Ep 643: Amazon Fees Hit 40%: How to Claw Back Margin and Stop Wasting Ad Spend (Pilothouse)

0:00Before we jump into today's all killer, no filler episode, a quick word about who makes this show possible. The D2C podcast is brought to you by Pilothouse, the performance agency behind some of the fastest growing D2C brands in the world. Creative, media, and customer journey all under one roof. Performance and brand without the trade-off. Every Friday, we hand the mic to a Pilothouse operator to break down what's actually working in their space right now. Want a team that treats your growth like their own? That's Pilothouse. Head to Pilothouse.co and now on with the show. You can't afford to be on Amazon, but you can't afford not to be on Amazon.

0:3663 % of consumers start their product journey on Amazon. They choose to start their product journey on Amazon more than Google, more than anywhere else right now. If you're trying to create brand awareness on Instagram or TikTok, and that customer likes your product, they decide to then go search on Amazon and you're not present. you might be leaving out that segment of buyer as well by not being present there. The best report that they provide to sellers, and I would urge every single seller to use this report.

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2:29It's all killer, no filler. I'm back with Tyler, head of Amazon at Pilothouse, to talk about what we're coining, or Tyler was coining in the notes, as the Amazon paradox, which sounds like a conspiracy film from the 70s. Big fan of that genre. So explain to me what you mean by the Amazon paradox. You can't afford to be on Amazon, but you can't afford not to be on Amazon. Obviously, oxymoronic. But those two paths, I think we can venture down and understand what I mean by both, and then maybe try to find how to solve that paradox together. And the first path we can go down is people feeling like they can't afford to be on Amazon.

3:16Yes. And why is that? Profitability just right out of the gate. And I think that's something that you hear more and more and more these days with brands and sellers is it's just harder to sell on Amazon. And it's for a few reasons. It's that fees are increasing, but also it's becoming that much more competitive, which is then driving up advertising costs as well. So across the board, your fees are increasing and squeezing you and taking a much larger percentage of your overall sales. For example, in 2020, so pre-COVID, fees were about 26 % of the cost of your product. And now it's close to 40%.

4:05So it's in that 34 % to 40 % range. and the sellers and the brands are the ones that are taking that hit. So how do you, as a brand, now navigate this and still be successful on Amazon? And the numbers bear this out. One of the things I'm talking about on the podcast, one of my friends does this cultural podcast and he was really going into the concept of the death of the middle. How there's this big challenge right now where the big are getting bigger, but the middle is getting squeezed massively. And according to my numbers here, half of Amazon's GMV in that 2020 range was about 15 ,000 sellers.

4:48Now that's down to 8 ,000 sellers. And actually, the overall number of sellers has actually decreased on Amazon, which is kind of surprising. It's the first time in the last few years where there's less sellers signing up to be on Amazon. And that's because they're getting squeezed. I think they're getting squeezed. It's a lot harder to actually compete on Amazon. and it's also a lot harder to ramp up your velocity on Amazon. So Amazon's algorithm has changed from pre-2020 as well. And there's Cosmo that has been introduced and there's speculation that it's no longer just the A9 algorithm, right?

5:29It's what's being coined maybe as A10 plus Cosmo. And just at the highest level, brands are being provided with more velocity on the Amazon side. So if you bring in traffic from outside Amazon onto Amazon, that tells Amazon that you're a bigger brand, that you have better brand authority. And Amazon in their algorithm will score you better as well, which is that like that's not something that ever played into their algorithm before. So the whole bigger getting bigger, if you have a lot of branded traffic coming into the site, it's probably because you're big as well. And then that's an indicator to Amazon.

6:11So I do think that, did you say the death of the middle? Yeah. Is that overstating it? You know what? I do think that it likely is true, but if you had a certain level of velocity on Amazon before, you didn't necessarily have to be the biggest brand, but you were big on Amazon and in Amazon market share. So those brands still maintain during this period. But the biggest thing is that these brands like Nike and many others like Nike have brought their ad budget to Amazon. So now you're competing with them. Whereas a lot of brands before, you could just go in, purchase their branded share because they weren't there to convert it.

