The proliferation of internet-enabled mobile devices coupled with mobile payments has made e-commerce one of the most dominant forms of trade globally. Companies generate billions of dollars in sales on the interwebs every year thanks to the ease and convenience of shopping online, making e-commerce an incredibly lucrative industry. However, success in this sector is dependent on understanding the hidden costs involved in running an online store and coming up with sustainable ways to cover the expenses.
These hidden e-commerce costs are putting increasing pressure on small businesses, eating into their profits and making it difficult for them to maintain sustainability. Increased competition from the massive influx of online stores has complicated the e-commerce sector’s dynamics and increased the challenges businesses have to deal with when they sell their products and services online.
For starters, third-party sellers on online marketplaces like Amazon have been paying larger and larger platform fees over the past few years. Amazon also updated the fees applied to sellers that use Fulfillment by Amazon (FBA), added a surcharge to shipments that aren’t split across Amazon fulfillment centers when the service used to be free, and a new low inventory fee that led to significant seller backlash.
A study by e-commerce analytics company Marketplace Pulse has found that the cost of doing business on Amazon is continually rising resulting in Amazon retaining more than 50% of third-party seller revenue, up from 40% half a decade ago. With around two million businesses selling on the online marketplace as of March 2022, operational fees are a huge earner for Amazon.
Marketplace Pulse sampled profit and loss reports from third-party sellers on Amazon and analyzed these reports to determine the costs related to operating on Amazon. The study noted that in addition to the referral fee, the base fee Amazon charges sellers for transacting on its platform, Fulfillment by Amazon, and advertising are among the most important fees sellers pay.
FBA ensures their products are eligible for Amazon Prime while advertising is key to increasing product search visibility, making them key to generating product sales. Amazon has hiked the costs third-party sellers are required to pay to enjoy advertising and fulfillment services in recent months. The transaction fee currently ranges from 8-15%, advertising expenses are around 15%, and FBA expenses can reach 20-35%. By the end of 2022, these costs cumulatively gobbled up around 50% of third-party seller revenue.
Leveraging open commerce solutions can help small businesses cope with the rising costs of online trade. Open commerce refers to an open and transparent e-commerce trade system that’s built on open-source technologies. Integrating open commerce solutions into their operations can allow businesses to predict demand and trends, optimize their supply chain management strategies, provide personalized suggestions, boost customer service using chatbots, and improve online shopping experiences via augmented reality and visual search.
Major e-commerce players like Alibaba Group Holding Ltd. (NYSE: BABA) need to ensure the third party sellers on their platforms don’t feel aggrieved by the levies charged since this can result in a quiet exodus to alternatives.
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