Amazon free shipping isn’t actually free. Many consumers and brands are unware of just who foots the bill when it comes to “free” shipping provided by Amazon. Someone pays for the shipping – and it’s not who you think. Discover if the consumer, brand, or Amazon ultimately pay for the cost of free shipping.
“There’s scarcely tastier bait for American shoppers than free shipping,” according to a recent Atlantic article, “and it’s been transformed from an occasional incentive into something that closely resembles a consumer requirement.”
As consumers, we expect delivery. We really, really, need delivery. But pay for it? No way.
When is shipping truly free for the customer? When is it not? Who pays, and why? Is this sustainable? Let’s find out.
The History of Amazon Free Shipping
Back in the olden days, people rode their horse and buggy to the physical stores for all our needs. If the physical store didn’t have what we needed, we’d go without (a concept my kids still can’t wrap their heads around). The product price was a “box price” which is the price of the item only. Alternatively, people could order from a catalog. For the privilege of ordering a seemingly endless assortment (often from a rotary phone or fax machine), we paid a “landed price”, which is a box price plus a shipping fee.
Then along came eCommerce – where competing for sales is hard, and the delivery fees for space heaters, diapers, and big screen TVs are expensive. However, shipping costs are a major deterrent to online shopping (still the largest driver of all cart abandonments.) If customers were responsible for the actual, itemized delivery fees, they would feel guilty and lazy for paying to shop in their pajamas. They would go to the store.
Barbara Kahn, Professor of Marketing at Wharton, calls this the “pain tax”: “If the shipping price is incorporated in the price of the good and customers don’t have to think about that pain tax, they would definitely prefer it.”
To get people to shop online, retailers must make shipping free. So, who pays for it?
Does the Customer Pay?
Let’s say an item’s retail price is $20, and it costs $5 to ship. If the retailer charges $25 and announces, “free shipping”, then the customer is paying.
This approach is still common among many third-party sellers on sites like Amazon and eBay. These sites have toggle buttons to help customers filter for items with “free shipping”, and you want your products to show up. (On Amazon’s web site heatmap, for example, those filters are the hottest places on the page.)
Alternatively, retailers or sellers will charge shipping overtly, in the form of a shipping charge (i.e., Land’s End). Order minimums (i.e., Free Super Saver Shipping) are also a way of having the customer share the burden. Larger orders drive incremental revenue and profits for the retailer.
In these cases, the customer pays for the benefit of having products delivered to their homes.
Does the Retailer Pay?
Many eCommerce players got their start this way, matching competitors’ in-store, box prices, AND offering free shipping. In this case, the cost of the shipping comes out of the retailer’s profit margin. This helps the retailer buy customers, but it is not sustainable as a long-term strategy. If you operate in a margin-rich category, this works. It also works if your shipping costs can be reduced over time by economies of scale. Yet Amazon’s retail business is profitable…likely even before advertising.
However, cat trees, toilet paper, and Campbell’s soup carry high shipping costs. Contrary to popular belief, Amazon and Walmart have moved away from this. While Amazon has economies of scale, it would be difficult for them to ship most of their merchandise profitably – especially with One-Day shipping – without some help.
Doesn’t Amazon’s Prime Revenue Help?
It helps, but it’s likely not enough. It’s estimated Amazon spent $5-6B last year on digital content for Amazon Prime, or $40 per Prime customer. That leaves only $79/customer to allocate to Amazon’s shipping costs. This probably doesn’t cover the 24 orders per year that Prime customers place. Of course, the math is more complex, LTV, etc., but you get the picture…
So, you guessed it, someone else is subsidizing shipping.
The Manufacturer Pays (ding ding!)
Amazon is in the middle of Annual Vendor Negotiations with vendors. This year’s top request by Amazon? To increase funding, especially freight, to help pay for Amazon’s launch of One-Day shipping.
Manufacturers heavily subsidize the cost of both the pricing war between Amazon and Walmart AND their free shipping programs.
Manufacturers are also feeling the squeeze of Amazon and Walmart.com to keep on subsidizing.
Years ago, these (1P) manufacturers happily loaded their products onto Amazon with minimal trade funding. Amazon came to represent their primary eCommerce customer and a profitable growth channel.
However, in the past five years, manufacturers have consistently told me that Amazon’s gone from their least expensive channel to their most expensive – by a long shot. That’s because over time, sites like Amazon have shifted the burden of price matching and shipping costs to the manufacturers.
