So we need to have a talk about Amazon.
Look – as a buyer of items online, Amazon is unbelievable. Basically, they have the widest selection for the lowest price at the fastest delivery speed. It will not be long before most of the country can receive their purchases within a few hours wherever they are standing at that time via an Uber/Lyft driver or a drone or by simply beaming the product over with Amazon Teleport.
Amazon has already won the e-commerce battle. I mean, it’s over. While everybody else was busy “testing the waters” and “finding their online identity” and “pivoting” and “re-purposing their brand” Amazon was relentlessly building out a national shipping network and rolling out software that rivals the largest software companies. I can’t think of a scenario in the next several years where Amazon is not taking market share from other e-commerce companies and brick and mortar retailers. The pie is very, VERY large, but Amazon seems to have an overwhelming appetite for market share and disruption of industries.
So again, as a buyer of items online, this is all great news. The stuff that we buy will keep getting cheaper and delivered faster.
However, it may be hard to buy anything after you’ve been downsized because you are or work for an e-commerce book, DVD, or CD seller, because Amazon is about to do their best to put media sellers out of business and may be showing signs of dealing a death blow to printed media completely.
As you already know, Amazon sells millions and millions of movies, music, and books annually. They are, by far, the largest media seller in the United States. For books in particular, Amazon accounts for almost 80% of all book sales.
In 2000, Amazon also opened up their Marketplace, which allows 3rd party sellers to sell their items on Amazon as well. The Marketplace has become a substantial profit center for Amazon – they collect a royalty on every item an independent business sells on the Amazon Marketplace platform. There are tens of thousands of small and large businesses that sell their wares on the Marketplace. For many of these companies, Amazon can easily be 75% or more of their sales volume.
For a bookseller, Amazon is an easy choice. Since Amazon already sells 80% of all books, it’s a simple decision to hitch your wagon to the Amazon juggernaut and sell books on their Marketplace. Amazon is a sku-based website, so all a seller needs to list a book is the books’ ISBN number, the quantity, and their price. With good software, a seller can literally (and I have) list over a million books for sale.
The media category was the first Marketplace category Amazon opened up, and of course that makes sense. Amazon started as a bookseller, then a book, DVD, and CD seller. What that also means is that there are thousands of Marketplace sellers in those categories that derive 70% or more of their sales and revenue from Amazon with established businesses that can be 15 years along at this point.
So in March, I believe that Amazon fully intends to swat most of these sellers down. Let’s talk about what they are going to do and then speculate as to why they are doing it.
Late last year, Amazon announced that they are again raising seller fees. This time, however, the fees are aimed ONLY at book, CD, DVD, and Video Game sellers. What looks on the surface as a single fee increase is actually two fee increases.
How bad is it? Let’s do math.
As it stands right now, Amazon takes 15% of the sale price as a commission and also charges a flat fee of $1.35 per sale. (As a side note, that $1.35 fee used to be $.90 and started at $0.00). They then credit back $3.99 to the seller for shipping reimbursement.
So let’s say you purchased a book from a book liquidator for $3.00 and then sold it for $5.00 on Amazon. Here’s what the fees look like:
Book sale price: $5.00
Amazon shipping reimbursement: $3.99
So the Amazon customer pays $8.99 in total.
Amazon takes 15% of the sale price: $.75
Amazon charges $1.35 flat fee: $1.35
Then you ship the book to your customer. 1 pound USPS media mail rate is $2.63
Remember, the book cost $3.00 to purchase. Let’s also assume that your labor per item and shipping materials = $.40
So what the net profit looks like is this:
$5.00 + $3.99 – $.75 – $1.35 – $2.63 – $3.00 – $.40 = $.86
So your $3.00 book made you $.86, or 29% profit.
For a bookseller, the key is volume – medium/large sellers can sell hundreds or thousands of books a day on Amazon and so that $.86 has to add up to be worth it.
Ok, so let’s talk about the Christmas present all media sellers received from Amazon last year:
Changes to Selling on Amazon fees.
