Amazon recently announced that it was ending the Small and Light Program, effective August 29, 2023. The decision to enroll and reap the benefits of reduced fulfillment fees was a no brainer if you were selling qualifying products:
Lower FBA fees, improve conversion, increase unit sales, reduce PPC ACos, and ultimately, drive higher total EBITDA dollars? Easy choice.
And that’s just scratching the surface.
We’ve said it before, maintaining a healthy contribution margin is absolutely critical for running a profitable 3P brand that’s built to last. And for the right brands, enrolling in Small and Light absolutely drove contribution margin through the roof. Look at Bonza, a Brandable beta partner and leading pet brand with a catalog of durable, high-quality, and environmentally friendly pet products.
Bonza’s contribution margin was sitting right around 30% in March 2023. From time of enrollment to this post, the reduced fulfillment costs that came with Small and Light pushed a whopping 8% contribution margin increase and nearly doubled top-line revenue. This freed up nearly $40,000 in capital on an annualized basis for Bonza to spend on marketing and advertising and new product launches, all while maintaining profitability.
That’s not all. With excess inventory and the corresponding FBA fees chipping away at Bonza’s bottom line, the team was able to aggressively lower prices across their catalog via Small and Light to ramp up sales velocity, increase conversion, and boost CTR. Ultimately, Bonza sold off their stagnant inventory at a high profit margin without sacrificing (you guessed it) contribution margin.
But what’s done is done. And make no mistake, the halcyon days of Small and Light are finished. Here’s how we’re moving forward and you can too.
What Changes With Amazon’s Announcement?
For now, the Small and Light Program will be replaced by what Amazon is calling “Lower-Priced FBA Fees.” The specifics of these fees have yet to be announced, but we know they will apply to all items priced under $10. It remains to be seen if Amazon will impose additional qualification standards based on weight and dimension.
Some additional points coming out of this news. Eligible items (currently those priced under $10) will automatically receive lower-priced rates and will not be subject to holiday peak fulfillment fees, which will run from October 15th through January 14th.
We expect that the impact will extend to brands selling items under $15 as well. A large portion of these businesses were already operating with razor thin margins, and effectively built their operating model around sales velocity that resulted from Small and Light’s lower priced FBA fee structure. Per Jungle Scout’s 2023 State of the Amazon Seller report, this cohort makes up approximately 30% of all items sold on Amazon.
What Should You Do Now?
Now if you fall into this group, the question really becomes how to maintain that high contribution margin you enjoyed under Small and Light, without sacrificing sales velocity. There is a window of opportunity here in the form of adjusting order size.
Typically, placing a larger order will meaningfully drive down your Cost of Goods Sold (COGS). It’s not unreasonable to expect that ordering twice as many units will drive down your unit cost by 30 - 40%.
Your margins still may not be quite as high as they were under Small and Light, but you may be able to make up for it. For example, selling 1,500 units at a lower price may net you roughly the same total EBITDA dollars as selling 1,200 units under Small and Light.
There are also levers you can pull at the SKU-level. Head to your Inventory Management page in Seller Central, and view your sales data for the specific SKU that you’d like to analyze. In the sample below, Average Units Per Order indicates that customers are ordering more than one unit of product. In other words, 16 out of 100 orders contained more than one unit. With Contribution Margin and EBITDA dollars as your North Star, launching multipacks for this particular product can boost AOV (average order value).
Looking Ahead
While the outcome of ending Small and Light remains to be seen, it’s a near certainty a substantial portion of 3P Amazon brands are going to have to make major changes to their pricing, marketing, and supplier strategy to make up for the resulting loss in margin. And even though qualifying items will automatically have two-day Prime shipping, that still won’t close the gap.
Capitalizing on multipacks to boost AOV and adjusting order size are just two tactics you can utilize to drive EBITDA dollars while maintaining a high contribution margin.
We’re continuing to monitor the slow drip of details coming from Amazon on Lower-Priced FBA Fees, and we’ll share more actionable tips you can use to make up for lost benefits as Small and Light sunsets in late August.