6:58So there were a lot of smaller sellers that were able to feast on that. We've talked about it on the podcast, but I think the ad ecosystem in Amazon is one of the fastest growing aspects of the service. I think you articulated it there, but maybe go in a little like, is it because ads have become table stakes? Because they've invested so much in their ad platform, now investing in ads is really one of the key ways that you're able to generate scale or volume. So it just adds into the cost equation. Yeah. So there's a few reasons for that. So it's becoming more competitive. So cost per clicks are increasing.

7:35But Amazon's ad real estate on their search engine results page has also increased. So used to be like 70 % organic listings. Now it's split. And Amazon's constantly changing where those ads are on the page. So the customers don't know what a sponsored ad is versus an organic ad. So Amazon knows that that is a big growth lever for them as a business. So they're further investing into that in many ways. And then I think you referred to this in the beginning, but just to dive back in, ads are one of the biggest additions to this middle squeeze. But the service fee, talk to me a little bit about the service fee ecosystem and how that's changed and who that affects most.

8:20So the service fees are taking up a lot more of what would have been your take home. So you go back 10-15 years ago, a lot of brands could set up on Amazon and do really well. because after fees, which were just under 30 % plus advertising brings you to around 40%, 50%, the rest you could reinvest into your business or take home as well. Now you're actually getting into that 50%, 60 % range before you even invest in ads. So that is just becoming a lot more difficult because now cashflow is an issue. So how do you manage your cashflow? Because Amazon also doesn't release it to you right away. So if you're making less profit and then it's also being released to you late, then you're not able to operate as fluidly as you have in the past.

9:20And what brands are able to do that a lot better, a lot of the bigger brands. So I think that plays into it as well. And back to the ad portion as well, I'm seeing April 15, 2020, 2016, 2026, Amazon moved to deduct ad spend straight from seller disbursements instead of letting sellers float it on credit cards. So that's another cashflow crunch. Yeah, exactly. That's interesting. So they take your ad costs out of your sales revenue. It would be from your invoice. Yeah. From your invoice. Interesting. So is there anything else on the can't afford to be on Amazon side. On that side, it's all about trying to understand what are those costs too.

10:01Because from the highest level, it's like, okay, FBA fulfillment fees, referral fees, and then your COGS. But there's what I call hidden fees as well. There's long-term storage fees, there's inbound fees that Amazon's charging, there's freight fees, there's returns and chargebacks as well. And all of those fees add up to be like 5 % to 8 % as well. So that further takes away from your margin. And you might not necessarily know what's happening because individually, it looks like a percent here and there or slightly under a percent here and there. But amalgamated, it is a big chunk of your margin.

10:41So the so what here? There's a few tips, especially on the reimbursement front. So Amazon will sometimes wrongly charge you or lose or damage your inventory. So you need to go get those fees back and you need to get them reimbursed. And Amazon will pay them back to you. You just have to dispute it. A lot of brands don't. You can either do it yourself or there's tools that help you do that. So you can get some of those fees back and then they'll take a percentage of what you got back. So that would be one tip. And then another tip, which a lot of sellers are using is AGL or AWD. This is Amazon Global Logistics.

11:28So if you have a manufacturer, let's say in China, you can deliver it directly from that manufacturer to Amazon's warehouses and fulfillment centers directly from them using Amazon's cargo and chips. So they'll transport it for you so that you don't have to organize that yourself and then send it into Amazon. And it usually saves brands like three ish percent, let's say overall on their margin. But that that actually adds up, especially if you're doing 100 ,000 units a month. Right. Right. So those two things will help you claw back some margin on your side. And then you either can reinvest that elsewhere, or you use it to help with cash flow.

