Amazon's Toll Road – How it funds its monopoly empire
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This sounds like a lot, but "revenue" in this case is the retail sales price of the goods.
Traditionally, in a wholesaler-retailer model, the retailer "keystones" their cost on the good, meaning they arrive at the selling price by doubling their cost. This is of course a somewhat antiquated idea now (markups are generally lower now) but it gives you an idea of typical gross margins before selling costs (doubling the cost would give you 50% margins).
34% means that Amazon is keeping 34% of the retail price of the product as profit. That doesn't actually strike me as particularly high. It's not low (Costco is much lower, with 15% selling margins) but it's not particularly high either.
The article goes on to complain about advertising costs. Welcome to retail! Are you ready to play slotting fees? End-cap fees? Promotional and coop fees? Most big retailers do this. I know of not-huge companies that pay millions per year, in advance, to a home improvement retailer to secure exclusivity over an entire shelf.
It's one reason why selling to retail is annoying (versus selling to businesses), because almost all big retailers are extractive and prioritize their profits over great prices to consumers. But this article comes across as if they don't know anything about retail.
There's a good argument that this kind of behavior is perhaps Day 2 behavior - the conversion into a big company that pushes for margins above all else. But it's not different from traditional retail.
then later
> But it's not different from traditional retail.
Aren't these contradictory?
Is it really apples to apples, or more of an apples to oranges type of comparison? I'm not convinced we should be using brick & mortar retail business practices to justify/rationalize business practices of Amazon.
Coca Cola doesn’t want to pay your local supermarket to be in the front of the soda aisle. But they do, because it drives sales.
If we were talking about Amazon as just a retailer, yes, everything you've said would be true.
If we were talking about independent 3rd parties being retailers on their own web sites, then yes, everything you've said would be true.
But we're actually talking about independent 3rd parties selling through Amazon's marketplace. Amazon hasn't really promoted its store as if it was a department store, but rather as a mall owner (and perhaps operator of the keystone store in that mall). In that context, the usual arrangement is that the 3rd party sellers just rent space from the mall owner, but the mall owner gets no cut of their sales (nor any information about their sales).
Most 3rd parties selling on Amazon do not consider themselves as "selling retail" the way they would if they put their products in Nordstrom or Target or Neiman Marcus or Dillards. They (imagine) are using Amazon as a way to sell direct to customers, but instead, Amazon's arrangement is indeed more like the traditional retail model that you've described.
I am fairly sure that if Amazon had started the marketplace by promoting it just as an online department store, with all the "selling to retail" elements in the GP, it would have been much less successful than it was given their actual promotion of it as a marketplace.
Strip malls no. Strip malls with an anchor store could have some profit going to the anchor stores.
Amazon has solved the shipping end and that's where much of their value is.
Therefore, Amazon, Walmart, etc, should be prohibited from competing with their own customers. Vertical partitioning.
Further, the advertizing business must be separate, for all of FAANG et al. Horizontal partitioning.
Busting these trusts up will unlock shareholder value, allow competition, boost innovation. Same as before (oil, railroads, telephone, etc).
I'm ok with Amazon remaining in logistics, shipping. Once Amazon Prime is no longer run at a loss, it probably won't be anti-competitive.
34% is Amazon's average cut, but it's not profit. They are getting this number including advertising and fulfillment spends.
I understand some press, or parties want to take down Amazon or whatever it is. But they need to do a better job at it.
$0.50 actual cost
$0.34 Amazon fees
In the wholesaler-retailer model, the process looks like this:
Wholesalers buys item from manufacturer for, say, $0.25. They sell item to retailer for $0.50, and keep $0.25 in gross profit. Retailer sells for $0.76, for a selling margin of 34%. The $0.26 of profit the retailer gets pays for the store, staff, logistics, net profit etc.
In Amazon's third party model, it looks like this:
Wholesaler buys item from manufacturer for $0.25. They sell item to end-customer for $0.76. They get $0.51 of profit! But now they pay Amazon a litany of fees amounting to 34% of the price the item sold at: 34% of $0.76, or about $.26. That leaves the wholesaler with the same $0.25 of profit.
