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Amazon is taking more than half of each sale from its merchants while laying off Zappos workers

Amazon seller app

Amazon seller app

Grappling with slowing sales growth and rising costs, Amazon.com Inc. is squeezing more money from the nearly 2 million small businesses that sell products on its online marketplace.

For the first time, Amazon’s average cut of each sale surpassed 50% in 2022, according to a study by Marketplace Pulse, which sampled seller transactions going back to 2016.

The research firm calculated the total cost of selling on Amazon. This includes the commission, fees for warehouse storage, packing and delivery, and money spent to advertise on the site. Paying Amazon for logistics services and advertising is optional, but most merchants consider these a necessity.

Sellers have been paying Amazon more per transaction for six years in a row, according to Marketplace Pulse. They were able to absorb the increases because the company was attracting new customers and rapidly increasing sales. That changed when pandemic lockdowns eased and people chose traveling and dining out over online shopping. Last year, Amazon generated the slowest sales growth in its history.

Amazon is No. 1 in the 2022 Digital Commerce 360 Top 1000 database. The Top 1000 ranks North American web merchants by sales. It is No. 3 in the Digital Commerce 360 Online Marketplaces database, which ranks the 100 largest global marketplaces.

Buyers are pickier than ever before

Consumers are far more deal-conscious than they were during the pandemic, so Amazon merchants fear fees and raising prices. Along with the steady increase in fees, that means many sellers are struggling to make money. Now, some are shifting to handling shipping themselves and spending less to advertise on Amazon’s site.

“For these small businesses, it’s getting harder and harder to be profitable because they are spending more and more money on Amazon fees,” said Juozas Kaziukenas, Marketplace Pulse’s founder and CEO. “Amazon might be tempted to keep increasing fees because it’s in a tough spot, but you have to reach some kind of equilibrium.”

Amazon sellers choose to use its logistics services because, on average, they cost 30% less than alternatives. Merchants are free to buy advertising anywhere, company spokesperson Mira Dix said in an emailed statement. The fees Amazon charges reflect the company’s own costs and investments, she said.

“Many selling partners have built and run their businesses without advertising,” she said. “If they choose to advertise their products, they have many service providers to choose from. Sellers are not required to use our logistics or advertising services, and only use them if they provide incremental value to their business.”

Amazon is cutting costs with layoffs

Maintaining profits as sales slow presents a major challenge for Amazon’s core online retail business. Without Amazon Web Services, the profitable cloud computing business, Amazon would have posted a $10 billion operating loss last year. CEO Andy Jassy is trying to restore the balance by cutting 18,000 corporate jobs and narrowing the company’s focus.

Subsidiary Zappos laid off more than 300 employees — about 20% of its workforce — in January, the Wall Street Journal reported.

The cuts, described as being part of broader layoffs at the company, included customer-service representatives at the online shoe and clothing retailer, which Amazon bought in 2009, the WSJ said.

Longtime executive Tyler Williams also left during the layoffs, it added, part of an ongoing shakeup two years after the death of former CEO Tony Hsieh in 2020 at age 46.

Zappos spokesperson Laura Davis said the cuts were part of regular business planning, and “ultimately made to ensure Zappos is set up to continue to provide an exceptional customer experience, long-term.”

Amazon is charging merchants higher fees

In response to rising costs, Amazon increased the annual price of a U.S. Prime subscription by $20 in 2022. Last month, the company announced plans to levy fees on online grocery orders of less than $150. But charging customers more is risky. Merchants, many of whom generate 80% to 90% of their sales on Amazon, are less likely to rebel.

Chuck Gregorich, who sells fire pits and outdoor furniture, says turning a profit on Amazon is getting harder. One of his popular fire pits costs $200, of which Amazon takes $112 for commission, warehouse storage, delivery and advertising. That leaves him with $88 to pay the manufacturer, ship the product in from China and cover his overhead. He expects his Amazon logistics expenses to increase up to 8% this year under a new fee structure that took effect in January and further scheduled changes.

“I’ll have to raise my prices, and I already raised them a lot last year,” said Gregorich, who is based in Eau Claire, Wisconsin.

The higher fees have compelled Gregorich to do more logistics himself. Other carriers can deliver fire pits for $28, he said, or about half what he pays Amazon. Amazon’s delivery service often takes longer than the two days customers expect, so it’s no longer worth the premium, he said. Dix said Gregorich’s experience is “the exception and does not represent the vast majority of both Amazon sellers we partner with and customers that we deliver for.”

Sellers are cutting down on advertising to save money

Amazon sellers don’t control the commissions Amazon charges or fees for things like packing and delivery. One thing they control is advertising, and there are signs they are pulling back. Advertising revenue over the holidays grew 18.9%, a slow-down from 32.2% growth a year earlier.

Amazon is dedicating more space on its site for advertising, which  makes each spot less valuable, said former Amazon executive and president of online marketing consulting firm Pacvue Melissa Burdick. Conversion rates, which measure the number of shoppers who purchase a product after clicking an ad, declined each quarter last year, she said.

“The advertising space on Amazon isn’t as successful as it used to be for sellers,” Burdick said. “A lot of sellers are choosing to offer discounts rather than advertise because shoppers are responding more to discounts.”

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