12:15And then back to the state of things with the number of sellers actually shrinking. Do you think that is to do with, because it's like you've got all of these constraints and changes on the Amazon side, and then you've got tariffs. And the amount of percentage points and the amount of sellers that kind of went down due to the tariff pressure. Do you think that the decrease in sellers has more to do with the tariffs or more to do with the changes on Amazon? I think if you remove tariffs from the picture, at the end of the day, Amazon is trying to take more. Even if you remove that from the picture, it is likely just how do you win within the Amazon ecosystem, regardless of that, because everyone's dealing with that same tariff issue.

12:58So in theory, it should affect that whole market or your competitors unless people have found loopholes, which I mean, that's personal to each brand and they can find that. But on Amazon, I think there are ways that you can try and navigate within that ecosystem better than others. And I call it operational rigor. And not everybody is deploying that. Like there's fees being left on the table and there's options that aren't being used that can actually help you save in margin. And whereas previous years, those would be nice little padding your numbers, increasing your profit, but it's kind of like becoming table stakes in this new stricter environment.

13:41Exactly. And the other piece of profitability is advertising, which I haven't really spoke about under that lens of can't afford to be on Amazon, because I actually think it ties why you can't afford not to be on Amazon with can't afford to be on Amazon. So I'll pause on advertising and we'll talk about it after. Q4 is coming. And if you've ever run holiday ads, you know that it's the most expensive quarter of the year to advertise and budgets get tight real fast. The good news, Universal Ads is giving away $30 ,000 to cover one lucky brand's TV campaign for all of Q4. Black Friday, Cyber Monday, holiday promos, all of it.

14:23No strings attached and you don't even need a TV ready ad to enter. Just head to universalads.com forward slash Q4 dash contest. Check out the official rules for eligibility and enter today. Even if you're not the winner, every eligible brand that enters gets $500 in matched ad credits. So entering is a win either way. Don't wait, the clock's ticking. Enter at universalads.com forward slash q4 dash contest. No purchase necessary. See official rules for details. Let's jump over to why I think a lot of people know high level why you cannot afford to not be on Amazon. Something like 70 % of the US marketplace commerce flows through Amazon.

15:04Why else can you not afford to not be on Amazon? So a few stats that I always like to read out. So 63 % of consumers start their product journey on Amazon. They choose to start their product journey on Amazon more than Google, more than anywhere else right now. What that tells you is that consumers see Amazon as the biggest marketplace in the world, and they're using that to help them do research and to look at you and your competitors. Two, prime penetration in the US and Canada. So 75 % of people in the US use a prime membership. It's 55 % in Canada, but those are high numbers, right? A significant portion of both those populations are prime members, which signifies that they're buying on Amazon.

15:55The other piece is that it's estimated that 10 to 20 % of customers like to purchase for the first time on Amazon. If you're trying to create brand awareness on Instagram or TikTok, and that customer likes your product, they decide to then go search on Amazon and you're not present, you might be leaving out that segment of buyer as well by not being present there. All these things suggest that you should be on Amazon. Customers are using Amazon as an important part of that buying journey. And then we didn't even get into all of the search volume that's happening around the generic searches for your product.

16:39What do you mean by that? So most people who are selling a product, there is a customer on Amazon searching for that product generically. And that is your in with a new customer base as well. And maybe you don't want to compete on the most generic searches, but there are tremendous amounts of long tail searches happening on Amazon every single day around your products. And you can go and own those niches and start to build customers from those generic searches as well. So not only do you want to own your branding searches. You also want to build based on generic searches that are happening on Amazon.

17:22And, you know, eventually you can build up into the shorter tail terms if you build up enough velocity on the long tail. Does Rufus play into this? I have stats here about how since as of November 2025, Rufus has 250 million active monthly users, which is up 150 % year over year. So people are using this as a buying surface. And I want, does that, does that affect keywords at all? Cause I know whenever I, whenever I think about keywords, I type in a few keywords, but whenever I'm searching or talking or engaging with my, you know, one of my AIs, it's just a verbal diarrhea of what I'm thinking at that moment.

