How Inflation Impacts Amazon: Fuel Inflation Surcharge and 6 More Challenges to Watch Out
Why are there so many jokes about inflation these days? Because demand has increased following a period of low interest. This funny but sad pun reflects the post-pandemic imbalance between consumer demand and supply capabilities that was the first trigger of the ongoing economic crisis.
As inflation accelerates, it puts more pressure on consumer spending and changes online customers’ shopping habits, posing new challenges to eCommerce store owners. This also rings true for Amazon businesses.
To help merchants navigate their business risks, we put together seven main challenges that inflation has presented for Amazon sellers. Read on as we shed more light on the current shift in consumer behavior, its impact on your Amazon business, and uncover key strategies to shore up your online store in the face of a long-term crisis.
Inflation in 2022: A Quick Overview of Reasons & Effects
How High Is Inflation?
In broad terms, inflation is the rate at which the cost of goods and services rises over time, affecting consumer purchasing power. Whereas the moderate price increase reflects positive economic growth, higher inflation rates indicate the contrary and entail specific risks for shoppers and business owners.
Given that U.S. inflation has now accelerated to a 40-year high of 8.6%, the question of how hard it can hit eCommerce sellers is a topic of active debate.
How Is Inflation Measured?
To evaluate the inflation expectations, the Federal Reserve officials look into a combination of price indexes, such as the Consumer Price Index (CPI), and Personal Consumption Expenditures Price Index (PCE). After that, central banks try to stabilize the prices by maintaining the interest rates.
Price Indexes’ Interpretation:
CPI measures inflation experienced by consumers in their day-to-day living expenses and represents a basket of goods and services that a consumer would buy when prices change.
PCE measures price changes in consumer purchases applied to all households and nonprofit institutions. Compared with PCI, it encompasses a broader range of goods and services from a greater variety of buyers.
Currently, the Federal Reserve has hiked its benchmark interest rate by 0.75% to hold the price increase.
What Is Causing Inflation Right Now?
Several factors are causing inflation in 2022. Most of them revolve around the pandemic-related economic disruptions that were the early triggers of the ongoing crisis.
Here are the main reasons for the overall price bump in 2022:
How Inflation Impacts the eCommerce Industry
Today, online entrepreneurs struggle with the sky-high production and delivery costs. Therefore, more and more top executives now try to keep their businesses afloat by cutting expenses and reducing the staff. For example, Elon Musk, CEO of Tesla, announced his plans to freeze hiring and cut staff at Tesla by 10%.
Regardless of merchant type, product category, or seller experience, eCommerce business owners are confronting the same inflationary pressures:
- galloping fuel costs
- decrease in consumer purchasing power
- increased commodity prices
- raw materials shortage
- higher inventory costs
- labor market challenges
To set themselves up for success in the current economic landscape, online merchants need to work out efficient selling, marketing, and order fulfillment strategies. Let’s take a closer look at how inflation affects Amazon, and what online sellers can do about it.
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Did Inflation Impact Amazon?
Much to our regret, yes.
Having benefited from COVID-related lockdowns and social distancing, Amazon is now facing the new economic challenges that brought a shift in buyers’ purchasing power, spiking freight costs, and increased FBA fees.
Even though Amazon is still the most prevalent shopping site for U.S. customers that holds over 40% of the US eCommerce market share, it has also started to admit to missing profits.
As per Quartz, the digital commerce giant reported a net loss of $3.8 billion for the first three months of the year as rising prices drove up costs in its consumer marketplace business. During that period, inflation presented further challenges for the company by adding approximately $2 billion in expenses compared to the previous year.
Against this backdrop, Amazon couldn’t but pass some of its expenses on to sellers, giving them one more inflation headache.
What Challenges Does Inflation Pose to Amazon Sellers?
We’ve mustered up seven main inflation issues that Amazon sellers currently encounter.