The main difference in these two processes is that in the third party model, the wholesaler keeps the inventory on their books for longer, because they ship it to Amazon and then the inventory sits at Amazon (but is still owned by the wholesaler) until it sells. That means that even if they get the same profit in the end, they've employed more capital, and it gooses Amazon's return on invested capital (they don't have to own that inventory) while reducing the wholesaler's.
The immediate post sales support could be pretty huge and typically the retailer would handle most of that, wouldn’t they?
Your example made it more clear, so thanks.
Walmart makes $0.02-0.03 on the dollar in margin. Retail is either speciality or volume driven.
Have always thought of Amazon as "providing services / platform" to seller.
But from the reverse perspective, Amazon is outsourcing to sellers. Amazon is handling so much of the transaction, the seller may never actually see the product. Sellers are getting paid, primarily, for managing inventory risk.
The liability (from an accounting perspective) of the inventory lives with the mostly small business sellers who don’t care as much.
So hold up... the "fees" include fulfillment and optional advertising expenses? And it's still only 34%? That's a bargain! In brick and mortar retail, you are lucky to get 50% margin on a product, and that's just in the stocking (fulfillment) costs - let alone advertising!
It's also worth noting those referral fees are not just free money for Amazon - they are buying ad space on other sites on behalf of their customers (likely at a loss). So their report that Marketplace is secretly crazy profitable is mostly bunk - it basically assumes Amazon incurs no costs to ship and advertise products.
The real problem they are dancing around here is that Amazon allowed the direct inclusion of international storefronts in the marketplace. Companies abroad can operate at much lower margins, and the traditional e-retail business model (buy from wholesalers, resell at markup to consumers) basically doesn't make sense anymore.
How the hell is this legal? Who do I donate to in order to start the ball rolling on making it illegal?
The whole spirit of market capitalism is "players are allowed to be relentlessly self-interested but we rely on competition to keep them in check." MFCs clearly undermine competition and therefore undermine the very foundation of our economy.
Discover typically charges the merchant lower fees than AmEx does when you checkout at a retailer. However the merchant is forbidden by it's agreements with AmEx (and Visa, and Mastercard) from giving you a discount if you use Discover card.
They do make about half their revenue off swipes, but I wouldn't describe Amex as low fee to cardholders. Their flagship card has an annual fee of $695.
What lender are you thinking of that makes Amex look low-fee?
In context of article with specific point to make, it sounds awful. But think about it: if e.g. Marriott starts selling rooms for $100 on their website, but $120 on any other site such as Bookings or Expedia or whatever, isn't this ALSO something you as a consumer would get peeved at? Wouldn't you immediately demand that they put a stop to that insidious practice, and regulate some law that forces Marriott to give same low prices to everybody? :->
I'm mad it's the other way around, the cheapest price should always be direct. If someone wants to "add value" let them justify the mark up.
Amazon's policy makes total sense. If you discover an item on its site, benefit from its reviews, specs and descriptions, and then last minute, go buy at Newegg or Walmart or wherever because its $20 cheaper, how does that help Amazon? Amazon would rather have you "discover" items that it sells at the lowest price, and thus lowest probability of you going to an alternative store. I don't like Amazon's massive dominance but I can't blame them for directing you to items you are most likely to buy from them.
Amazon promoting products that Amazon is most likely to sell is NOT "anticompetitive behavior."
Every company seeks to do things to benefit themselves. Do you oppose them all?
Amazon is obviously free to show the best deals on Amazon. That's not at all what this is about, and you know it.
The OP suggested lawmakers should somehow make it illegal for Amazon to offer preferential treatment -- prominently featuring their items -- to suppliers that don't charge less to other retailers. Every store does the exact same thing -- and this is GOOD for consumers. When your supermarket puts Coca-Cola on sale (because Coke paid the supermarket), it brings out extra bottles and places them at the front of the store and makes it easy to buy. Sure you can still buy Pepsi, it's back somewhere on aisle 12 where it always is.
Haha you can't even pretend to have misunderstood the situation to this extent. QED on the bad faith. Amazon DGAF what percentages other retailers get. How would they even know those? They are penalizing suppliers for the prices that consumers pay at other retailers. So long as Amazon are allowed to do this, they'll just keep slowly increasing their cut. What's 34% today will be 40% next year, etc.
