Dealing with inflating logistics costs at Amazon

Dealing with inflating logistics costs at Amazon 

Rising costs seem to be top of mind across the CPG industry - at least for almost all clients and  partners we speak with. We're hearing about and seeing cost pressure in an wide range of areas: freight,  COGS, labor, and so on. And of course delays in the supply chain that don't help.

Amazon is no exception: this month they raised their FBA fees by over 5% - one of their largest  increases ever. However, there were a few other changes they made that had major implications for CPG  brands. We're going to explain those changes and how we're adjusting to keep costs down.

Dimensional weight and the exemption

Amazon calculates FBA fees based upon the greater of two factors: the item's gross weight, and it's  "dimensional weight". Dimensional weight is a logistics industry concept used to price products that are  physically large but light, like an empty cardboard box. This is done to adjust pricing in terms of how much  product can fit in a truck and how costly it is for companies to move.

Amazon's calculation for this is L x W x H / 139. This means that a 7" cube would be 7 * 7 * 7 = 343,  343/139 = 2.4676. This product would fall into the 2-3lb tier, and have a $5.79 FBA fee. This is a very high  cost for most CPG goods, and often difficult to make viable on the platform.

The end of the great exemption

There used to be a major workaround to Amazon's dimensional weight rules: Amazon didn't  consider dimensional weight for items under 12oz gross weight. This was huge for products in salty snacks,  baked goods, and other products that had a large cube or bags with air in them.

Amazon has now ended this exemption. All products within Large Standard tier (where the vast majority of CPG fall) are now subject to dimensional weight. One of the most successful products affected by this change is High Key's Chocolate Chip Cookies – a perennial best-seller with over 50 thousand reviews.

This product is beautifully designed according to the “old rules”: 3 bags of 2.25oz net weight, coming in at just under 7oz gross weight - well below the 12oz threshold for dimensional weight. Prior to this change, at 7oz, this product shipped at $3.77. Its dimensional weight: 3.58*5.71*7.72=157.81, 157.81/139 = 1.14lbs. At 1-2lbs, it ships for $5.14 – a 36% increase.

Options to lower your Amazon fulfillment costs:

This change has created a major problem for brands trying to stay profitable on the Amazon channel. We've come up with the following levers to deal with these challenges.

1. Shrink your product to reduce dimensional weight

If you can reconfigure your packaging, you may be able to shrink the dimensions of your unit. Many products are in bulky boxes, or tall standup pouches with lots of air at the top. Cutting this down could seriously save you costs. Note that this is much more difficult in some categories, such as salty snacks which have a USDA air fill requirement.

You can even make adjustments to already produced inventory that you’ll need to sell through. This Belgian Boys product on the right is actually only filled to about 40% of the height of the bag. Simply folding the bag over and taping it could save over $1 per unit on dimensional weight costs.

2a. Raise prices

Pretty straightforward in Seller Central, and if possible, the best way forward. We've had success  with our brands increasing prices 1-5% without seeing impacts to velocity, so it's worth testing. We recommend raising prices slowly, e.g., $0.25-0.50 every week and checking to see how your ad  performance and conversion rates respond.

Raising prices is not always so simple. Many brands have products on other eComm retailer sites  that trigger a price match, either on a total product, per unit basis, or even per oz basis. Raising prices on  these products would cause Amazon to suppress your buy box, greatly harming sales.

2b. Raise prices pt 2: Get around the price match with custom kits

Brands can make custom or unique kits to avoid price matches. While not a “silver bullet” and not without risk, it's possible to construct kits that cannot be price matched, and then adjust pricing to a profitable level. Here are our options, in order of "safety", or chances of sticking:

• Have multiple brands or product types. Think jerky + meat sticks, or chips + crackers, or even drinks + snacks.