1. Increased FBA Inventory Fees and Fuel Surcharges
Effective April 28, 2022, Amazon sellers that use Fulfillment by Amazon (FBA) are charged additional inflation-related fees. An FBA fee surcharge of 5% is implemented on each unit sold, including products purchased before that date. As of now, it averages from a $0.15 to a $7.55 increase, depending on product size and category.
A Quick Overview of Amazon FBA Fees
2022 Amazon FBA Monthly Storage Fees:
January-September: $0.83 per cubic foot
October-December: $2.40 per cubic foot
January-September: $0.53 per cubic foot
October-December: $1.20 per cubic foot
2022 Amazon FBA Dangerous Goods Fulfillment Fees:
Small standard (6 oz or less to 16 oz) items have a per-unit fee of $3.85 to $4.16.
Costs for large standard items (6 oz or less to 20 lb) range from $4.29 to $6.57 + $0.30/lb above the first three pounds.
Small oversize (70 lbs or less) costs $9.66 + $0.38/lb above the first pound.
The medium oversize (150 lbs or less) fee is $13.56 + $0.44/lb above the first pound.
Large oversize (150 lbs or less) costs $93.94 + $0.79/lb above the first 90 pounds.
Special oversize (over 150 lbs) costs $170.74 + $0.79/lb above the first 90 pounds.
FBA Aged Inventory Surcharge
As of May 15, 2022, aged inventory fees were also updated. Previously, items with 365 days or more were the only ones charged. Now fees also apply to items with at least 271 days in the FBA warehouse.
Items in fulfillment centers 271 to 365 days: $1.50 per cubic foot
Items in fulfillment centers 365 days or more: $6.90 per cubic foot or $0.15 per unit, whichever is greater
Solution: With the new fees, online sellers should redo their math to see how far they can discount the products and still make a profit. Confirm all your product sizes are accurate, so you aren’t overpaying for shipping or storage. Also, mind the inventory in stock, as large items that take up a lot of space or products that don’t sell quickly will incur extra storage costs.
2. Amazon Sales Slow Down
As of April 2022, American online shoppers spent $5.28 billion less than they did in March. At the same time, Amazon seller forums show a dramatic drop in Amazon sales compared to previous years. Although inflation didn’t hit all seller types and product categories evenly, most Amazon merchants confirmed that June 2022 was their worst month.
That said, the question naturally becomes: Why are we seeing a decline in Amazon sales? So let’s take a closer look at the main factors causing Amazon sales to slow down.
- An expected return to brick-and-mortar. Customers who turned to online sales for safety and convenience may now return to in-person experiences as the pandemic recedes.
- Decrease in consumer purchasing power. Given the rising inflationary costs, consumers are being more careful and diligent about their expenses. So while online grocery stores can see an irrelevant decline in traffic and sales, Amazon brand owners selling non-essential and luxury goods risk their profits.
Solution: Optimize your product line! Conduct thorough product research to determine your brand concept, and maintain profit margins for the maximum profit.
Uncover bestsellers by assessing the unit cost of the product and the Cost of Goods Sold (COGS) with Seller Labs PRO. Once you enter your unit price value, you’ll see that PRO automatically updates the estimated profit. So, if an estimated monthly profit meets your expectations, you’ve got a winner!
3. Soaring Freight Costs
Per the latest AAA research, gasoline prices are now over 5 dollars per gallon, and rising with prices higher on the west coast, Alaska, and Hawaii, while they are lower in more central states.
Spiking fuel prices mean that anything transported on a truck, train, or ship is affected. No wonder Amazon merchants now see a significant increase in shipping costs, likely hitting their bottom lines (mainly if they import their goods from far off or sell internationally).
Solution: Streamline order fulfillment! To reduce rising logistical costs, Amazon sellers should leverage their connections with fulfillment centers, diversify the sourcing of their products and switch to domestic suppliers to obtain more consistent delivery times.