We will be making two changes to how Selling on Amazon fees are charged for Media products (including Books, Music, Video, DVD, Software, and Video Games). These fee changes will not take effect until March 1, 2017, to give you time to plan accordingly.
- Variable Closing Fees (VCF): The VCF charge in Media product categories (Books, Music, Video, DVD, Software, and Video Games) will increase to $1.80 from $1.35 per item. This charge will appear as a Closing Fee (CF) instead of as a VCF to avoid confusion, as it will be a fixed fee rate and not variable”
Well, isn’t that wonderful. Amazon just jacked up fees by $.45 PER SALE.
Using the same math as above:
$5.00 + $3.99 – $.75 – $1.80 – $2.63 – $3.00 – $.40 = $.41
So the profit margin just got cut in half, and because it’s a fixed fee, that means that the lower the price you sell an item for, the worse the fee is for you. I’m looking at you, used book sellers.
But wait – Amazon announced TWO changes:
Referral fees: Currently, the referral fee for Media products is an applicable percentage of an item’s sales price (excluding any shipping or gift wrap charges). Effective March 1, 2017, the referral fee will instead be calculated on the total sales price
That is a massive fee increase also. Remember Amazon currently collects 15% on the sale price, so:
$5.00 sales price = $.75 fee.
Now, Amazon will collect 15% on the TOTAL sale, so:
$5.00 + $3.99 shipping = $8.99 the customer pays = $1.35 fee
To remind you, here’s what the current formula looks like:
$5.00 + $3.99 – $.75 – $1.35 – $2.63 – $3.00 – $.40 = $.86
And here is the new formula with both fees built in beginning March 1:
$5.00 + $3.99 – $1.35 – $1.80 – $2.63 – $3.00 – $.40 = $-.19
And that’s all she wrote, folks. All the profit is gone and now you will lose money selling on Amazon.
Simply put, this fee increase is devastating and designed to kill off the very media sellers that enabled Amazon Marketplace to grow and thrive to begin with.
Who Does This Impact The Most?
If you are a third party media seller on Amazon and you sell new or used items for under $9.00 total, you’re dogmeat. Simple as that.
Unfortunately, this includes most media sellers. Think about it – no one is selling physical CD’s for over $9.00. DVD is even worse – Amazon must pre-approve you to sell certain publishers or over a certain price, and that knocks out 80% of sellers, so DVD sales are well under $9.00. And then there’s books. Used books are absolutely under $9.00 and the vast majority of $16.00 retail trade paper books sell for under $9.00.
If you want to deep dive Amazon book pricing, there’s a dynamite analysis over at Authorearnings.com
The major exception I can think of is Textbooks – congratulations! You’ll be paying millions more in fees to Amazon, but you’ll survive this.
So How Do Sellers Survive This?
Here’s what sellers can do:
Action: Sell books, DVD’s, and CD’s elsewhere. There are plenty of other places to sell.
Analysis: Most sellers are already selling everywhere else also. As I’ve stated, Amazon makes up 70% or more of the average media seller sales. So there’s really no place to go
Action: Raise prices.
Analysis: Well yeah, duh. There’s no way to remain on Amazon without raising your price by at least $1.25 on the low end. There are several challenges with that.
a) Customers probably won’t pay more for printed books. We’ll talk more about this in the Why? section, but raising prices move printed books up into the pricing for….e-books. (raises eyebrows suspiciously)
b) At first many sellers will, for whatever reason, NOT raise their pricing at all or just a little. While you are losing tons and tons of sales, these sellers will be busy going out of business. Can you survive 3 months with a 90% drop in sales while you wait for these dummies to flame out?
Action: Get out of the business.
Analysis: Face reality, sellers. It’s probably time to move on. This is a killer blow and there may be no way out of it.
Action: Hey dummy, I’m not a media seller!
Analysis: Well, good for you. Question: If Amazon can take out an entire category worth of sellers, do you believe that your category is bulletproof?
Why Is Amazon Doing This?
I have a complete and thorough analysis of the Why? question coming out soon – for now let’s just say it isn’t good news for anybody except Amazon.
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