Although I made the initial mistake, I'm pretty sure you just piled on with more bullshit. I'm rather confident Amazon has a good read on what its suppliers charge other vendors, just Wal-Mart and Target do in the B&M space, and that they do very much care.
> Even though some competing platforms charge much lower fees, if Steve lowers his prices on another shopping site, Amazon’s algorithms punish him
I think in most cases, this "fair-pricing" bot kicks in because a seller has instead inflated prices on Amazon to squeeze more profit from Amazon customers. Amazon thinks that such tactics diminish the value of their marketplace, so they apply this crude heuristic as a way to disincentivize it.
So to answer your question: it's good for you, because if you're shopping on Amazon you can reasonably expect that you're getting good prices (at least in theory). This leads to a virtuous cycle which feeds the beast: people buy more stuff from Amazon, Amazon can operate more efficiently, you get lower prices.
Steve is griping against Amazon, but quite possibly he just has a bad business, and the core of his problem is that he can't compete effectively with other sellers on Amazon. But to him, Amazon seems like the problem because he feels like he's between a rock and a hard place.
But, hypothetical harm aside, Amazon (FBA especially) is currently a really good deal for sellers in terms of shipping costs and access to customers.
Presumably for the same reason(s) that you want an unelected corporate bureaucrat in Seattle making these decisions instead.
If a committee of Senators, on the other hand, makes a declaration -- Amazon cannot sell Chinese goods cheaper than American-made alternatives -- or maybe, delivery times to rural areas must match those to cities -- then everybody loses, and you can't opt out of that.
You can ignore a commitee of senators at any time by voting them out.
Do board votes or shareholder votes not count ?
Alternatively
"Why would you possibly want your democratic representative in Washington, or committee of such, regulating markets to work in favour of the average citizen?"
Amazon promotes items that it sells for the lowest price. Your local supermarket sends out a flyer every week with all the items it has put on sale, then makes sure those items are easy to find in the store. It's the same thing. Or maybe you want Senators to have final approval over supermarket flyers too.
When Amazon can force a "lowest price" the cost of Amazon's service always gets passed to me, and the lowest possible price is higher.
If Steve wanted to sell through a traditional retailer, he would wholesale to them and they would set the price to whatever they want.
Amazon's model is different, but not really. Imagine Steve could come in to negotiate a wholesale price with an Amazon rep.
Amazon would say: "Steve, we want to have the lowest prices in the marketplace. We checked 10 other stores, and the lowest price we found is $10. So, if we make a deal today, that would have to be our retail price. Now, working backwards, if we subtract our profit margin and expenses, the best wholesale price we would buy at from you is $3. Take it or leave it."
Also, what are these competing platforms charging much lower fees? In any case, if you're not profitable selling at the lowest price on Amazon, you don't have to sell on Amazon. You can go to these other platforms, or set up your own website. And the reason you won't want to do that is because actually Amazon offers a lot of value both to sellers and customers.
Even if you use a search engine, most of the top results are usually amazon, or a website that links to Amazon. At least in my experience.
I’d say it’s worse in other countries. The US probably has the most developed non-Amazon e-commerce market out there.
In Canada, doing an eBay search too is usually a non-starter, and there we have fewer niche online retailers in the first place.
Other countries without an e-commerce market right now risk becoming 100% dependent on Amazon.
Translated with Deepl
Source: Interview wiwth Philippe Moati, https://www.lenouveleconomiste.fr/philippe-moati-la-force-da...
> Steve has tried to escape Amazon’s grip by selling on other platforms. But he’s had no luck generating more than a trickle of orders on these sites.
Kinda gives the game away, right? You're either sharecropping on Amazon's land or Google's. There is no scalable way for companies to reach their markets that doesn't involve something being the portal that people use to do product discovery. Whatever business finds themselves in this position will by its very nature wield disproportionate market power. You can't "break up" Amazon, Google, YouTube, Apple, and the countless other people who act as discovery portals into different markets -- you can only regulate them.
> It would help if he could lower his prices on these sites, he says, but Amazon effectively blocks him from doing so under its “fair pricing policy.”
