What is the marketplace fee?

The marketplace fee is a commission that is charged by online marketplaces like Amazon, eBay, Etsy, and more on each transaction completed through their platform. It is a percentage of the total sale price that the marketplace charges sellers in order to cover the costs of providing services like payment processing, customer support, marketing and advertising to bring buyers, seller tools, secure infrastructure, and more. Understanding how the marketplace fee works is important for sellers looking to optimize their profits when selling online.

What is the purpose of the marketplace fee?

The marketplace fee serves a few key purposes for online marketplaces like Amazon and eBay:

It covers the marketplace’s operating costs – Marketplaces incur significant costs to build and maintain their technology platforms, process payments, provide customer service, host servers, market the platform, and much more. The fees collected from sellers help fund these operations.

It is a revenue source for the marketplace – In addition to covering costs, the fees represent an important revenue stream for these companies and part of their business model.
It provides value to sellers – In exchange for the fees, marketplaces provide sellers with tools, visibility, and buyers they likely would not reach on their own. So the fee provides a valuable service.

By charging sellers a percentage of sales made, marketplaces create an aligned incentive – they only make money when sellers make sales. This helps marketplaces focus on providing as much value to sellers as possible.

How is the marketplace fee calculated?

The marketplace fee is calculated as a percentage of the total sale price of an item, including product costs, shipping costs, and taxes. The exact marketplace fee percentage varies across different platforms:

Amazon – Amazon charges 15% of the total sale price, plus additional fees like a monthly subscription for professional sellers.
eBay – eBay’s fees vary by product category but are typically 10-20% of the total transaction and include an insertion fee per item.

Etsy – Etsy charges a 5% transaction fee on the item price plus shipping, plus additional fees for ads and offsite ads.
Walmart – Walmart Marketplace charges variable referral fees of 6-20% depending on product category.
Shopify – Shopify charges 2.9% + 30¢ per transaction from in-person and online transactions using Shopify Payments.

These percentages are applied to the entire buyer payment – so marketplace fees are calculated on both the item cost and any shipping or sales tax collected. Sellers should factor this commission percentage into their pricing strategy and margins.

Common additional marketplace fees

In addition to the standard commission on sales, many marketplaces also charge a variety of other fees for optional services and features:

Insertion fees – Fees for each new product listing added to the marketplace.

Final value fees – Extra fees applied when selling high-priced items.
Subscription fees – Monthly or annual fees for access to seller tools and features.
Promoted listing fees – Fees to increase product visibility and traffic through ads.

Fulfillment fees – Fees for the marketplace handling shipping and fulfillment.
Returns processing – Fees deducted for handling buyer returns and refunds.

These extra fees add up, so sellers should closely review the full fee structure of any marketplace they are considering selling through.

Strategies for minimizing marketplace fees

While marketplace fees are unavoidable, sellers can employ some strategies to try and reduce the impact on their bottom line:

Sell higher priced items – The marketplace fee applies as a percentage, so it has less impact on pricier items.
Drive volume discounts – Some marketplaces offer fee discounts at higher monthly or annual sales volumes.

Sell additional value-added services – Services like assembly, gift wrapping, etc. that are not subject to the marketplace fees.
Optimize packaging/shipping – Careful shipping strategies can reduce fulfillment fees charged by the marketplace.
Limit promoted listings – Only use promoted or featured listings when they will notably increase sales.

Negotiate – Large sellers may be able to negotiate custom marketplace fee rates.

Finding ways to sell more without additional fees, qualifying for marketplace discounts, adding new profit channels, and cutting unnecessary costs can help sellers maximize their earnings.

Factors that impact marketplace fee rates

While each marketplace has its own standard fee structure and policies, there are some key factors that commonly influence the specific fee rates charged:

Sales volume – Sellers with higher monthly or annual gross merchandise sales often qualify for reduced commission rates.
Item category – Categories like electronics, handmade items, jewelry etc. tend to have higher fees.
Seller status – Top-rated, longstanding sellers with positive metrics may get better rates.

Fulfillment method – Using the marketplace’s fulfillment services usually carries additional fees.
Payment processing – The marketplace’s own payment processor often provides discounted processing fees.

Understanding these dynamics allows sellers to make decisions to maximize fee savings, like driving more volume to qualify for lower rates or choosing certain product categories.

How do marketplace fees compare to other sales channels?

Marketplaces charge commission fees ranging from 5% to 20% on average. How does this compare to sellers using other ecommerce sales channels?

Your own ecommerce site – No commissions, but you pay for hosting, marketing, payment processing.
Physical retail stores – Typically pay rent, but no commissions on sales.

Sales reps – Sales reps typically earn 5-15% commission on wholesale orders they generate.
Social commerce – Facebook, Instagram, and social platforms charge selling fees of 5-20% as well.

There are pros and cons to each sales method. Marketplaces provide built-in traffic and scale, but reduce profit margins. Your own site allows you to keep more profit, but requires separate marketing efforts. There is no definitively better or worse option – it depends on your specific business model and goals.

Should I raise prices to offset marketplace fees?

With marketplace fees eating into profit margins, some sellers consider artificially inflating their item prices to pass on the added costs to buyers. There are a few important risks to keep in mind with that approach:

Higher prices may make you uncompetitive – Buyers can easily comparison shop.
Marketplaces may detect excessive pricing -Amazon, for example, can suppress listings it deems overpriced.