Amazon reports vendor profitability numbers back to vendors, requesting to be compensated when their item-level profits aren’t hitting targets. They receive this funding in the form of margin guarantees, freight allowances, accruals, CRaP allowances, straight payments, AVS/SVS programs, and Amazon Advertising. If Amazon can’t get subsidies for these products, the products are often deemed CRaP – in which case, you can’t advertise, you fall out of search, and Amazon may stop ordering. Why would Amazon drive sales of unprofitable products?
If you’re a typical manufacturer that does more than half of your eCommerce sales on Amazon or Walmart, they yield a tremendous power over your business.
In Amazon and Walmart’s defense, I don’t think anyone could have predicted how technology would drive such a pricing race to the bottom. Price matching in-store box prices carries a huge burden for an eCommerce retailer, who must ship products. Not being beat on price is an expensive proposition. On the flip side, not being competitive on price is a major trust buster for someone like Amazon or Walmart.
Please, please have a channel strategy
Manufacturers’ channel strategy – or lack thereof – plays an integral role. If you’re tied to an old-school promo calendar that gives each retailer their “turn”, you’ll always be on sale online.
If you think Amazon is your most expensive channel, take a hard look at your promotional strategy.
Also, pay attention to which retailer drives pricing in your category. Consider whether you want everyone to have the same assortment. Best-in-class manufacturers are differentiating. If you give everyone the same thing, expect a race to the bottom and a bunch of emails from eCommerce retailer buyers asking for help with profits.
Is this sustainable? What’s going to happen?
No, it’s not sustainable. Why do we rarely see third-party sellers eating the cost of shipping? Because they know that a business built on negative profit margins is generally not a good business.
Major retailers are still competing over eCommerce customers. However, over time, manufacturers are going to run out of money to subsidize retailer profits. When that happens, I believe we’ll eventually see eCommerce pricing adjust up to reflect the true cost to serve customers. (Sorry, customers.)
In the meantime, the customer wins
Unless it’s clear the customer is paying shipping, someone else is. Therefore, the customer wins. Yay customers!
One thing’s for sure – you’ve got to appreciate Bezos’ customer focus. In a recent shareholder letter, he said, “There are two kinds of companies: those that work to try to charge more, and those that work to charge less. We will be the second.”
We recently outlined some perspectives and tips on the AVS (Amazon Vendor Services) vendor-funded support service. Whether you are considering the value of the service or have already signed on and want to ensure you’re making the most use of those funds, this video provides information on how to avoid the six most frequent mistakes brands make when utilizing the AVS program. Also, this chart explains the possibilities for utilizing your AVS resource:
As a brand manufacturer selling on Amazon, your approach to the holiday season may be tried and true. However, Amazon and the competitive landscape continue to evolve – and a basic refresh of last year’s approach may not yield the results you’re projecting. Therefore, it’s important to consider lessons from Prime Day in planning for Holiday on Amazon.
The holiday season has many things in common with Prime week. Amazon puts significant efforts into sourcing deals and driving traffic to the site. As the marketplace becomes crowded and more competitive, driving success and sustainable growth require a laser focus on the correct strategy for your business. At Ideoclick, we have distilled several critical Amazon Prime Day (July 15th & 16th) takeaways into applicable strategies to help prepare your brand for the holiday shopping season:
1. You must have a winning and coherent strategy
This is not the time to throw things at the wall and see what sticks. The difference between client success and failure during highly promotional times depends on the effectiveness of the strategy. Identifying goals and setting tactics to meet them is critical, as is ensuring that your approach addresses other eCommerce players and their reactions, pricing or otherwise.
For example, a robust promotional calendar isn’t effective if downstream pricing implications aren’t considered, and products end up back on Amazon in third party, creating pricing compression and headaches for months. A strategic Amazon Advertising plan won’t be successful if demand forecasts aren’t addressed and Amazon runs out of stock. An ad campaign focused on differentiation is less effective if your competition is focused on the same message. Work with your team, agencies, and/or solutions providers to create a plan that incorporates a cross-functional and cross-retailer approach.
2. Ensure rock-solid inputs (boring but essential!)
Your products must be retail-ready to have a chance at success: Properly and accurately set-up, financially viable for both you and Amazon, and in-stock and buyable. Regardless of the promotions you run, if your products will not be adequately in-stock, for example, your ASIN will be suppressed and sales will suffer.
Retail-ready includes:
Products in-stock
Search optimized titles in product listings
Optimized bullets, listed in order of most important product features
Robust images that highlight selling points and product variations, including a hero image that calls out the core differentiator of your product –
Large number of product reviews with favorable ratings
Ensuring products are profitable for Amazon, so they can be advertised
3. Get your marketing budgets approved early to cover pre-holiday, during-holiday, and post-holiday season advertising
Use share of search data to develop a cohesive strategy. What keywords do you need to win, and how often? What role will DSP play in your strategy? Other Amazon media?
