The New Economics of Books

Change is in the air.  Again.  It seems like every month, Amazon is introducing new changes (a.k.a. new fees) to the marketplace.  It reminds me of this quote:

Even more fees were announced yesterday, and it is causing quite a bit of upheaval on “the internets”:

Before we take a closer look at the fees, it’s important to point out that these increased fees were inevitable.  As this recent article on GeekWire points out, Amazon lost $1.74 billion (yes, with a b!) on shipping costs in the THIRD QUARTER OF 2016 ALONE.  Ouch.  Shareholders will only tolerate those losses for so long before dumping Amazon’s high-priced stock.  Bezos decided to start looking like less of a bozo in this sector of the business by increasing the Prime shipping revenues to help offset the losses.  Unfortunately for third party sellers, that means the cost of fulfillment had to go up.

Now that we understand why the fees are increasing, let’s see just how bad they are.  Here’s a summarized chart of your new net profit figures for a typical book and a typical textbook at a range of prices.  (If you want to see detailed charts, scroll further down.)

(Note: the Fulfillment Fees will increase on February 22, and the Closing and Referral Fees will bump up on March 1, so I factored in all of the new fees as of March 1.  The fees will be slightly lower from October through December, so these fees are the worst case scenario that will exist from January through September.)

On a typical one pound book, the FBA fees will go up about $1.53 across the board, regardless of the book’s sale price.  For Merchant Fulfilled sellers, the fees will impact them about $1.05 per book.  For heavier textbooks, FBA sellers can expect to pay an additional $2.29, while MF sellers will still experience the same $1.05 price hike.

Author’s note – many of you reached out to me and pointed out that the fees will be worse on a two pound book compared to a one pound book.  You’re absolutely correct.  Thanks for noting that!  Here’s how the fees shake out for each “class” of book, as well as the mix of books in my current inventory of ~15k books:

• Small Standard Size (21%) – $1.30 additional fees
• Large Standard Size, <1 pound (9%) – $1.53 additional fees
• Large Standard Size, 1-2 pounds (40%) – $2.33 additional fees
• Large Standard Size, 2-3 pounds (16%) – $2.31 additional fees
• Large Standard Size, 3-4 pounds (8%) – $2.29 additional fees
• Large Standard Size, 4-5 pounds (4%) – $2.27 additional fees
• Large Standard Size, 5-6 pounds (1%) – $2.25 additional fees
• Large Standard Size, 6-7 pounds (1%) – $2.23 additional fees
• Weighted Average of Additional Fees: $2.03

Key Takeaways:  Is this the end of selling books via FBA?  Hardly.  The market is going to shift dramatically over the next few months as sellers adapt to the new fees.  We will likely see a brief race to the bottom as sellers try to clear out their cheaper/older inventory, but the market should reach a new equilibrium point after that.  Those who don’t adapt their strategies will get burned.  FBA offers in the $4-5 range will get bumped up to the $6-7 range to net the same profits as before.  Ultimately the higher costs will get passed along to Amazon’s customers.  However, sellers will bear the higher fees as well.  For an FBA seller who sells 2,000 books a year, the added fees will deduct roughly $3,000 from their bottom line.  This will hurt larger sellers even more.  Here’s how you can adapt:

• Buy better books (obviously!) – No rocket science here!  Sourcing $8 books won’t be as profitable as before, but there may be more of them out there once the market catches up to the changes.  Also, a $50 book will have its overall profit margin impacted far less than a $10 book will.
• Price your books better – The days of pricing ridiculously high and waiting for the right Prime buyer to come along are long gone.  Proper pricing will help you turn your inventory faster, which is in your best interest as well as Amazon’s.  The game is being changed to encourage faster flips.  A repricer may play a key role in keeping a lean and mean inventory (see my recent post about my experience with RepriceIt).
• Learn to interpret Keepa & Camel charts – A book with a rank of 500k sold a copy 2 or 3 days ago.  The real question is how many copies has it sold in the past six months?  Sales rank alone won’t tell you that answer.  Average rank will help, but it’s not perfect.  Learning to read the Keepa charts will help you avoid sending in duds.  I’m not suggesting that you look at the charts on every single book as you’re sourcing, as that would slow you down significantly.  But taking a look at the charts when you list the books and price them may save you some serious coin in today’s fee-heavy environment.  If you do online arbitrage, you can do your research before purchasing the book, which will give you a bit of a competitive advantage compared to buying at library sales.  Hint, hint.
• Buy Amazon stock – In February of this year, one share of Amazon’s stock was trading for $500.  It reached a high of $840 in October, and has dropped off a bit to a bargain price (mostly kidding) of $758 as of this afternoon.  Amazon is killing it in other sectors, including their AWS Platform (Web Services).  As they shore up some of their losses by hiking these FBA fees, that ought to help them hit their quarterly targets.  If the stock price does increase, it could help offset your increased fees.  Of course, the stock could crash and burn, and you could lose your investment there.  Who knows what will happen?  **This is NOT intended as investment advice.  If you invest money in Amazon, do so at your own discretion.  If you lose money, don’t blame me.  If you earn a small fortune, however, please keep me in mind.**
• Partner with thrift stores or libraries – As the fees go up, it won’t be as easy to turn a profit by selling only a small percentage of your inventory.  Many thrift stores have been dabbling with selling online, and they may not be able to keep up as the market shifts.  Look for some of them to dump their Amazon inventory and you can capitalize on the increased supply of good books on your local store’s shelves.  Or better yet, approach the thrift stores and offer them guidance.  You could charge a consulting fee or work out a deal to manage the entire process for them on a commission/consignment basis.  Think outside the box here.
• Merchant Fulfilling is not the answer – Yes, the estimated profits are slightly better for a $10 MF book than they are for a $10 FBA book.  But as long as customers are willing to pay more for FBA items compared to MF items (and they still are), then FBA still makes sense.  A $10 MF book will net you $4.09 starting on March 1st, but you will likely be able to sell the same book for $15 (or more) using FBA, which would net you $7.71 (or more).  It may make sense to MF some of your long-tail books, but I still plan on using FBA for all of my books for the foreseeable future.  It sure beats shipping out individual orders every night, plus your business can still run in the background when you’re out wandering the globe.

Bottom Line:  Ultimately, these fees were inevitable.  We’ve been fortunate to be able to sell books so cheaply on Amazon’s platform for the past few years.  Amazon has acquired tremendous market share through their Prime program, and they are now in the perfect position to capitalize on that investment.  In the past, booksellers could sell a small percentage of their overall inventory to reach a break even point.  In the future, that percentage will have to rise to compensate for these additional fees.  But at the end of the day, the margins on used books are still exceptional, even if they will be squeezed by the Amazon Machine.

What do you think?  Take a moment to comment below.  Are you going to get out of the business altogether?  How do you plan to adapt to this new environment?

Assumptions:  For the detail oriented people, check out my assumptions and spreadsheets below.

• Inbound shipping rates (for FBA) – calculated at 25 cents per pound.  These may vary depending on where in the country you live (20 cents/pound is normal in Indiana, 35 cents/pound is more common in Colorado).  If you ship by the pallet your fees will be dramatically lower here.
• Storage fees were ignored – the above figures are accurate if you sell the book within the first month of it hitting Amazon’s warehouse.  I know this isn’t normal for most books, but it’s a way to look only at the changing fees.  Storage fees are increasing as well by about 20%, but that means you’ll pay 2.4 cents per book per month instead of 2 cents.  Long term storage fees will hurt as well, but they will only be charged on the books you HAVEN’T sold in the first 6-12 months.
• MF Shipping Rates – calculated using Media Mail rates purchased online (through PayPal Multi-Order Shipping).  These rates are cheaper than you’d pay if you purchased them at the post office, but more expensive than bulk rates if you qualify.
• I didn’t factor in the cost of inventory – don’t forget to account for these!  Just subtract the cost of your books from the bottom line in the profit figures below.

‍