1. Liquidate obsolete inventory. SKUs that haven’t turned in 120-180 days can eat up margins with long-term storage costs. At current storage rates, you could end up losing money if inventory is stored too long and many providers have penalties for storing non-turning inventory. Additionally, clearing out dead stock will free up valuable warehouse space for your top selling products that are the most profitable for your business.
2. Carefully plan your distribution network. Minimize the distance between your supplier, warehouse and end customer as much as possible. Fuel is one of the greatest cost drivers in the supply chain, so it’s important to understand where your customer base is concentrated in relation to your vendors and where you store your goods. Weigh the cost of transporting your products from the port of entry and/or domestic supplier to your warehouse against the cost of transportation to your consumers.
3. Distribute your inventory across multiple warehouses. Adding even just one warehouse to your fulfillment network can significantly lower time in transit (TNT) and parcel long zone shipping charges.
You can also think of selling digital products and services that do not require shipping.
4. Challenging Inventory Management
Stock availability can make or break your Amazon sales. Running out of stock presents significant risks for Amazon sellers, such as decreased customer loyalty and loss of competitive edge. At the same time, excessive inventory translates into lower Amazon rankings and poor cash flow.
In the current economic landscape, two main factors put the brakes on your Amazon inventory flow:
- Volatile demand
In the pandemic, isolation and social distancing made it hard for factories to operate at full capacity. Despite this, consumer demand remained high, exacerbating the issue of product shortage.
Today the situation has reversed: Amazon sellers are facing a decrease in consumer spending, which highly likely makes non-essential goods low-performers.
- Supply-chain disruptions
As noted by MorningStar, shipping delays average seven days, nearly doubling the pre-pandemic levels.
At the same time, Zippa’s Studies note that only 6% of companies have complete visibility of their supply chain, while 69% of businesses do not have logistics transparency.
Due to the persisting supply chain bottlenecks, some Amazon sellers risk severe inventory shortages, which can urge shoppers to buy the competitor’s product.
Solution: Automate your inventory management! The right inventory management software can provide accurate reporting and reduce human error. With it, you can keep a sharp eye on your inventory and be ready to adapt your plans in case of stocking problems or shortages. Discount and promote in case of excessive stock, or pause Amazon PPC campaigns for the product listings you cannot fulfill.
5. Amazon Shoppers Seek Out Discounts and Better Customer Experiences
With consistently rising prices, customers seek more deals and discounts than ever. This presents an opportunity for Amazon brand owners to build consumer loyalty with the right products, perks, and promotions to meet shoppers’ needs.
According to the EY U.S. Future Consumer Index, 52 percent of respondents consider price the most crucial purchase criterion. And with that, 42% percent will only buy from brands that align with their values and provide the gold standard of buyer experiences.
Solution: Improve customer engagement! Given the competition among online sellers, trusted relationships with your target audience matter now more than ever.
To win customers and stand ahead of the pack, online entrepreneurs should:
- develop a strong social media presence by initiating virtual communication with your audience via influencer marketing or Tik Tok ads, to name a few
- build your brand reputation with seller feedback and positive product reviews
- earn Amazon badges to spice up your product listings and improve brand loyalty
Here’s a quick bird’s eye view of some badges that are up for grabs:
6. Fierce Competition
Given the lowering consumer demand, online sellers strive to maintain their market share. Unfortunately, this leads to fierce competition and puts more pressure on profit margins, mainly if you sell on Amazon.
Solution #1: Win the Buy Box! Customers are more likely to choose featured items; thus, winning the Buy Box as often as possible will help you maintain a healthy profit margin. If your product doesn’t consistently own the Buy Box, a competitor will win it at a lower price, and your margins will be lower.
Amazon added a price-comparison feature that would help sellers increase their chances of winning the Buy Box. With the newly Pricing Status feature, you can view how your price compares to other prices on Amazon or outside of Amazon in the Price + Shipping column on the Manage Inventory page.