Create an Amazon Advertising Pro-forma to assist in budget planning
Create buzz and interest in your products before the holiday season. This is when people are putting together their wish lists and when competition for ads is lower
Ensure your items show up in search (both on Amazon and in search engines) during crucial holiday shopping dates
Continue increased spend levels well after the promotional period. Other advertisers begin to dial down spend so the inventory can be less expensive
4. Remember that deals create sales growth and juice the Amazon flywheel
The most successful products selling on Amazon during the Prime Day period were those that sold via Lightning Deals, Vendor Powered Coupons, and Deals with a significant discount. By significant, we mean over 20%. It’s not a surprise that the 41 – 50% discount range created the best boost in unit sales during Prime Day. Also, bigger budget items with discounts sold better than smaller ticket items with discounts.
In deciding the items most likely to succeed in this environment, start with products that are already top sellers (unless you plan to launch a new product, see below). We observe that regardless of the discount, if an item is less desirable, it just won’t move as well on Amazon. Essentially shoppers want their choice items, but at a discount.
Speaking of discount, a key observation of Prime Day activity is that shoppers will look both on and off Amazon for the best deals on items they want. Which leads us to:
5. Leverage the off-channel stratosphere to direct traffic to your deals
Inspire and capture your shopper regardless of where they’re shopping or spending their time online. Many of our clients saw increased success with this strategy. Also, this approach is likely less expensive!
Leveraging off-channel traffic and bringing those shoppers to your deals on Amazon can improve your sales velocity – and you won’t be competing (or paying the price tag) for the finite traffic on Amazon. Consider Google sponsored products, temporary campaigns on your branded web sites, and advertising on social media – all directing customers to your Amazon deals.
Prior to Prime Day, many of the top-selling products participated in affiliate programs with the “Products you Don’t Want to Miss During Prime Day This Year” type articles. Affiliate marketing with influencers also created steady traffic on Amazon during Prime week. At the least, consider social media and Google ads that will lead people to Amazon for the likely conversion.
Amazon’s DSP (Demand Side Platform) campaigns prove to be a highly successful approach as well, targeting shoppers that have shown previous interest and bringing them back to your product detail pages.
6. Get creative
During Prime Day, those brands that had new product launches (Lady Gaga’s HAUS Labs, for example) or unique stories and offers (LifeStraw gifted a year of clean water to a student in need for every LifeStraw purchase) experienced impressive sales. Consider an exclusive offer, a new product bundle or launch, or tell a story associated with how your product is the ideal gift.
This is the time to consider your products’ differentiators and fully promote them. And, if your product does not have a “hang your hat” worthy differentiator, you will want to develop one or create a product-adjacent activity or lifestyle angle that enables your brand to stand apart.
As an Amazon managed services firm advising over 200 clients on Amazon strategies, operations, and marketing, we are here to help. Reach out to your client success manager to discuss holiday planning. Or, if you are not already an Ideoclick client, contact our business development folks to discuss how we can help.
Brands that sell on Amazon through Vendor Central must adhere to very specific operational compliance processes and standards in order to be paid in-full by Amazon. Any discrepancies resulting from purchase orders, shipping, receiving, packaging, and data misalignment may result in chargebacks to the vendors and significantly cut into their earnings.
At Ideoclick, utilizing our Operational Compliance Health Dashboard, we aggregate client data to identify deductions from Amazon in the form of chargebacks and shortages resulting from non-compliance. Our team of Operational Compliance (OC) experts then work to identify root-causes for the chargebacks, as they are symptoms of operational issues that lead to shortages. The OC team then manages the complex process of dispute resolution to recover funds on behalf of the client.
For one of our clients, a major player in the healthcare products industry, we were able to demystify the complex invoice hierarchy system produced by Amazon to identify a shortage amount of over $300,000, which had accrued over a 12-month period. Of that amount, we successfully managed the dispute process to recover $235,175.05 in shortages for the client.
Critically, Ideoclick identified the causes for the shortages. In this instance, many of the casepacks were improperly scanned at the Amazon fulfillment center due to labeling issues during the vendor’s shipping process. The vendor also received chargebacks related to advanced shipping notification (ASN) complications. The identification of these root causes was critical in enabling the client to change its labeling and ASN practices to avoid future chargebacks that subsequently lead to shortages.
