Amazon has been attempting to curb losses on shipping orders of low-priced items by raising shipping fees for consumer goods suppliers
Amazon has been attempting to curb losses on shipping orders of low-priced items by raising shipping fees for consumer goods suppliers, Bloomberg reports.
The e-commerce giant deducts transport costs — or the cost of moving a supplier’s inventory through its distribution network — from payments for bulk orders from suppliers.
But, as its shipping costs have dramatically increased over the years, Amazon is looking to shift these costs more to its suppliers, and specifically target low-cost items that are heavy and expensive to ship, like beverages and diapers.
Additionally, the e-commerce giant is planning to make it more difficult for shoppers to purchase single, low-priced items, such as toothbrushes or soap, to encourage them to add these items into a larger purchase. Some personal care and health items on Amazon are already restricted as “add-ons,” or items that can only be purchased with a basket size of $25 or more. However, the company is planning on designating more items as “add-ons” by expanding the category to include health and beauty products that cost less than $7.
Amazon is looking to curb costs because its shipping costs are skyrocketing. Although Amazon has been working to optimize its fulfillment network through various initiatives, like extending order cut-off times to eliminate split shipments, its shipping costs are still growing in the double digits. Shipping costs reached nearly $20 billion in 2017 for the e-commerce titan, growing 31% year-over-year (YoY) in Q4 alone. As Amazon looks to grow its Prime Now, one-hour, and two-hour delivery services, while keeping its reputation for free and fast shipping on all orders, its move to improve profitability on consumer goods products is a sensible one.
The retail giant is following Walmart’s move to aim for profitability in shipping online orders. Walmart has already raised prices for some online goods, and recently began to push suppliers to offer more high-priced goods on its e-commerce site. Although these two companies have been in a grid-lock price war, it seems like they’ve come to a tipping point in terms of shipping costs.
However, each company’s approach has different pros and cons, making it unclear which one will be more successful in optimizing online revenues while minimizing shipping costs.
- Amazon risks alienating its suppliers by increasing fees, which is a risky move as its competitors grow their e-commerce sites. Amazon is already known for demanding a lot from its suppliers during negotiations if they want to remain major suppliers on the site — it’s previously increased the portion of freight costs suppliers take on, or persuaded them to purchase more ads on the site, for example. However, if suppliers begin to gain more revenue from other e-commerce sites, Amazon could lose its leverage and risk renegotiating at less favorable terms.
- Meanwhile, by offering more expensive items online, Walmart risks losing out on sales from its core, price-conscious customer base. Walmart may benefit from taking an “add-on” approach to remain in favor with these customers, and could potentially attract more customers if it keeps the basket size threshold lower than Amazon’s.