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Amazon Relents on Key Merchant Policy So Prime Members Can Get Better Selection

Another move aimed at pleasing Amazon's best customers.

Jason Del Rey
Jason Del Rey has been a business journalist for 15 years and has covered Amazon, Walmart, and the e-commerce industry for the last decade. He was a senior correspondent at Vox.

Amazon has spent a lot of time and money increasing membership in its Amazon Prime program over the past two years. Now, the retailer is experimenting with a change in how it qualifies products for Prime’s two-day delivery service to give those Prime members an even wider selection of items.

This year, Amazon has quietly been reaching out to a select group of merchants who sell on Amazon with a new pitch: We’ll let your goods qualify for Prime’s free two-day shipping program without storing your inventory with us, according to multiple people familiar with the program.

The move is being viewed in the seller community as a concession by Amazon because it has historically been adamant about requiring sellers to store their goods in one of its warehouses to qualify goods for Prime’s two-day delivery program. This stance has turned off some merchants who don’t want to participate in the warehousing program, known as Fulfillment by Amazon, or FBA, which, despite some hesitations, continues to grow.

With the policy change, Amazon may be able to greatly increase the number of products available that benefit from the Prime shipping service, without taking up more of its own warehousing space. It also can potentially add unique or higher-priced products to Prime’s catalog that merchants or brands historically haven’t wanted tied up in Amazon’s facilities.

An Amazon spokesman declined to comment.

The move underscores Amazon’s desire to continue to improve product selection and perks for the Prime membership program, which costs $99 a year. Amazon has spent hundreds of millions of dollars over the last year to acquire unique video content, such as HBO shows, to offer Prime members for free. In addition, the company has introduced free photo storage and music streaming to Prime, and even two-hour delivery for no extra charge in a handful of cities.

The reason for these investments is clear: Prime members spend anywhere from two times to four times more on Amazon each year compared with non-Prime members, depending on which third-party survey you trust. And the investments appear to be working. Amazon Prime membership grew by 53 percent in 2014 on a base of at least 20 million members. Amazon doesn’t disclose the exact number of Prime members, but that rate of growth suggests there were at least 30 million Prime members worldwide by the end of last year.

The new program also highlights the growing importance of third-party sellers to Amazon’s overall business. Sales from third-party merchants on Amazon accounted for 44 percent of total unit sales in the first quarter of the year, which is up from 40 percent a year earlier, according to Amazon CFO Tom Szkutak.

Amazon CEO Jeff Bezos has long preached that product selection is one of the critical pieces of the company’s “flywheel” of growth. Increased selection improves the customer experience, which should lead to more people buying on, which in turn should attract more sellers.

But the FBA warehousing requirement created a barrier to how wide Amazon’s selection can grow. Many of the third-party companies that sell goods on Amazon don’t want to store goods in an Amazon facility because they don’t want to tie up unique or expensive inventory that they might want to sell to other retailers. Others worried that storing goods in an Amazon facility in another state would trigger a sales tax that they would have to pass on to shoppers, potentially making their product pricing less competitive, according to industry experts.

Even so, the sellers invited to this program will undoubtedly see increased sales with their goods qualifying for Prime shipping. Many Prime shoppers filter their product search results on Amazon to weed out sellers that don’t offer two-day Prime shipping. More than half of the third-party sellers on Amazon don’t use FBA, meaning their goods historically haven’t qualified for Prime.

The new program could also indicate that Amazon is running out of warehouse space in its own facilities. Amazon already operates more than 100 fulfillment centers globally and has been adding warehouses closer to big metro areas to increase delivery speed where there’s a higher concentration of Prime customers.

The move does come with risks for Amazon. Prime’s main attraction is still the promise of two-day delivery, which will be harder to guarantee for items that aren’t housed in one of Amazon’s own warehouses. Sources, however, say the company is being selective about which merchants can participate in the test so it doesn’t add merchants that can’t live up to the Prime delivery promise. It’s not clear if Amazon offsets the two-day delivery fees for these sellers, or if the merchants will be required to pay the fees on their own.

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