You can't get the benefit of free marketing by being listed on Amazon and then try to screw them over by lowering prices on your own sites. This isn't monopoly power inasmuch as businesses not realizing that they're trying to get advertising and discovery for free without paying the piper.
If this is "picking winners" then every participant in the economy is picking winners all the time. Usually I think the term means something more like an outside actor deciding that results will be different than what the buyers and sellers would have decided in the absence of that outside actor. One might think that "the government" is the only such outside actor. However I feel that other large organizations with plenty of money and political power also qualify.
"For every $100 sellers earn in sales, Amazon is taking $34, up from $19 in 2014."
Whereas if one doesn’t have prime, there’s many other retailers.
According to this article, if you use Prime, you cost Amazon money.
If you subscribe to Prime in any other way, Amazon might make less profit, but you're not costing them money, you're 'feeding the beast.'
A sale on item “x” is not a loss if it’s net effect is to bring in massive profits. If there was no overall monetary benefit to prime it would be peculiar for Amazon to keep it.
The customer pays for the prime shipping.
Now, rant about Amazon Music incoming!
What I don't like though is all the spam Amazon does in Amazon Music to try to get you to upgrade to Amazon Music Unlimited - honestly, it's absolutely relentless! Multiple times a day it brings up a full-page and/or popup nag, and sometimes even does it in the middle of a track! I've been a member for several years, and must have said "no" thousands of times by now - you'd think the system would have realise by now that all they're doing is damaging good will.
You said you haven’t canceled your prime subscription, but have you started using the service less? I think this is a case where the relentless A/B testing ubiquitous in modern tech fails: how would one even measure this long term sentiment that may not affect user behavior for a very long time?
Although, as a user I’ve learned to complain by canceling (and explaining why when possible).
You're right that it's difficult to measure goodwill over long timescales, but IMO not everything needs to be 100% science driven - the team behind Amazon Music must know that excessively, relentlessly nagging already paying customers is going to a not them.
Amazon is double dipping, because not only do you pay them a 15% fee to sell anything on their platform, now, increasingly in order for your products to get ANY visibility and traction, you also have to spend ~15-20% on advertising in order for your products to not get relegated to the 2nd or 3rd page, where customers won't go.
This isn't because Amazon is evil. This is mostly because Amazon became too successful, so now where 4-5 sellers used to compete in a category, you now have 30+. So now you have no choice but to get them into a bidding war with each other for front page space, eating into their margins.
Who's the main beneficiary of this? Amazon, of course.
What's scummy of them is that they fully recognize this, yet refuse to reduce their 15% fee. In the past, the fee represented money paid to Amazon for your products to be visible on their platform (and for hosting product data and images). These days if you JUST pay the 15% fee, you will get literally 0 visibility and never get off the ground.
But that's not all folks!
Another way they're being scummy is having piss-poor algorithms that prevent you from raising the price on a product and disabling the listing for something they consider a high price. Well, obviously if you've created a system where you take 40% of the 50% markup, you constrain the 3rd party seller to never making more than 10% margin. Remember, this 10% must pay for
1. Returns
2. Employees that manage the catalog
3. Employees that manage order processing
4. Employees that deal with Amazon customer communication
5. Developers that make integrations for fulfillment purposes and help develop software to make catalog management easier.
Is it any wonder then when this big brother is telling you to stop hitting yourself, while using your own hand to do so, that people get mad?
Yet ANOTHER way they're being scummy is blatantly ripping off successful products, pushing them down, and promoting Amazon Basics brand or whatever they have now, selling the exact same thing.
Tails I win, heads you lose indeed.
They are arguing that Amazon policy of having the lowest price for listings, artificially inflates the prices?
So in order to not inflate prices, Amazon needs to raise prices???
Are you thinking of if Amazon had instead set a maximum allowed price policy?
Except the the policy is you cannot list on Amazon at a higher price, because they can only dictate the terms of their platform. Are they setting a minimum or a maximum?
"Setting a price on a product or service that is significantly higher than recent prices offered on or off Amazon"
[1]https://sellercentral.amazon.com/gp/help/external/G5TUVJKZHU...
If a seller wants to sell on momnpop-example.com which only takes a 5% cut and Amazon.com with its 30-40% cut, they are disallowed to pass any of the lower overhead for customers on momnpop-example.com back to the customer as they must price the same as on Amazon.