You lose the benefit of marketplace conversion – Their traffic converts better than your own site.
You may lose search ranking – Algorithms favor competitively priced listings.

A better strategy is to find ways to optimize your operations to lower costs instead of simply raising prices. With creative cost management and volume-driven discounts, top sellers are able to thrive on marketplaces even with commission fees. Focus on improving your business rather than passing on costs.

Should I include marketplace fees in my product pricing?

When setting prices for your products to sell on a marketplace, you should absolutely factor the marketplace commission fees into your pricing decisions to ensure you maintain your profit margins. Here are some tips on incorporating fees:

Build fees into your base pricing – Add the average commission percentage into your basic cost structure.
Model different pricing scenarios – Calculate profitability at different price points factoring in fees.

Aim for 2-3X cost pricing – Following this pricing model leaves room for marketplace fees.
Track your profit margins – Analyze net profit over time after fees to optimize.
Review category differences – Vary pricing by category based on different fee rates.

Determining the right prices for maximum profitability involves estimating sales volumes at different price points, factoring in all associated fees, modeling out net profit, and settling on an optimal price. Build fees into your core pricing foundation.

Should I raise my prices to cover increasing marketplace fees?

As marketplace fees creep higher over time, sellers face a dilemma of whether they should increase prices to maintain margins. There are a few key factors to consider:

How price sensitive are your buyers? – Big price jumps may turn off some customers

What is the competitive landscape? – Being the highest priced option could hurt
Have your costs risen elsewhere? – Higher overhead may already justify some price increase
Can you negotiate fee discounts? – Volume deals may offset rising rates

Can you cut operational costs? – Improved efficiency may offset fees

Rather than a direct price increase to match rising fees, consider incremental price adjustments paired with initiatives to reduce costs or qualify for discounted rates. This balanced approach minimizes the risk of pricing yourself out of the market. Monitor your profit margins over time as the optimal solution.

Should I pass on marketplace fees to my customers?

Some sellers consider separately calling out the marketplace commissions on invoices or receipts to show customers that a fee is being charged. However, this approach has some risks:

Buyers may see it as passing on costs – They likely won’t appreciate seeing fees called out.
It can appear unprofessional – Leading sellers typically don’t mention third party fees.
It draws attention to profit – Calling out your profit margin leaves less room for discounts.

The true costs are opaque – Platform fees include much more than just commissions.

Rather than directly passing on the marketplace fee, it is better to incorporate it into your pricing decisions and aim to provide as much value as possible on the marketplace. Transparently passing on fees should be avoided in most cases.

How can I minimize the impact of rising marketplace fees?

As marketplace fees increase over time, here are some ways sellers can try to minimize the impact on their business:

Negotiate discounts based on sales volume – Meet targets to qualify for lower rates.
Reduce unnecessary costs – Streamline processes to improve profitability.
Shift sales across channels – Diversify to marketplaces with lower fees.

Upsell high-value services – Add profit margin through services like gift wrapping, installation, etc.
Analyze pricing gaps – Adjust pricing based on competitive data.
Emphasize customer experience – Retain more customers to maximize lifetime value.

With a creative, multi-pronged strategy focused on efficiency and value, sellers can adapt to steadily increasing marketplace fees over time without taking a direct hit to their bottom line.

Should I raise prices in anticipation of an increase in marketplace fees?

If rising marketplace fees are clearly on the horizon, sellers face a temptation to immediately raise prices in anticipation. There are some key risks to moving too quickly:

Early price hikes could reduce competitiveness now – Buyers may jump to lower priced options.

The actual impact of new fees is uncertain – You may overcompensate and lose sales.
Sudden price changes frustrate customers – Shoppers value pricing predictability.
You lose time to optimize – Quick price increases provide no runway to streamline operations.

Rather than a knee-jerk price increase, the ideal approach involves:

Model the actual impact of new fees on profitability based on your volume.
Look for ways to reduce costs and qualify for discounts to offset the fees.

Phase in minor price increases gradually over time if necessary.
Communicate value additions like new features or services that justify pricing changes.

With some upfront analysis and planning, sellers can likely avoid significant price hikes when marketplace fees rise.

Is it better to build marketplace fees into item pricing vs. shipping costs?

Marketplace fees apply to both item prices and shipping costs. So sellers have flexibility in how they want to build the fee cost into their pricing:

Higher item price – Results in lower perceived value. But provides flexibility to discount.
Higher shipping cost – Can appear inflated to buyers. But item seems competitively priced.

Balance across both – Spreads the cost evenly between item and shipping.

The right approach depends on your product, margins, and buyers. Electronics sellers may prefer higher item prices while lower value products sell better with small item costs. Testing different balances is key – optimize for maximum conversion across both components.

Conclusion

Marketplace fees are a reality of selling online that smart sellers plan and account for in their operations and pricing approach. Rather than looking at them as an unfair cost burden, the most successful sellers view fees as part of the investment required to access the audience, infrastructure, and revenue opportunities that marketplaces provide. With careful financial planning and execution, marketplace fees can be offset through higher sales volumes, optimized pricing, and operational efficiencies. The marketplace model thrives when sellers focus on delighting customers rather than obsessing over fees – buyers reward great value with loyalty and repeat purchases. Marketplaces only make money when their sellers succeed, so a mutually beneficial relationship aligned around creating customer value will make fees simply part of doing business.