Solution #2: Go multichannel! With accelerated competition on Amazon popping up, sellers may try to expand their products to other marketplaces, such as Walmart and Target, and win more online customers.
As part of your multichannel strategy, you can also consider having your eCommerce website powered by a scalable Shopping Cart solution. Today, eCommerce software providers like X-Cart, Shopify, or BigCommerce, offer plenty of opportunities to launch an online store from scratch.
Brand owners can make the most of their omnichannel strategy with Amazon’s new Buy With Prime program that helps to convert shoppers on the eCommerce websites. This program allows sellers to fulfill their off-Amazon orders with Amazon Pay and Prime shipping and even use their FBA inventory.
7. Amazon’s Push For Lower Prices
Let me repeat this: fierce competition among Amazon merchants is now fueled by the customers’ demand for cheaper products. In this context, raising prices doesn’t look like the relevant game plan for pushing conversions. Especially regarding how Amazon’s ranking algorithm works, favoring products with high sales volume, competitive prices, and a sufficient number of positive reviews.
If a seller raises their prices, the Amazon search engine can move the position of products down the search results. This, in turn, can lead to less traffic and a decline in sales for the online merchants that increased their product prices compared to those who did not.
Additionally, many third-party sellers find it challenging to increase prices due to Amazon’s new price competitiveness policies. The eCommerce giant has consistently engaged in predatory pricing and is now selling products and services below cost to outgame competitors and expand its market share.
Solution: Strategize Your Pricing! This process mainly involves monitoring sales data and tracking prices to adjust them. Choose best-selling products to increase your product margins, and use lower-margin products as bonuses, benefits, or entry offers.
You can utilize Amazon’s automated pricing feature to remove the burden of manually tracking and adjusting prices. Thus, you set upper and lower price thresholds, and Amazon does the rest to keep your products competitive in the market.
Enter the FBA Small and Light program that can reduce fulfillment costs for merchants, selling small, cheap, and fast-moving products. Please mind that Amazon updated fulfillment fees for small and light units. Effective January 18, 2022, the weight limit for FBA Small and Light was adjusted from 12 oz to 3 lb. To avoid getting in trouble with the new Amazon fees, look at all 2022 Amazon selling fee changes.
Some Amazon sellers can’t offer the promotions they used to because consumer demand is outstripping supply. So they won’t be able to fulfill orders if they give shoppers extra incentives to buy their products. Another factor is Amazon’s new restrictions on how much inventory can be stored at the company’s warehouses. Inventory limits also stop sellers from offering too many discounts.
Amazon pushes its Brand Referral Bonus Program to award up to a 10% bonus to sellers that drive sales to their Amazon listings from off-site traffic. To join the program, sellers should enroll in Amazon Attribution and have some non-Amazon traffic, such as social media, to redirect.
Since most economists forecast that inflation will still be at about 4% or higher by the end of the year, it’s unclear if these inflationary pressures will fade away short term. One thing is for sure: returning to normalcy will take time.
Digesting the risks, Amazon merchants should focus on the two main priorities:
- Act strategically: As the consumers’ demand shifts toward services and experience, price dispersion and volatility can ensure selective opportunities for some Amazon players.
- Avoid panic-driven decisions: Those Amazon sellers centered on resilience and backed with actionable reports stand a chance of relative outperformance. While keeping an eye on their critical KPIs, they can create and seize strategic opportunities in bad times and sail their Amazon boats in the right direction.
If you still keep your options open for a robust Amazon data management tool, you can try our new data warehousing feature as part of Seller Labs PRO.
Besides data aggregation functionality, our PRO solution can back you up while keeping track of your reviews, finding profitable keywords, growing your brand with social media, and managing your advertising campaigns. You can also contact our Services team for dedicated help.
Maria is an SEO Content Specialist at Seller Labs. Once captured by digital and content marketing in her student days, she keeps living and breathing it ever since.