PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Amazon’s “Big Secret:” Happy Small Sellers

By at 12 March, 2024, 1:22 pm

SMALL BUSINESS INSIDER

By Karen Kerrigan

For nearly 30 years, SBE Council has worked to ensure the voice of small business is heard on legislative and regulatory issues or when government takes major actions that impact markets and the economy. When a federal regulatory agency is considering an action, for example, we strive to make sure regulators understand the impact on small businesses – for good or for bad – and that agencies do what they are supposed to under federal law to protect small businesses from harmful regulatory actions. Our team also reads a lot of media coverage about business and policy. As expected, we are frustrated when uninformed claims are put forward by journalists. This may happen when the small business side of an issue is completely ignored, or if a claim about small business harm is not verified through interviews with small business owners.

Such is the case with a recent article in The Atlantic: “Amazon’s Big Secret.” Specifically, the piece contends that Amazon is not transparent about how the company “really” makes it money. It points to big (yet “undisclosed”) profits that Amazon makes on its third-party marketplace – that is, from sellers on the platform, the majority of which are small sellers. According to the piece, small sellers are middlemen, of sorts, in driving up alleged, non-specified online prices via the pass-down effect associated with Amazon’s fees and market power. This (apparently) is part of the alleged ploy that underpins Amazon’s “big” secret.

Similar to what the Federal Trade Commission (FTC) contends in its Amazon lawsuit, the article refers to the “exorbitant” fees imposed on small sellers. These “ever-higher fees,” as the FTC theory goes, are passed down to consumers through higher prices across online channels, and work to sustain “monopolistic” prices. This supposedly happens because small sellers cannot price their products lower outside of the Amazon marketplace. If they do, the company “throttles” them.

Unfortunately, or conveniently, not one small seller was interviewed about this interesting theory.

Small Sellers Give Amazon High Marks

According to Amazon’s most recent “Small Business Empowerment Report,” independent sellers – the bulk of which are small businesses – sold more than 4.1 billion products in the company’s U.S. store. That’s an average of 7,800 products every minute.

Indeed, there is significant opportunity for small businesses to reach millions of potential customers on Amazon. Still, the platform is not for every small business. Therefore, other technology platforms (and for many small businesses, offline encounters such as pop-ups, their own storefronts, special events, farmer’s markets, etc. are the norm in addition to online channels) may work more effectively in reaching niche or target audiences. As highlighted by our recent SMALL BUSINESS PULSE SURVEY (Q4 2023), small businesses use a variety of technology platforms for branding and sales purposes.

SBE Council consistently talks to small business owners about their online selling experiences, their in-store and website efforts to drive sales, collaborative sales partnerships, and the growth and evolution of multi-channel sales in general. We have surveyed thousands of Amazon small sellers, and they consistently share a very different story and experience than that conveyed by the FTC, as well as in The Atlantic article.

According to our most recent SMALL BUSINESS PULSE SURVEY (Q4 2023), 93% of small sellers say that Amazon provides them with significant support. In addition, 88% agree that Amazon makes small business operations “easy and cost-efficient in a competitive economy.” That’s something you didn’t read or hear about in The Atlantic article or from FTC Chair Lina Khan in her antitrust claims against Amazon.

FTC’s Outsized Claims vs Market Realities

Amazon is merely one way that some small businesses reach consumers to drive sales. In fact, 22% of U.S. small businesses say they use the platform to sell goods and products. For those small businesses that use Amazon, less than 20% of their total sales (18% median) come from the platform. Twenty-five percent of small sellers report Amazon sales account for 10% or less of total sales; 30% report Amazon sales range between 11% to 20% of total sales; 29% report 21% to 50%; and 16% note Amazon sales makeup over half of total sales.

So, it is really hard to see how this relatively modest portion of sales activity by small sellers on Amazon (again the bulk of their sales is generated via other means – see chart below) results in monopolistic pricing “across the web.” The scheme laid out in the article – and in the FTC’s antitrust case against Amazon – of forcing higher fees on small business sellers, who pass these onto consumers, which creates monopolistic pricing, makes no economic sense given the myriad of ways that consumers buy their goods and products (both online AND off.)

If this small-seller scheme were true, you would think consumers would hear the cries of small businesses who are “forced” to partake in Amazon’s “illegal tactics” that keep them “locked into its platform.” In its lawsuit, the FTC claims that Amazon charges “costly fees on the hundreds of thousands of sellers that currently have no choice but to rely on Amazon to stay in business.” That’s a sensational claim, which is not true.

In addition to the 93% of small sellers who are pleased with the support Amazon provides, 89% say that they pay a fair price for using Amazon services, according to our survey. And the cost-effectiveness of these services allows many small businesses to achieve healthy profit margins- 45% of small sellers report higher margins on Amazon than other sales channels – 38% say it is about the same, one-in-six (16%) report lower margins (11% slightly lower, 5% much lower.)

Small Business Purchasers Like Amazon Too!

Indeed, the claims being made by the FTC (and generously recapped in The Atlantic) are rather curious. So, low prices on Amazon are a bad thing? And, are these low prices really not low at all, as the FTC claims? How does the FTC know this? By the way, what is keeping consumers from shopping on other sites and channels?  Lastly, why would consumers waste their time using Amazon if greed is “degrading the customer experience” (as the FTC lawsuit contends) through “junk ads,” making it “harder” for customers to find what they are looking for? If this alleged ill-treatment is true, then why is Amazon rated as one of the most trusted, favorable and innovative brands in the United States?

For 65% of small business owners in our survey who use Amazon to buy things, the platform is an important tool that helps them efficiently run their firms. Small business owners cite convenience, speed, and efficiency of delivery as top attributes. Moreover, they enjoy the wide variety of choices and yes, the “low or fair prices” that are available on Amazon.

FTC Needs a Small Business Reality Check

Rather than expounding absurd theories to rationalize their legal action against a company that is helping small businesses generate sales and compete in the marketplace, perhaps the FTC needs to talk to small business owners to understand how they reach and engage customers in the modern economy.

FTC regulators will quickly learn how dynamic the market actually is, how rapidly it is changing, and that most small businesses are using multi-channel sales strategies to meet the diverse needs of consumers. These strategies are both complimentary and competitive. The big secret about Amazon is no secret at all – customers and small businesses really like the marketplace. Both enjoy many other choices (and use them) to sell and purchase goods and products. And, it’s no secret that the dynamic marketplace will continue to rapidly evolve. New technologies, innovative entrepreneurs, and changing consumer needs will continue to drive the marketplace, not Amazon.

Karen Kerrigan is president & CEO of the Small Business & Entrepreneurship Council.

 

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