New documents reveal Amazon’s “secret pricing scheme”
Chairman Jeff Bezos is said to have approved this strategy.
Why we care.
If Amazon is found guilty of charging brands high fees for showing irrelevant ads that hurt the user experience, advertisers may want to consider moving their ad spend to other platforms for a healthier return on investment and more effective ad placement. Chairman Jeff Bezos reportedly approved this strategy.
Why we care. If Amazon is found guilty of charging brands high fees for showing irrelevant ads that hurt the user experience, advertisers may want to consider moving their ad spend to other platforms for a healthier return on investment and more effective ad placement.
Degrading search results. The Commission claims that Amazon’s service quality declined as it shifted from prioritizing relevant, organic search results on its online storefront (as originally directed by its founder and then-CEO Jeff Bezos), to now featuring pay-to-play advertisements. The organization says Amazon bosses knew this created “harm to users” by making it “almost impossible for high quality,
helpful organic content to win over barely relevant sponsored content.”
Junk Ads. The commission claims that Amazon requires sellers to pay advertising fees to reach its large online customer base. This leads to less relevant search results for customers and higher priced products. Bezos, his staff and even the sellers who pay for these ads are said to call them “defects”, despite the fact that they cost a lot of money. According to the Commission, an Amazon executive gave examples of how junk ads could negatively impact the shopping experience. Some results were clearly unrelated to what the customer was looking for, like an LA Lakers t-shirt ad appearing in a search for “Seahawks t-shirt.” Others were just strange, such as “Buck urine” showing up as the first Sponsored Products slot for “water bottles.”
Rejecting guard rails to protect customers. Amazon has allegedly rejected the idea to implement “guardrails” in ads as a way to protect customer experience. Senior executives at Amazon stressed that advertising shouldn’t be restricted by rules and regulations, even though this approach had flaws.
Bezos ‘prioritizing cash over service’. Bezos, according to reports by the Commission, directed his executives that they should accept more “defective” ads because he preferred to focus on advertising revenue rather than improving customer service. According to a senior executive, the principle of maximising advertising profits had become the driving force, despite its flaws.
Raising the prices of consumers. According to the Commission, Amazon’s “pay-to-play” ecosystem is increasing costs for sellers. These expenses are then passed on to consumers. An Amazon executive reportedly said:
“his extra cost is likely to be passed down to the customer and result in higher prices for customers.”
- ‘Penalties’ for competitive Sellers[T]. Amazon’s alleged antidiscounting practices also penalize sellers who offer lower price on other platforms. As a result, many sellers establish their prices on Amazon, even with higher fees, as the minimum price across the internet.
Consumers pay the price. By inundating its search results with paid ads, Amazon guides shoppers towards pricier products. A 2018 study acknowledged that increased advertising makes it harder for customers to find lower-cost products, and as advertising grows, it significantly affects the overall site’s average sales price (ASP).
Alleged anti-competitive conduct. Amazon is alleged to use an algorithm developed by Jeff Wilke, a former executive. The goal of the algorithm is to keep prices high and prevent price competition. To avoid losing market shares, this approach involves copying the pricing changes of competitors. This results in less competition for prices and possibly higher prices for consumers. According to the commission:
“This conduct is meant to deter rivals from attempting to compete on price altogether – competition that could bring lower prices to tens of millions of American households.”Stopping competition
- . Amazon introduced Seller-Fulfilled Prime (SFP), in 2015, to increase the number of Prime-eligible items for customers, boost sales and support Amazon’s growth. SFP enabled sellers to sell Prime-eligible items without using Amazon Fulfillment by Amazon. Amazon’s CEO, Andy Jassy, announced last week that the company’s ad revenue had “grown robustly” – up 26% to surpass $12 billion. Andy Jassy announced last week that Amazon’s advertising revenue has “grown robustly”, up 26% and surpassing $12 billion. Search Engine Land contacted Amazon to get a comment. Tim Doyle, Amazon’s spokesman told us that:
“The FTC claims an old Amazon pricing formula called Nessie was an unfair method for competition which led to higher prices for consumers. The FTC claims that an old Amazon pricing algorithm called Nessie is unfair competition, which led to higher prices for consumers. This is a gross mischaracterization of this tool.” “Nessie’s purpose was to prevent our price matching from leading to unusual outcomes such as low prices that were not sustainable. The project ran for a few years on a subset of products, but didn’t work as intended, so we scrapped it several years ago.”
Get the daily newsletter search marketers rely on.What the Federal Trade Commission is saying
: A spokesperson for the department said in its complaint:“In a competitive world, Amazon’s decision to raise prices and degrade services would create an opening for rivals and potential rivals to attract business, gain momentum, and grow. Amazon, however, has used an illegal monopolistic strategy in order to shut off this possibility. This case concerns the illegal exclusionary practices Amazon uses to restrict competition, stifle rivals’ growth and consolidate its dominance. This strategy is mutually reinforcing. “
- Amazon has illegally entrenched their monopoly in both relevant markets. An industry source claims that Amazon has more sales than all fifteen of the largest U.S.-based online retailers combined. Amazon violated the law, not because it is big, but because of how it used its size and scope to stifle competitors. “
- Deep dive
. For more information, read the Federal Trade Commission
in its entirety.