change; standard-sized items will still be $2.40/cubic foot, and oversize items will be $1.20/cubic foot.
Aged Inventory Surcharge
Most of Amazon’s recent announcements have been about increasing fees, but they’re also introducing a new fee that affects aged inventory. Items that are stored in an Amazon warehouse between 271 and 365 days will incur a cost of $1.50/cubic foot; that’s in addition to the normal cost of storage. It’ll kick into effect in the middle of May 2022; any items that have been in FBA storage for 271 days or longer will incur this fee.
Sellers already paid an extra charge for their aged inventory, but it only applied to items that had been kept in storage for over 365 days. It’s pretty steep, at $6.90/cubic foot or $0.15/unit (whichever one is more).
It’s thought that if sellers have to pay more for aged inventory, they’ll be forced to prioritize their fast-selling items over the ones that can still be sold, just not very quickly. It could also discourage sellers from trying to sell new items, as they’d be risking extra fees if the items didn’t sell as well as they’d hoped. A common-sense alternative (which some sellers have already implemented) is to use other fulfillment centers for the less popular items, while keeping the best-sellers in FBAs. That way the sellers can still offer Amazon Prime in their store, while also optimizing their storage-related fees.
FBA Removal and Disposal Fees
Sometimes an item gets damaged or somehow becomes unsellable; in that case, the seller can either pay for the FBA to ship it back to them, or pay for the FBA to destroy it. Since the fees are based on the size and weight of the items, this fee category gets complicated really quickly.
There are nine size tiers, and each one has been increased at a different rate (as of January 18th, 2022). Unfortunately, most of them (except the smallest size category) will see a jump of more than 200%, which isn’t an easy pill to swallow. As an example, 1.0 to 2.0 lb. items formerly cost $0.48 to be removed or destroyed, but now they cost $1.14. Even though this particular fee only applies to items that aren’t sellable, it’s still just one more thing that eats into profit margins.
The takeaway
Amazon has put its sellers in a tough position, but the situation may not be as dire as it seems at first glance. The best approach is to analyze all the relevant data, and then see if you can adjust your strategy in order to minimize the impact to your bottom line.