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Amazon Pushes Sellers’ Limits With Latest Pricing Policy

This time a year discounts aren’t unusual. But leave it to Amazon turn tradition upside down.

Over the last couple of weeks, almost every retailer has been rolling out press releases detailing their promotional strategies for the holiday season, and price breaks feature prominently in their plans.

But the deals Amazon is offering aren’t on the company’s own products; they’re on third-party sellers’ merchandise.

The Wall Street Journal recently reported that the e-commerce giant has lowered prices on some goods in its marketplace by as much as 9 percent. The discounts appear to be temporary and limited to products from companies that use Amazon’s fulfillment service.

Amazon decides what gets discounted on its own, though sellers are able to opt out of the program.

These third-party merchants aren’t losing out though. The discount comes out of Amazon’s margin, not theirs, which is why the goods are flagged with “discount provided by Amazon.”

And though 9 percent is a paltry discount, combined with Prime perks, it could be enough to tip the scale in Amazon’s favor.

“My guess is that Amazon’s figured out how much money they make off of a third party retailer transaction and have decided that this is a number that’s a balance between attractive enough to get consumers to buy on Amazon as opposed to buying at Walmart or some competitor without digging too far into the transaction cost to Amazon,” said Jeremy Richardson, an attorney at Michelman & Robinson who handles fashion and juvenile products.

The move is no doubt an attempt to go head-to-head with its competitors, according to Pete Killian, a principal at The Cambridge Group, but he said there might be more to the story.

First, this could simply be a way for Amazon to streamline its business. “The process for setting promotional calendars and negotiating between manufacturers and retailers and within retailers about who’s going to get quality merchandise space is slow and inefficient and leads to not the best experience for customers,” he said. So by just making these unilateral decisions, Amazon can move more quickly.

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Also, it’s impractical to think Amazon could meet with every third-party seller to discuss individual promotional calendars.

Even with that as a consideration, the 9 percent seems curious to Killian. “It’s just a first step, a testing of the waters,” he said. “It’s not especially exciting if you look at that number. I say expect for that discount to get deeper over time. [The 9 percent] minimizes downside and probably helps them calibrate some of their model. And it gauges some of this public response that we’re hearing—‘How upset are people going to be about 9 percent? What about if we give 20?’—and probably accessing some of their capabilities to respond to the strains that are going to be put on their system from this kind of activity.”

But even if Amazon decides to offer deeper discounts, what’s the big deal? Consumers will be happy, which should prompt more sales, and the money’s coming out of their coffers and not the sellers’. Aren’t sellers coming out on top?

In some cases, maybe, but other sellers, whether they’re brand owners or wholesalers, could see it very differently.

As it is, some brands have been hesitant to sell on Amazon because they’re afraid it will erode their brand. And with Amazon taking control over pricing, those concerns could be magnified. “The problem you’ll see is that, especially for luxury brands, they want to be able to control the price because if you’re a luxury brand, discounting is not something that goes well with luxury,” Richardson stated. “It’s an exclusive experience and if you can buy it online for 10 percent off, it cheapens the brand.”

The second issue is for authorized wholesalers on the site. These sellers have agreements with the brands that often included minimum advertised pricing policies. Think iPhones. They’re not sold at varying prices all over the place. That’s because they’ve agreed to stick to Apple’s pricing. If they were to violate that agreement, the relationship would likely end. So what of these sellers who have said one thing but now, because of Amazon, are doing another? “That’s a can of worms. I can tell the supplier it wasn’t me, it was Amazon but I might lose a supplier,” Richardson said.

Ultimately, Amazon knows it’s their playground, so it makes the rules. And yes, other marketplaces exist, but right now with Prime it’s hard to argue that taking your bat and ball and going elsewhere would net the same rewards.

And as Amazon has shown, just because you’re not selling on its site, doesn’t mean your products won’t be available there. In July, the retailer made headlines for buying goods from its third-party vendors, which it then resells. The program was designed to help the e-commerce company meet demand for specific brands in underserved markets. When the practice came to light, it got pushback from some brands and sellers.

The macro story is they have all the leverage here and it comes through access to the customer with Prime and everything else they’ve got,” Killian said. “They formed that layer between sellers and buyers now in e-commerce that you kind of have to go through them to reach very attractive Prime customers.”