I guess it’s a little confusing because when Amazon sets a maximum price policy on their marketplace pegged against others, it in effect creates a minimum price policy on other marketplaces.
I just don't find it a convincing argument of harm to the consumer.
Let's look at restaurants & delivery apps as distribution channels. They charge 12-15 dollars through the menu on the app for a 10 dollar-hamburger if I had ordered in person, because the margins are different. It's not benefiting the consumer, it's benefiting the business and is actually a deceptive practice to the consumer.
This has been illegal in USA since 1890. The only hope for Amazon is to hire every decent economic torts lawyer in the nation before e.g. Shopify get their act together. This is open-and-shut restraint of trade. Given the sums involved, it might actually be possible that a year or two could pass when Bezos doesn't get even more stinking rich...
My local FiveGuys sells a Cheeseburger for $11.87 Thru DoorDash app but for $9.89 thru the FiveGuys App. We aren't even talking about a different service like Delivery vs Pickup, those fee's get layered in later -- its the same menu priced 20% higher to pass costs of the partnership onto the customer. This is anti-consumer and deceptive and is the sort of behavior Amazon prevents with their policy.
You're still completely confused about your own analogy. Fiveguys are analogous to product vendors, in that they actually have the thing that the customer wants. Doordash are analogous to Amazon, in that they charge a fee for delivery of the thing that the customer wants.
Yes it is
> It represents the additional value that their service provides.
In theory but that is with non real world assumptions.
In this case, I would be charged 20% more for the identical hamburger either being delivered to my house or me picking it up from the store because of how I placed the order. It has more to do with lack of transparency on the platform and deceptive billing practices than value add.
Amazon uses their leverage to not allow vendors to charge 20% to pad their margins. F@#$ DoorDash for lying about prices on their platform and allowing vendors to pass it on to consumers.
Continuing the doordash if it were like Amazon, the 1.98 extra for ordering on door dash is forced to be also charged to people who go pick it up themselves. That doesn’t make sense but that’s what Amazon is doing. Amazon is not forbidding them from padding the price, its forcing them to pad the price elsewhere in order to make that elsewhere uncompetitive. it’s forbidding them to pass on cost saving from using marketplaces that don’t charge the exorbitant tolls that Amazon does.
For your view of it to be correct, the cost of an item would have to be separated into two categories, marketplace fees and base item cost. Market place fees would include every cost of selling on Amazon, any percent they take. Then if Amazon said that the base item cost must not be lower anywhere else, but the marketplace fee portion can vary, then yes your view would be correct. However, Amazon is actually saying yeah our marketplace fee portion may be exorbitantly higher, but you have to charge people our high prices even on other cheaper marketplaces
[1] A merchant is permitted to offer discounts for paying in cash, however, the discount must be given as a reduction from the standard price.
Does Amazon prevent you from offering promotions or discount code's on your own Shopify site? Otherwise I don't think it's analogous.
> it’s forbidding them to pass on cost saving from using marketplaces that don’t charge the exorbitant tolls that Amazon does.
No it's forbidding them from passing on the costs of the partnership, to Amazon's customers
> For your view of it to be correct, the cost of an item would have to be separated into two categories, marketplace fees and base item cost.
Which in my example you do have. The consumer experience is almost identical... I can place order for pickup/delivery thru the FiveGuy's app or thru the DoorDash app, but thru DoorDash the FiveGuys menu is priced 20% higher to pass-on the cost of the partnership to DoorDash's customers, instead of FiveGuy's selling a burger at lower margin.
If Amazon remove's the policy, prices go up 20% on Amazon to be at the same margin of their Shopify app or w/e. It's the businesses Amazon was squeezing who will benefit not the consumer. Maybe we shouldn't let Amazon or other oligopolies have that much power over vendors but they are taking the side of Amazon customers here.
And at the end of the day... some distribution channels are more expensive than they are worth. If the commercials don't make sense, stop listing on Amazon.
This is the point. Amazon is has too much market share for that to be feasible.
