How to Minimize Amazon Seller Fees & Costs to Maximize Net Profit Margin 

Amazon Seller Fees Erode Margins

Amazon fees have steadily climbed over the years, eating into profit margins. Many of these costs rose even higher in 2020 as the pandemic triggered supply shortages and shipping delays across industries. If you’re finding that your profit margins are narrowing, you’re not alone.

But while misery loves company, we’d rather leave that particular crowd behind. So, in this post, we’re reviewing which factors drive up costs the most, then we’ll delve into several tools and tricks you can use to minimize your costs and Amazon seller fees.

What Factors Affect Amazon Net Profit Margins the Most? 

Material Costs  

Material costs have risen dramatically across industries since the start of 2020. The global pandemic resulted in lay offs and furloughs, so sourcing and production slowed or even stopped. When production resumed, fewer workers were able to return working due to companies’ financial uncertainty, health and safety regulations, fear, or a number of other factors. Meanwhile, demand rebounded relatively quickly or even increased. With limited supply and high demand, prices have gone up. 

Safety Testing 

Amazon has steadily increased its requirements for safety testing, sometimes asking brands to go above and beyond government requirements. At Kaspien, we’ve seen numerous cases of brands being asked to conduct safety tests that aren’t legally required for their product. If brands don’t comply, Amazon can suspend their listing, cutting off Amazon sales for that product. As such, most brands find it easier in the end to pay for the additional testing, although it remains an intensely frustrating experience that chips away at the brand’s revenue. 

Supply Chain Costs 

Once a product is manufactured and has passed all the required certifications, there’s still the matter of transporting the product from the factory to the end consumer. That may involve freight, shipping, and storage fees. Supply chain management is complex and dynamic, so much so that it deserves an entire blog post. And, oh, would you look at that! Here it is.

Amazon FBA Fees 

Over 85% of top Amazon sellers use Fulfillment by Amazon, and with good reason. It’s simple, convenient, and provides increasingly faster delivery times. Of course, it’s not free. Sellers must pay fulfillment fees for product that pass through their centers. The fee is based on product size and shipping location. 

Amazon Storage Fees 

Amazon also charges monthly storage fees for products as well as long-term storage fees. Like fulfillment fees, storage fees also change periodically, typically once per year. Before are the fees per cubic foot. 

Amazon Referral Fees 

Amazon’s not done yet! They also charge Amazon sellers referral fees – essentially, a commission for transactions that occur on the Amazon marketplace. Amazon referral fees are based on MSRP and product category. 

Pricing Parity 

Amazon is known for offering the lowest prices available online. One way that it enforces that reality is by requiring pricing parity. Pricing parity means that any product sold on Amazon must be offered for the same or lower price as products offered elsewhere online. If the product price on Amazon is higher, Amazon will roll up the Buy Box.  

When the Buy Box is rolled, shoppers have to click several more times to see prices and sellers for the given product. The abnormal experience is enough to make shoppers bounce from the listing, costing you sales. This penalty is simple but effective.

Pricing parity can affect net profit margin because it forces brands to price products the same across online marketplaces (or suffer the consequences), regardless of each ecommerce platform’s unique fees. While not always the case, this can impact a brand’s wholesale costs or retail price.  

Amazon Retail (1P) Fees 

If your brand sells through Vendor Central and Amazon Retail serves as your online reseller, you’ll pay percentage-based fees for services such as marketing co-op, damage allowance, early payment, chargebacks, and shipping. If you use optional services like marketing, you’ll also be responsible for the bill. These fees are typically dependent on how vendors negotiate their contracts with Amazon, and larger vendors have greater negotiation power. 

Third-Party Sellers 

Many brands choose to sell on Amazon through third-party sellers like Kaspien. In these cases, the third-party seller pays Amazon’s fees instead of the brand. However, these fees do affect the seller’s margins, which can lead to negotiations about wholesale cost, but not always. Besides possible discussions about wholesale costs, most third-party sellers don’t charge any type of fee since they are buying product from the brand. 

Amazon Agencies 

Instead of selling their product wholesale to Amazon Retail or third-party sellers, some brands prefer to sell their product on Amazon themselves with the assistance of an Amazon agency. In this situation, a brand hires an agency to manage the day-to-day of running their Amazon seller account, and the agency charges either a percentage-based commission or a flat monthly fee.

If you’re curious about this model, check out our post, “How to Decide If You Should Work with an Amazon Agency.”  

Amazon Marketing 

Finally, we come to Amazon marketing. With millions of sellers and tens of millions of products on the Amazon marketplace, marketing has truly become a requirement for Amazon success. And, marketing requires a budget. 

Now, that said, Amazon marketing should NOT affect your net profit margins. Marketing is meant to increase sales, and if isn’t generating a profitable return on investment, then whoever is running your marketing is not doing a great job. Marketing is a cost, certainly, but it is one that should pay for itself and more.  

Discover the Costs of Selling on Amazon 

In this free eBook, we explore the costs associated to selling on Amazon through Amazon Retail (1P), third-party sellers (3P), and direct-to-consumer (DTC). Download now to learn which option makes the most sense for your business needs! 

Download the eBook

How to Minimize Costs & Amazon Seller Fees 

Now that we’ve covered what factors can decrease your net profit margins for Amazon, let’s delve into how you can minimize any of those expenses to maximize your profitability. You’ll note that most of the below tips are based around supply chain management.  