“Many vendors just accept chargebacks as a cost of doing business with Amazon, as they don’t have the time or systems in place to make sense of Amazon’s reinvoicing system or investigate where the non-compliance originated,” explained Shawn Oleson, Senior Operations Compliance Manager at Ideoclick. “Our process of identifying the discrepancies, helping to solve for the root-cause, and handling the dispute resolution will enable many more of our clients to recover funds, as well as avoid future chargebacks. Ultimately, we are helping clients conform to Amazon’s highly efficient ways of doing business on a massive scale – so both the consumer and the vendor stand to benefit.”
Ideoclick provides a complimentary initial assessment of clients’ overall supply chain defect and cost profile based on a vast set of Amazon data and Ideoclick analysis. Clients can also gain additional details of shortages and deductions for up to three previous years of selling on Amazon.
Recode’s Jason Del Rey dives into the history of Amazon’s success in this Vox Media/Recode podcast “The Land of the Giants, The Rise of Amazon” featuring insights and memories from Ideoclick’s Andrea Leigh, who was a ten year Amazon executive. Additional current and former Amazon contact interviewed to provide perspective on the creation of what is considered Amazon’s biggest win: Amazon Prime. This podcast episode, titled: Why You’ll Never Quit Amazon is described by Vox, “Since its invention in 2005, Prime has dramatically altered consumer psychology. Land of the Giants is a deep dive into how this bland idea was powerful enough to alter online retail forever.”
This podcast specifically explores the history and prevalence of Amazon Prime. You can listen here.
News and industry discussions are swirling around the rumor that Amazon is shaking things up with smaller suppliers and planning to cut all 1P manufacturers under $10M in annual sales. If you read the Bloomberg article or have heard of this elsewhere and you’re concerned, please don’t worry because we have you covered!
Here’s the gist of why you shouldn’t worry: First, there have been no confirmed timelines associated with this change – so it’s possible you’ll never be affected. Second, there are tremendous advantages to a being third-party seller on Amazon, and we can readily help you get set-up. If you already have a hybrid 1P/3P arrangement, we can help you optimize your seller central account and product assortment as a precaution to best mitigate risk.
First, it’s helpful to understand what’s likely driving Amazon’s motivations behind the rumored transition:
Having lots of smaller suppliers introduces risk to Amazon
For Amazon, holding and managing inventory for smaller suppliers with less predictable product movement represents a financial risk. Also, it’s difficult to properly vet, police and remove (when necessary) the smaller suppliers who may be selling counterfeit or otherwise unauthorized product. Similarly, smaller manufacturers who may not have met certain safety or testing standards can clearly become problematic for Amazon. We realize our clients don’t fall into these counterfeit or safety-risk categories, but Amazon may not.
First-party vendors are more high-maintenance for Amazon
As with any business, a company must consider how employees’ time spent generates revenue and constantly evaluate the value of each employee. Considering the time involved in onboarding and managing first-party platform vendors and items (even with scaling and automation efforts), Amazon finds that the arrangement comes at a high cost to serve compared to the realized revenue.
Amazon’s investment into one-day shipping means they must find ways to shift to more profitability elsewhere. Third-party vendors create “easier” profit for Amazon, and better selection for customers
Without the maintenance mentioned above, Amazon still earns commission on every sale through the 3P platform – so it’s guaranteed earnings at a lower cost to serve.
Having a large stable of 3P sellers allows Amazon to offer their customers a larger selection, without the heavy burden of directly managing them.
With Amazon’s “hands off the wheel” price matching algorithm for 1P vendor items, the items and even entire brands may become exposed to a CRaP out situation, which presents a loss for Amazon as well as vendors. Vendors moving to 3P gain the control to price their products more sustainably – creating a win/win for vendors and Amazon.
Here are some advantages of the third-party seller central account:
More control
A seller central account gives you the ability to set your own retail prices (avoid CRaP status), manage your own inventory and marketing. And because you manage your own data, you have access to superior reporting.
More information
There’s a tremendous community of experienced Amazon third-party seller forums that share best practices and help others troubleshoot. You will be amazed at the plethora of resources available.
What you should do
If you don’t already have a seller central account, let us help you set one up. For reference, we have published an FBA playbook that you can request here if you don’t have it already. (Or, if you’re an existing client, reach out to your account manager.)
We can help you create and manage a pricing strategy. Be aware that in your seller account, you will have to manage sales tax remittance in all states.
If you receive communication from Amazon regarding hybrid selling, or selling as a third-party seller on Amazon, we recommend that you don’t respond immediately. Please consult first with your Ideoclick Account Manager. We will help you craft a strategy and response that serves your best interests.
You will find the seller community a very welcoming place and the third-party arrangement an incredible opportunity to continue growing your business, and we look forward to helping you through this transition!
