It is safe to say that consumer expectations today are higher than they’ve ever been before. While many think this is due to the things that shoppers visibly see everyday, such as great marketing campaigns, innovative products or competitive pricing, sellers know where the magic needed to create happy, loyal customers lies – fast, free shipping and order fulfillment.
The elevated customer expectations that online retailers face due to fast shipping times has been created by the “Amazon Prime Effect”. What is this effect, and what implications does it have for merchants selling online?
Let’s go back to 2005, when Amazon introduced free two day shipping on orders over $35 – a move that everyone thought was crazy. Later in the same year, they introduced Prime – with its annual fee that allowed customers to get as many items as they wanted, with no shipping fees. By the time of the Covid-19 pandemic, same-day shipping arrived on Prime – run out of something urgent? Order it, and get it delivered that very day – amazing! While this has been great for Amazon and their customers, competitors large and small have been scrambling to catch up.
For example, it took Walmart 12 years to catch up and offer 2-day shipping! As Amazon has gotten faster and faster at shipping, even their biggest competitors have taken a long time to reach the elevated shipping standards that Amazon makes table stakes.
On every channel today, the sellers winning are those offering fast shipping. For example, on Walmart (inspired by Amazon’s approach) – listings offering 2 day delivery rank higher in search results, win the buy box more often and see conversion lifts as high as 50%
But in 2023, Amazon made fast, free shipping a standard for every e-commerce brand and retailer, through their Buy with Prime (BWP) program – allowing any online merchant to offer order fulfillment through Prime.
While meeting the gold standard of Prime now applies to every online merchant, these times are harder than ever to win in for sellers. Costs at each step of the fulfillment chain (shipping, warehousing and labor) are on the rise:
- Shipping – General Rate Increases have surged upward, much higher than the prevailing inflation rate, making it harder and harder for merchants to absorb the last-mile costs involved in meeting the expectations of free same-day shipping.
- Warehousing – To get orders fulfilled faster, you need to distribute your inventory in warehouses closer to the customer. But online merchants face the challenge of dealing with both elevated rent costs, and limited vacant space in warehouses:
- Labor – With as much as 48% of the warehouse workforce quitting in 2021, Amazon has had to increase the wage they pay their workers – at $19 an hour, this is no longer a minimum wage job.
With shipping companies raising prices, warehouses becoming tougher to rent and people becoming more expensive to hire, merchants face the daunting task of overcoming these challenges and meeting the customer expectations that Buy With Prime will bring.
So it’s worth asking – What does Buy with Prime do well, and where are its limitations?
Benefits of Buy With Prime:
- Amazon claims it boosts conversion rates by as much as 25%, which is quite possible given the high consumer trust Prime enjoys.
- Merchants get to feature reviews from Amazon on their website and place ads on the Amazon Marketplace which link to their own website and drive traffic.
- Merchants can feed off the high trust customers have in Amazon, and checkout experiences are simpler – they just have to login to their Amazon account.
Limitations and Problems of Buy With Prime:
- Many products do not show the actual date by which they’ll be delivered, as in the case of this product listing:
- You can only qualify for Buy with Prime if you use Fulfillment By Amazon (Amazon FBA) for your shipping – while FBA works well, the Buy with Prime button disappears from the product listing on your website if there is no more inventory available with Amazon, as in possibly this case!
- FBA may not be suitable in the first place itself for long-tail SKUs – the costs associated with stocking inventory that does not turn over frequently with Amazon can become very large. This might necessitate the need to create a filter on your website for customers to view SKUs that they can buy with Prime, creating a cumbersome user experience:
- Discounts and promotions that you offer customers when they checkout through the native gateway on your website do not roll over to Buy With Prime:
- The payment processing fees are significant – 5.4% of the cart value + $0.30 – as Buy With Prime is a competitor to the Shopify ecosystem, any BWP purchase on a Shopify storefront incurs another 1% in payment processing fees. And aside from all this, there’s the fees involved with FBA!
- While BWP is as much as 43% cheaper than Multi-Channel Fulfillment (Amazon’s precursor to BWP, where you could take in an order from any channel and have FBA take care of it), it is nearly twice as expensive as selling on Amazon’s marketplace directly with FBA.
- Amazon had a very complex system to deal with how sellers get access to warehouse space, as part of FBA. Now, that’s been simplified to a “Capacity Limit” system where you bid for a given amount of space (in cubic feet) that you’ll hold in a month – Amazon gives visibility for the subsequent 2 months to enable you to perform planning. But things can go well, or really bad in this scenario.
- Let’s look at a good case first – let’s say you’re paying Amazon $3000 a month and bid $1 for a cubic foot of extra space, for a total of 1000 cubic feet ($1000). Amazon gives you credit on a pro-rata basis, for the incremental revenue that you drive through this:
- Let’s say you drive $40,000 of revenue in March – you’re eligible for 15% credit on 25% of the revenue – in this case, things work out very well for the merchant – you end up with a credit of $500 after paying off the $1000 to FBA.
- But if your sales don’t go so well….
- In this case, you end up owing money to Amazon.
- The bottom line is that Amazon is constrained for space to house inventory in their warehouses. If you make a lot of revenue or move a lot of product through Amazon, it may still be worth it to bid aggressively for warehouse space with them. But if your products are long-tail, or do not move quickly enough, you should think very carefully before placing your bids.
So if Buy with Prime has so many limitations, is there any way at all left for you to meet the customer’s expectation of free same-day or two-day delivery? It is a tall order – if you want to provide shipping within 2 days, you need 4 strategic order fulfillment locations. If you’re seeking to do it on the same day, that number goes up to 9.
Usually, merchants have tended to look to 3rd Party Logistics Providers (3PLs) for solutions – however, 3PLs often come with significant costs as fulfillment is their primary revenue stream.
That’s where a solution like Cahoot comes in – we’re unlocking the potential of over 2 million e-commerce retailers in the US that have their own warehouse space, who perform complete order fulfillment.
For the first time ever, merchants, brands and e-commerce retailers will be able to monetize excess capacity available in their warehouses through Cahoot’s peer-to-peer order fulfillment network, which delivers fast, free 1-2 day shipping while also lowering costs. We offer the industry’s leading Service Level Agreement (SLA) and we help our Amazon sellers by offering Seller Fulfilled Prime (SFP). If you’d like us to take over all aspects of order fulfillment, we can do that too! We offer B2B and B2C wholesale, retail and Amazon FBA replenishments.
Excited about how the peer-to-peer model works, but unsure about how to migrate from your existing fulfillment partner? You’re not alone. Migrating fulfillment partners can be an uncertain and stressful experience, which prevents merchants from exploring superior alternatives. To make this process simpler, we’ve created a step-by-step migration guide that you can read to make your switch easier!
If you have excess capacity in your warehouse, or are looking to offer your customers an Amazon Prime like delivery experience, consider joining our fulfillment network – it’s a great way to generate additional revenue and take advantage of the shared economy through our collaborative platform.