• Multiple sizes within a multi or variety pack: make a unit of 4oz bags mixed in with a couple 1oz bags

• Unique variety packs: make an assortment of flavors, unique to the channel. Note that in some rare cases we have seen this price matched

• Add a unique collectible item to your kit: we've had mixed success with this, but you can sometimes see products with a collectible clip, magnet, button, or similar item aimed to differentiate the product and prevent the price match

• Unique sizes: making a unique size, usually a bulk size or club size, can work to prevent price matches. However, we've seen these price matched on a per oz basis over time. If you pursue an Amazon-exclusive size, aim to maximize the weight and cube of your product to the limits of its size tier.

This maximizes the value of your FBA fees and optimizes  your effective cost per ounce for fulfillment. In the past some brands have had some success re-launching a product with a new UPC. However,  these tend to be caught by Amazon's algorithm pretty quickly. We wouldn't recommend doing this  without utilizing at least one of the above methods.

3. Fit your product into Amazon’s Small Standard Tier

If you can make your product smaller than 0.75" on its shortest side (basically, have it fit in a flat mailer), then you miraculously are exempted from dimensional weight. This may not be viable for most  brands, but worth investigating if you can adjust manufacturing and have a product that can be packaged  flat, like a powdered product, or even bars.

4. Use Amazon's Small and Light fulfillment program

Amazon's Small and Light program is designed for what it implies - lower cost shipping for small  and light products. You have slightly slower ship times to end customers, and a smaller fulfillment network,  but it can be the best way to send single units, eaches, or samples of a product.

Amazon has now expanded the program: products can be up to 3lbs, and can cost up to $8. We're  exploring moving sample or trial sizes for our clients looking to get more product exposure. While this  likely won't be a major profit driver, many early stage brands are focused on getting their product to as  many consumers as possible.

5. Switch to Amazon’s Vendor Central platform (“1P”)

Vendor Central, Amazon's first party platform, is unaffected by these changes. Your margin  calculations are done similar to a traditional retailer, with an invoice cost and program terms.  Unfortunately, it's very difficult to get an invite to Vendor Central, and Amazon likes to see $5-10mm in  sales on Seller Central at a minimum before they'll consider a Vendor Central invite. However, some  brands have legacy Vendor Central accounts (often from the Launchpad Program pre-2019) that you can  dust off and start up again. If this is an option for you, we're happy to run the side-by-side analysis to see  if the channel is viable.

Some other tips:

Ensure your products are being measured correctly. If you have a product that used to get the  dimensional weight exemption, re-measure it, and ensure you agree with the dimensions you see on your  product page, and that the calculation aligns with the FBA fees you'd expect. Sometimes Amazon can get  these measurements wrong - the way a plastic bag or pouch of product is set down can vary - and they'll  allow you to request up to 20 re-measurements per month. There's a request re-measure tool in Seller  Central to make these requests without filling out a standard support ticket.

Watching out for oversize

Amazon has an additional surcharge for even larger products. If your product is greater than 18 x 14  x 8 inches on the longest, middle, or shortest side, respectively, it will be up-charged as oversize.

This language is a little confusing. These packages would be considered oversize:

• 8.1 x 8.1 x 8.1 inches

• 19 x 4 x 4 inches

• 16 x 16 x 3 inches

The trickiest one here is the 8" cube - if your box is an 8" cube, chances are if it is compressed at  all it will be measured with one size slightly over 8, pushing you to oversize.

There's an additional - and substantial - downside of oversize. It means you are processed on an  entirely different conveyer line at Amazon FCs, and there are far fewer of them. You're more likely to have  to truck your product further, more likely to have receiving delays, and more likely to have slightly longer  ship times as your product isn't moved between FCs to balance inventory in the same way.

Amazon has become a more difficult platform on which to sell larger-cube CPG products. For  some businesses, the channel may become lower priority or no longer make sense. We've found that  most brands do have a path forward if they're willing to be creative, resourceful, and flexible. Please don't  hesitate to reach out if you'd like to brainstorm on how we can make Amazon a bigger or more profitable  channel for your business. Cartograph manages the full platform of Amazon (including Fresh) end-to-end  and has a proven track record of driving significant and category-leading growth in grocery.

Chris Moe and Jonathan Willbanks

Co-founders, Cartograph