17:59And so that's kind of translating into search keywords. Are you, are you seeing that the uptake of Rufus is affecting this equation at So Rufus is now called Alexa for shopping. So Amazon merged the Rufus technology with their Alexa technology. And now that is called Alexa for shopping in the US. So it operates like Rufus did. It just also has data from Alexa. And I think that those people that are searching on Amazon are using Rufus or Alexa for shopping in two different ways. You can either search using Rufus. So in the search functionality, you can actually click on Alexa for shopping and type in a question to Amazon, and it will consolidate products that fit the context that you gave it.

18:50Or you can use Alexa for shopping on the product page itself and ask questions about that product that you're purchasing. And that's where a lot of customers are currently using Alexa for shopping is on the product pages. And it's not as high yet on just using it generically on searches. Does that check out? Yeah, I think so. So I think that stat is showing that those customers are finding it helpful when they're looking at the product itself. And you can ask it questions about the product. And then you can optimize your page so that you feed your information into Alexa for shopping so that it can give the right answers back to the customer.

19:34And anyone using Alexa, you're not going to access. Obviously, Alexa is going to prioritize any sort of shopping on Amazon. So if you're not on Amazon, you're not going to get those Alexa shoppers. Yeah, exactly. The other piece of the equation maybe for why you can't – for why like on the ledger for the value that Amazon's providing and why you can't afford not to be there is they are rolling out free tools that are helping sellers as well. So that are increasing the value, whether it's Seller Central Canvas or some of the other Opportunity Explorer. Are there tools that you're finding really useful that they've rolled out to try to offset maybe some of the cost squeezes on the other side?

20:13one of, and you're saying first party tools, like from Amazon. Exactly. Yeah. Specifically. They are rolling out tools and some are good and some aren't that useful, but the best report that they provide to sellers, and I would urge every single seller to use this report is the SQP report. It's the search query performance report in Seller Central. You find it in brand analytics, and it shows you what your percentage share of purchases are, clicks are, and impressions. So you can see generic keywords, and you can identify how many or what percent of those customers' purchases are going to your brand for that keyword.

21:00And then you can align it with your ad spend. So this is a good question to transition into had spent if you'd like to, because I think that's really how you can tie finding efficiency within your advertising to make sure that you're more profitable with also taking advantage of the customers that exist on Amazon that are ready to purchase your type of product. So I'm setting myself up here and I'm going to dive in on that one because I think a lot of brands, they'll choose a tacos and say, okay, I need a 5 % or 30 % tacos. So that's the percentage allocation of your overall sales that you can use on advertising.

21:45I would say no matter what percentage you land on, depending on the type of brand that you are, it's how you actually put those dollars to use. And that is the differentiator with driving incrementality and profitability for your brand, a lot of brands or agency will use that as a vanity metric. Whereas if you're using tacos in alignment with a report like SQP that I mentioned, or a ranking report from Helium 10, you can actually align those three reports and see if you're spending over here, are you actually driving an incremental change in your share of purchase rate for a specific keyword? And then also what is your organic rank doing as you spend into that keyword?

22:36And if you're not seeing a meaningful change, but 10 to 15 to 20 % of your ad spend is going into those keywords, maybe there's different white space that you need to be looking at because you've reached the top ability to drive incremental sales and your organic position is actually winning on those sales. So you're cannibalizing that organic reach. It makes sense that a lot of brands would just think that's all incremental. It's not because it might be a generic term that you're bidding on, but your organic listing was going to convert anyways. So now you need to reallocate that spend to a different white space or niche and go and win those customers and increase that purchase rate.

