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Amazon started automatically discounting seller prices for the holidays

Amazon has a new program they’ve been implementing. In the interest of getting competitive on price in the holiday season, they started discounting the price sellers are listing an item for. Fronting the bill for the discount and providing the seller with the full price (minus their commission).

Here’s my take on the news and what it means for those selling on the marketplace.

1. Amazon recently did something similar in Grocery to try to drive a lower price point. In this case, they reduced their referral fee from 15% to 8% for items selling for under $15. At the $15 price point, this works out to be about a $1 savings in terms of cost. However, since Grocery can change their price point by selling less of an item or bundling it differently. The net result is more sellers will change their offering to get below that $15 price point. This discount is different because the discount provided is 1:1 with the cost to Amazon.

2. This barely moves the needle on actual selling price – so why do it? This is most effective on items that have a strong MAPP (minimum advertised price policy). If a video game sells for $59.99 everywhere, selling it for $54.99 on Amazon means they’ll get the lion’s share of the sales. Paradoxically, the places where they’ll see the most advantage is where they’ll also be upsetting brands the most.

3. The article mentions that businesses can opt out at any time. What it fails to mention is whether that’s sellers or brands. The key differentiation is sellers selling known brands with strong MAPP will likely not care to opt-out. Whereas, brands are typically much more price sensitive and would largely opt-out.

4. This is the reverse of a common discounting practice. Typically, manufacturers or brands will run pass-through discounts with retailers to increase sell-through in that channel. GE might offer a $100 manufacturer rebate, or Downy might run a manufacturer coupon to discount a new fabric softener. In this case, the retailer gets the full retail price and the brand is bankrolling the discount. Amazon flipped this model on its head and is fronting the bill for the discount and applying it right to the selling price rather than just charging a thinner commission.

5. Amazon fails to comment on what they’re doing on the vendor side. But, if they’re getting more aggressive with their third party sellers, you can bet they’re going to be working on thinner first party margins as well in these competitive categories this holiday.

Have questions? Let us know in the comments.