Product Sourcing 

If we’re trying to minimize costs, let’s start at the beginning. Our GM of Private Label, Denise Abraham, wrote a fantastic blog post about international product sourcing, including how to do so cost-effectively. She goes more in depth about the process, so we’ll just summarize a few key points here: 

• Get multiple quotes and samples. You need to find the right balance of costs and quality. 
• Know your product specs intimately. When sourcing internationally, it’s easy for vendors to take advantage of you and use cheaper materials or skip testing. Those issues will bleed into sales to consumers and future fees, so don’t let yourself fall into that position. By knowing your product front, back, and center, you’re able to spot potential issues earlier.
• Research and understand your purchasing options, including ex-works (EXW), freight on board (FOB), and landed duty paid (LDP) / delivery duty paid (DDP). Each purchasing option has significant implications that can effect your costs.

   

Inventory Forecasting 

To avoid long-term storage fees at FBA centers, you must strike a balance between sending in enough inventory, but never too much. To do so effectively, you need to understand how long each piece of the supply chain takes, which as we all know, has changed quite dramatically since COVID-19. Our Purchase Order Manager, Emily Spokas, wrote a handy blog post about inventory forecasting, which you can read here.

You can break your forecasted lead time into smaller pieces, including how long it takes you to prepare a shipping order after receiving a purchase order from a retailer and how long it takes to then ship that order from your factory to the fulfillment center. If you sell your products yourself, you could even factor production time into the calculation. 

The marketplace is dynamic, so your inventory forecasting model should be too. Your lead times will likely fluctuate with seasonality, environmental factors, inventory quantity limits, and other external factors, so carefully monitor and update your forecasts accordingly. 

Efficient Product Packaging 

Amazon FBA has specific criteria for product packaging requirements. If products do not have the required labels and compliant packaging, Amazon may refuse, return, or repackage the inventory. In each of these cases, the seller is losing money, either in processing returns or paying fees for repackaging. To minimize these fees, make sure that your products are prepped in accordance with Amazon’s policies. 

As for storage fees at FBA, Amazon charged fees based on cubic feet or number units. This issue is partially mitigated through inventory forecasting, but it can be further mitigated by using the most space-efficient packaging for your product. Going down a box size or using an envelope can help reduce volume and thereby fees. Of course, do not reduce packaging size at the expense of product survival. If product is damaged during transit or storage because of smaller packaging, the savings of the packaging won’t justify the loss of the product. 

Amazon Small and Light Program 

Speaking of optimized product packaging, we’d be remiss if we didn’t talk about Amazon’s Small and Light program. Small and Light is an FBA that reduces fulfillment costs for products under a certain size or weight threshold. To enroll in the program, products must be sold via FBA, and be priced under $7. If your products are eligible, Small and Light is a no brainer.  

One of our partners met every eligibility requirement for Small and Light except for product price. Due to margin considerations, their product was priced just over $7. We found that if we lowered the price so that the product could enroll in Small and Light, the savings from the lower fulfillment fee actually increased the product’s net profit margin. Thanks to Small and Light, the product was more affordable for consumers (which boosted sales) and margins were greater.   

FBA Seller Reimbursements 

FBA centers make mistakes, and Amazon doesn’t always fully reimburse sellers for inventory that is lost, damaged, or otherwise mishandled. Over time, these un-reimbursed or under-reimbursed inventory errors add up, eroding your bottom line.  

That’s neither tolerable nor necessary. To correct this issue and get back what you’re owed, you’ll need to file FBA reimbursement cases with Amazon. This process can be done manually or partially automated through software (Amazon policies forbid fully automating the process).  

At Kaspien, we’ve successfully reimbursed over $7 million to FBA sellers that they would have otherwise lost. On average, we see FBA sellers recover the equivalent of 2% of topline sales when they use our FBA reimbursement software. That adds up, especially as your sales volume climbs. 

Dropship Products Not Suited for FBA 

Let’s say you’re selling oversized products or your sales velocity is still low. In such cases, using FBA may not be the most cost-effective choice. Instead, you may consider using dropship to fulfill orders yourself instead of relying on Amazon.  

By dropshipping, you avoid Amazon’s storage fees, packaging requirements, IPI threshold requirements, and inventory quantity limits. The downside is that you may not be able to provide fast shipping, which is now a key component of a good customer experience.  

Amazon’s algorithm also tends to favor sellers who fulfill products via FBA, so if you’re in a listing with multiple FBA sellers, your chance at winning the Buy Box goes down. If you are the only seller in the listing, this issue matters a bit less, though you are still contending with competitor products. 

Amazon Global Logistics 

Amazon Global Logistics (AGL) is an Amazon program that allows sellers to direct-import from China into different markets. Typically, importing from overseas requires multiple checkpoints and multiple service providers, creating a lengthy and costly supply chain. Amazon Global Logistics streamlines the process, reducing touch points and costs for sellers. 

At Kaspien, we’ve seen Amazon Global Logistics reduce lead times by 20 days! By its nature, Amazon Global Logistics is most cost effective when transporting large volume, which is one of the perks of working with a large third-party seller like Kaspien. Because we have hundreds of partners that import from overseas, we can combine orders under a single account, thereby reducing costs and lead times for each involved brand. 

To learn more about Amazon Global Logistics, check out our podcast episode with our Chief Operating Officer, Director of Retail Operations, and Director of Purchase Order Management. They discuss best practices for Amazon Global Logistics, including which product types benefit the most from the service, how to leverage economies of scale, and how to navigate Amazon’s quantity limits. 

Find the Right Partner 

Last but not least, finding the right partner for your Amazon business can play a huge role in your profitability. Amazon is a massive market in and of itself, creating a whole industry of third-party sellers, Amazon agencies, third-party logistics providers, software providers, and more. As a result, you have plenty of options in finding the right partner and/or tools to grow your Amazon business. 

Do your research. Find the partner or tool that will give you the capabilities, attention, resources, and expertise you deserve. Their efficacy (or lack of) can have a major impact on your brand integrity, stability, and profitability.  

Learn More about Amazon Business Strategy 

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