Amazon charges sellers fees that are high enough to offset losses from Prime, a new report says

The massive reach of Amazon’s e-commerce platform is appealing for any small business that wants to sell its products online. But a new report suggests that the cost of doing business can become a Faustian bargain for a third-party seller, as the fees that Amazon charges them can quickly eat into profits.

Amazon Toll Road, a report from the nonprofit Institute for Local Self-Reliance (ILSR), found that Amazon charged third-party sellers a total of $121 billion in fees this year alone. According to the report, written by ILSR co-director Stacy Mitchell, those fees — for things like advertising, referrals, and shipping — usually mean that small businesses lose money to Amazon; Mitchell said that in 2014, sellers paid Amazon $19 of every $100 in sales, and today, it’s more like $34 per $100 in sales.

And, Amazon obscures the profit it makes from these small businesses in its financial reports, lumping it in with other less lucrative divisions “because showing that they generate these profits from small businesses is not a good look,” Mitchell said in an interview with The Verge.

But its Amazon Prime subscription service — believed to be a money loser for the e-commerce giant — provides Amazon a loyal base of shoppers who want to get their money’s worth of free shipping. The profits Amazon makes from seller fees subsidize the losses from its Prime division, according to the report.

“If you’re a company that makes or retails consumer products, you’re damned if you don’t sell on Amazon and damned if you do,” Mitchell said. A small retailer could try to use its own website to reach customers, but Mitchell says that’s often akin to “basically hanging your shingle out on a dirt road because of the role that Prime has in making Amazon often the first and only place customers go when shopping on the internet.” Former Amazon CEO Jeff Bezos said in his final annual letter to investors in April that by that point, Amazon Prime had grown to 200 million subscribers.

There are other e-commerce platforms where a small business could sell its products online, theoretically charging customers on those sites different prices than its Amazon customers. But if the seller also wants to continue selling on Amazon, it has to keep the same prices across the board. Under Amazon’s Fair Pricing Policy, a seller could be penalized if Amazon discovers the seller charging customers a different price for its products on other e-commerce platforms. Penalties can range from removing the seller’s product from the prominent “buy box” on a product listing page, all the way up to termination of selling privileges.

Amazon says the Fair Pricing Policy is aimed at pricing practices that “harm customer trust,” but the ILSR report concluded that it usually means customers may end up paying more overall because third-party sellers have to inflate the prices they charge customers to be able to pay Amazon’s fees and turn a profit, Mitchell explained.

Brooke Oberwetter, an Amazon spokesperson, said in a statement emailed to The Verge that the ILSR report was “intentionally misleading” and that it conflated Amazon’s selling fees with the cost of “optional services” that some sellers purchase, like logistics and advertising. Those fees range from 8 to 17 percent of the selling price, Oberwetter said. “These selling fees are highly competitive when compared to other selling options such as marketplaces like Walmart, Target, eBay, Etsy, and others, or direct-to-consumer via companies like Shopify and BigCommerce.”

In addition, Oberwetter said, some Amazon third-party sellers buy its Fulfillment by Amazon logistics service, which she said offered fulfillment services 30 percent cheaper than other logistics providers, as well as faster shipping.

“Some sellers also choose to purchase advertising from Amazon or use other advertising providers like Google, Facebook, and Twitter,” Oberwetter added. “Sellers are not required to use our logistics or advertising services, and only use them if they provide incremental value to their businesses.”

This assertion that the seller fees are not mandatory echoes testimony Bezos gave before Congress last year. Asked by Rep. Mary Gay Scanlon (D-PA) about what appeared to be sharp increases in the fees sellers pay to Amazon, Bezos said, “When you see these fees going up, what’s really happening is that sellers are choosing to use more of our services that we make available.”

The ILSR report, however, posits that the fees are all but necessary if sellers want their products to be visible in places like Amazon’s “customers who also viewed this item” carousels on search results pages. And unlike other forms of advertising, where a business places ads, reaches customers, then sells to those customers directly, Amazon’s policies limit most sellers from building these kinds of direct customer relationships. But, Amazon did test a feature earlier this year that would let sellers contact customers directly.

Mitchell writes in the report that an effective policy solution would separate Amazon’s divisions — marketplace, retail, AWS, and logistics — into standalone companies. She said a breakup of Amazon seems more likely than it has in recent years; the new chair of the Federal Trade Commission, Lina Khan, “sees the dangers of big tech.” Earlier this year, Amazon actually petitioned to have Khan recuse herself from being involved in proceedings that dealt with the company. And while there’s been an overall increase in antitrust scrutiny by President Biden’s administration and from Congress, Mitchell notes, whether there’s enough momentum behind the renewed focus on antitrust issues remains to be seen.

“A year ago, if you had asked me would we have bipartisan antitrust bills in Congress with the kinds of co-sponsorship we’re seeing, I would have been surprised by how much progress has been made,” she said. “We’ve gotten a lot further a lot faster than expected.”