Earlier this year, Amazon started to roll out Prime’s one-day free shipping for Prime members. Receiving your purchases as quickly as possible without the crazy fees is a dream come true for consumers.
But, what does this mean for brands?
Rise in FBA Fees
“With Prime’s free one-day shipping I’m curious to see what’s going to happen to FBA fees in February,” says Laura Meyer, Founder, and CEO, Envision Horizons. Historically, Amazon has updated its FBA fees at that time of year.
We saw from Amazon’s Q3 earnings report it was expensive to set up logistics for one-day shipping. Even Amazon had surprises in the cost. “We can only assume that in the beginning, Amazon took on a majority of the costs. They also possibly viewed some of these costs as marketing costs. It’s an additional way for them to innovate and continue to hold market share,” says Meyer.
But, what will Amazon do to subsidize these costs and level the playing field in 2020?
“Brands enrolled in FBA are eligible for one day delivery in certain areas of the country. However, I feel FBA fees will increase as by much as 25%. Amazon will place higher health metrics to keep top sellers in stock at their warehouses,” says Meyer.
Like the “Small and Light” program released earlier this year, we predict they will start offering much lower one-day shipping fees for small and light products that are priced lower.
An internal Amazon source revealed that when they roll out the new FBA fees in Q1 they might have more affordable options for the smaller items to participate in one-day shipping. The problem with a $10 item and your FBA fee being $3.50 is that’s 35% of your margin. That doesn’t include the referral fees, cost of goods, marketing efforts, etc. – it’s really hard to generate a profit at that point. This also aligns with Amazon having one-day shipping. Where Amazon has struggled is selling immediate need small items like a toothbrush. Customers will still run to CVS to buy those on-demand products and brands prefer selling those products in brick and mortar because of profitability.
Rise in Inventory
An increase in demand = an increase in inventory.
According to Amazon’s website, by maintaining target inventory levels of eligible, popular standard-size products, brands will get a monthly storage fee discount of 50% to 75%. Sufficient inventory is critical for offering faster delivery speeds on fast-moving products because it allows Amazon to place units in warehouses close to customers.
We know storage fees vary. In Q4 they increase significantly and the rest of the year they are 69 cents per cubic foot so this really is a great promotion. See the chart below from Amazon’s website for a quick breakdown:
One thing sellers should take into consideration is state sales tax. The more states that your inventory is in; the more states you most likely should be paying sales tax. We recommend to always checking with your accountant to figure out how you should go about paying sales tax.
“Overall, I think 1-day shipping is great for our clients and I’m curious to see if clients start feeling the pressure to offer 1-day shipping on their own e-commerce sites. I would also like to make a point that one-day delivery brands could start to see Walmart and Target sales start coming through their Amazon channel, but that we also predict conversion rates to increase especially for classic CPG products,” says Meyer.
We can’t help but wonder, now that Amazon’s offering the fastest delivery service available, what’s next?