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May 19, 2024

Will Amazon Third-party Sellers keep having higher costs?

Hey folks, I have some bad news that I think Amazon third-party sellers need to know based on Amazon’s recent earnings call. Stay tuned. 

3 insights for Amazon sellers from Amazon’s recent earnings call

So there are three facts in the recent earnings call, which I thought are a little bit scary for Amazon third-party sellers, and we need to join up the dots and think this through as Amazon sellers. Here they are: 

1. Amazon’s profits are up – largely due to third-party sellers paying more for ads!

Number one profits on advertising up a metric ton, which means more expensive sales for us. So Amazon should say thank you to the third-party sellers.

And of course, we all know this from experience, but it is a fact, and it’s clear that Amazon is, as it has been, continuing to prioritize using advertising as the main way of making not so much revenue as profit from its third-party marketplace and indeed the entire marketplace. That’s the first one.

2. Investment in FBA is down – bad news for third-party sellers

Second one. Investment in the FBA system, which has been a big percentage of their capex, the capital expenditure, is going to be less as a percentage going forward. So that means less fulfillment capacity relative to demand, which is not good news for third-party sellers, of course.

It means that also our money is not being spent and being reinvested in the fulfilment system. So where is it going? Is it just going to the shareholders? Well, no, they’re not interested in giving away dividends. It’s still a growth stock as far as the stock market’s concerned. So where is it going?

3. Investment in AWS is up

The percentage of capital expenditure going to AWS is booming. Now that makes sense for Amazon because AWS made about 65 per cent of their operating profits in the past year – and their view is that that is going to grow like topsy because most computing power is desktop. So in other words, it’s not on the cloud yet, but that is going to be a huge growth story.

Now that’s probably true for Amazon. And if you want to buy a stock market investment, well, I’m not a stock market investor, but there is a little bit of a hint. Well, I don’t, I mean, I invest privately, but I advise publicly. There’s a bit of a hint there, isn’t there? So you might want to consider Amazon as a great stock, not based on it being an e-commerce company, but it’d be in a pure sort of tech play as a platform for other people to do their tech work – famously, even the CIA uses AWS! 

Implications for Amazon 3rd Party Sellers

Now, what does that imply for Amazon third-party sellers? Well, they are taking money from us. They’re not giving it to the shareholders, but they’re not reinvesting it in the FBA system either.

They are investing it in their most profitable division. And that makes sense, but you should be aware that those are two bad things for us. 

Bad thing 1: We pay more of our revenue to Amazon

Not only is the percentage of money that we’re getting taken off. Gonna be bigger as we go because Amazon’s squeezing it. 

Bad thing 2: Amazon will invest less in the E-commerce Marketplace 

But quite clearly it’s seeing the, the future is AWS and the marketplace as a cash cow to squeeze, which means the investment in that I think going forward is gonna be less as well.

And that’s speculation on my behalf. I don’t have any in one on the inside of, of Amazon telling me that, but there’s a bit of a major hint and that it’s certainly true for the latest earnings calls. So some bad news. 

What should we do about this?

What does that imply We should do? 

1. Increase or maintain fat margins

Well. I think you’ve got to first of all, see the increase in costs coming and make sure you have nice fat margins.

2. Renegotiate with Chinese Sellers

The good news is you can renegotiate with your Chinese suppliers if you buy from China, because they are experiencing deflation at the same time as the UK and the EU and the U S have been experiencing consumer price. So you can actually increase your margins for once by negotiating on the cost side of that equation.

3. Consider AWD – Amazon logistics

The other one is you should expect FBA to over time to get more expensive, but also as a fulfillment by Amazon system. You should also expect it, I think, to be less effective, less capacity, which will mean more charges. And probably harder to get stuff to actually, you know, for example, when you really need it in Q4, the warehouses will be full or rather the FCs, the fulfillment centers.

So I think that pushes us to consider either the Amazon broader logistics arm, use the third party logistics, or even have your own warehouse. I know some of my customers and my clients have been going down the route of getting their own warehouses not cheap, not easy, but it gives you at least some kind of control over the situation.

Andy Jassy is AWS focussed 

The final piece to say about that is that Andy Jassy although he’s been an Amazon veteran for a long, long time, he’s kind of died-in-the-wool, Amazon guy, did come from the AWS background, not the marketplace.

So I think in his DNA, he’s automatically less invested mentally in the marketplace and the whole amazon. com retail store thing. 

So not an easy thing to talk about. Sorry to not be more positive today, but I think you need to see where things are going and have a plan that will At least be robust in the face of that. And rather than just assuming that, you know, somehow things are going to change. I don’t think they’re going to change.

I think the trend of charging us more as third party sellers from Amazon is going to continue and the trend of them taking less interest in the marketplace as a whole, the whole, what we think of as amazon. com is actually not Amazon as a corporate body, not their focus anymore. 

Forewarned is forearmed 

So bad news, but as ever, forewarned is forearmed. If you wish to stay forewarned about other things in your e-commerce life, particularly around Amazon, then you might want to consider joining the Mastermind which is going into its, I think eighth year now at the amazon mastermind.com.

But I won’t over plug it. It just is one of the places you can discuss these things and what to do about it. Thank you for listening. Sorry to not be more positive today, but I hope this gives you a little bit of foresight into what’s coming and gives you a chance to do something about it. Cheers.

Acquisition Audit

If you are considering acquiring an e-commerce business and you are not so familiar with the e-commerce markets, you could get some help from me as I’ve done for a couple of my clients recently. It’s quite a growing part of my consulting business, 

2 Perspectives on the business

which is that I can have a look at an e-commerce business from you from really two perspectives. And see if it would make sense for you to buy the thing before you get to the point of even putting in a, an LOI or letter of intent, or, a Heads of Terms, depending which side of The Pond you’re on. 

And really that would be the commercial due diligence and some basic financial areas. 

Now that the legal side, I don’t cover myself and I’m not an accountant nor do I play one on the internet, but the basic financials of it nevertheless, still tell you a bit of a tale, as I hope today illustrates. 

Market Evaluation 

And then what I can also do is look at the market you’re considering going into look at the demand, look at the competition and evaluate really, is this a growing market? Is this competition manageable? Does the business have a solid grasp on the market, even a dominance of the market that would make it a more attractive proposition?

So if you want some help with that, just go to myamazonaudit.com and I will be happy to give you half an hour of my time for free to look at that. 

How to book an audit

And if you send me some documents, I’ll even. put in bit of time having a quick look at the financials. And a quick look at the market on Amazon as well, to give you a good early steer of whether you should consider buying the business or not. 

 Obviously, if you own a business of your own already on Amazon, I can give you similar feedback as well. 

It may be with a view to selling it potentially. I tend to act on the behalf of people buying, not buying those selling, but the same insights apply in best cases. . Thank you so much for listening. And speak to you soon.

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Michael Veazey

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