Anyway multiple people have attempted to explain how Amazon’s policy is not in the interest of us consumers or the businesses. At this point, one can ponder it and try to see that view or one can keep thinking Amazon is helping us rather than driving up the prices.
> but thru DoorDash the FiveGuys menu is priced 20% higher to pass-on the cost of the partnership to DoorDash's customers, instead of FiveGuy's selling a burger at lower margin.
But they can’t sell at a lower margin! They have no margin to spare!
> Amazon remove's the policy, prices go up 20% on Amazon to be at the same margin of their Shopify app
No, prices stay the same on Amazon to be competitive with other Amazon sellers. Prices lower elsewhere off Amazon
Market share of what ? The internet?
Of course Vendors can become too dependent selling thru Amazon just like they can with any large retailer or on any enterprise client. But that is not the same things as a monopoly.
Even this anti-Amazon parent piece, only makes the claim that 60% of shoppers "start their journey on Amazon", whatever that means. Personally, I might "start my journey" on Amazon but I only try to buy digital goods (AWS, Video) and will actually be fine with paying more through other sites and having to create account and all that headache, because I've had extremely negative experiences with Amazon & don't trust co-mingling.
They can spend lots of money on Google, FB (or even Walmart and Target) adds instead of on Amazon.
> But they can’t sell at a lower margin! They have no margin to spare!
Then they should stop selling through that channel, maybe chartering private jets isn't the best distribution strategy for a lemonade stand... Or they can make changes to their business so that these channels make sense.
>> Amazon remove's the policy, prices go up 20% on Amazon to be at the same margin of their Shopify app > No, prices stay the same on Amazon to be competitive with other Amazon sellers. Prices lower elsewhere off Amazon
Were both generalizing about fundamental changes to massive/complicated marketplace so who knows both versions could play out to some extent... but like I've said I think the businesses will inflate costs to pass to the consumer, if they are given the opportunity.
If you can't list at a higher price on Amazon than anywhere else, then you also can't list at a lower price elsewhere.
1) ALL PRODUCTS ARE LISTED ON AMAZON
2) ALL PRODUCTS ARE LISTED ON AMAZON BY THE ORIGINAL UNIQUE MANUFACTURER
Are two major ones.
That right there is the very spirit of anticompetitive behavior. Refined, distilled, purified, and concentrated. And yes, it absolutely raises prices and puts the proceeds squarely in Amazon's pocket.
A. It's Amazon doing the charging, B. No, it's the price of a regulatory environment that frees the largest distribution channel from the need to compete on price, and C. we're talking about the legality of retaliating for exactly that.
The best you can argue for is that if you are an Amazon customer, you're paying less for the convenience of Amazon than you would be otherwise; but it's not clear that's a net win for consumers at all.
Is it spin? Amazon's policy is that they can't list on Amazon at a higher price [1]. So they want to charge a higher price on Amazon, but they can't. How do consumers win with them charging higher prices on Amazon?
[1]https://sellercentral.amazon.com/gp/help/external/G5TUVJKZHU...
Amazon would have to provide a service that was actually worth the premium they charge. Perish the thought.
> Amazon would have to provide a service that was actually worth the premium they charge. Perish the thought.
I don't follow this argument... They need to raise prices, to put pressure on themselves to provide a better service to customers because they raised prices?
I am not a fan of the tech oligopolies, there are tons of legitimate criticism of them but this seems circuitous
For me it's about the externalities such as poor treatment of their workforce, tax avoidance, worsening the consumption culture and environmental impact.
Amazon is an amazing thing when we're wearing our consumer hat. Not perfect, but really deeply amazing.
But if you put on some of the other hats, it's no longer so clearly a good thing. Wearing our consumer hat all the time ("Cheap! Fast! Great!") is not a positive thing for the overall structure of society.
But being big means you draw more attention. And journalists love to give them attention.
I try to avoid doing business with Amazon but I think arguments should start from a reasonable basis.
I think more people are abandoning brands as they realize they paid a premium for a non-premium item. I think more people are embracing no-name stuff (with a return policy) than "dreading" it as you describe.
(and yes, Amazon's algorithm benefits Amazon)
I'm curious how this compares with other channels. I guess there's a wide range of spectrum; from having their own online/offline stores all the way till Amazon/Ebay etc.,