23:25And then you monitor your rank and your purchase rate on the spend that you dialed back. And as you start to lose, then you can start to dial that back up again. And then that way you're optimizing the spend that you do have to drive incrementality and avoid cannibalization. Would you say that's the sort of number one tool you have. Ads are both the, speaking of paradoxes, they're both one of the major causes for the cost inflation. They're also, if you do it really efficiently, it's also your major lever to continue to succeed and to actually scale on Amazon. Yes, I do believe that. I do think you need operational rigor because as you free up margin, you can then reinvest that back into your ads to then be more efficient there.

24:13But we do a lot of audits and we see a lot of wasted spent. And I would urge brands to look at their last month, their last quarter, and see how many keywords were spent on that led to zero sales. I would also urge you to see your top keywords that you are spending on and look at what your purchase rate is in SQP, or what your organic rate rank is on Helium 10. And see if you actually really do need to be deploying that spend there, or can you actually move on to the next area to conquest? So that would be the actionable area I would suggest brands do, because that's where you're actually going to drive incrementality with the limited spend that you do have.

25:03Beautiful. Those are the major advice pieces you give to brands who come in here. You're saying the biggest things that you can do, You can't change a lot of the fee structure, as you say. There are ways I think you can be more efficient in making sure that you're recouping fees that you shouldn't have had to pay and making sure that you're categorized in the right way to make sure that you're not paying things you don't have to. But really, how would you summarize your top advice to brands that you give who kind of come in for an audit that maybe think about Amazon in one way and you're urging them to think another?

25:31So I would see if you're leaving money on the table with reimbursements. So are you not disputing? those fees or chargebacks, well, that's a great place to start. Either do it yourself or use a tool. Are you efficiently transporting your inventory? So if you want to use Amazon's network, which is called AGL, can you? And you likely save 2 % to 5 % in freight costs by using that. So that's on the operational side. And then on the advertising side, are you using more than just the advertising data to make your decision? Are you using things like your SQP report and your Helium 10 ranking data or whatever other tool you use to help with ranking?

26:21And are you aligning those three things together to make sure that you're effectively using that ad spend? There's a lot more that goes into it as well. But at the highest level, I'd say those are like three really easy wins to go and make sure that you're saving and improving your margin. And then also making sure that the limited ad spend that you have is actually driving incrementality and also is more profitable. And then one final note about the future of these platforms is as we move into things like agentic shopping, agents and different tools, whether it's Claude or ChatGPT or Perplexity, they're going to drive you to the path of least resistance in order to make a converted purchase.

27:09And so I imagine in a lot of these cases, they're going to be using Amazon to make suggested purchases. And therefore, again, for the future, if you're not on Amazon, you might be missing out on a little bit of that agentic future. Yeah. And I would say as we start to see that happening more and more, then that's where we definitely have those conversations. But I think even before that agentic future comes, I think everyone should be on Amazon. But you need to operate in a way on Amazon to make sure that you're still dropping margin. And it is possible we do it for a lot of brands. And I think you just need to do it in a way that's way different than pre-2020 and pre-2016 because it is table stakes, as you said.

27:58So I think we can update the Amazon paradox to be you can't afford not to be on Amazon and you can't afford not to be working with an agency as savvy as Pilot House. Is that more accurate? I would agree with that statement. I like how you summarize that. Yeah, oddly enough, on the Pilot House All Killer No Filler DTC podcast. Well, thanks for coming on again, Tyler. Look forward to connecting with you again in the near future. I see that I don't know if this is on your radar. I don't know if you're going or not, but I hear that Amazon Accelerate 2026 is coming up at the end of this month. Have you ever been to that show?

28:30I have been, but previous to Pilot House. Yeah, it'd be interesting to know what kind of things go on there or what predictions are always tough. But where do you see Amazon making, like what are the rumor mills talking about, about upcoming releases for the moves Amazon might be making in the future? I think they definitely want to invest in Amazon for shopping. So what used to be Rufus, I think they see the other major LLMs as competition now because people are going to ChatGPT, let's say, to help them purchase a product. And Andrew Jassy came out and said, we can actually do all of that way better because we have all of your purchase behavior and your browsing behavior, whereas the LLMs don't.