Amazon’s Pricing Algorithm Stirs Controversy as Sellers Lose Sales During Target’s Circle Week Event
The battle for the lowest price in e-commerce has taken a dramatic turn, as Amazon’s powerful pricing algorithms are causing unintended consequences for sellers during promotional events. During Target’s Circle Week, a discount event that typically precedes Amazon’s Prime Day, many third-party sellers saw their sales plummet on the Amazon platform, as their products were outbid by resellers who bought products at a discount from offline retailers. The culprit? Amazon’s automated systems, which detected the lower prices on Target’s site and triggered a price drop, resulting in the loss of the coveted buy box, the listing that appears first when a customer searches for a specific product.
Key Takeaways:
- Amazon’s algorithms are under fire: The company’s pricing systems are being scrutinized by regulators and sellers alike, who accuse them of stifling competition and harming small businesses. The Federal Trade Commission has filed a lawsuit, alleging that Amazon uses its algorithms to "stifle competition" and engage in an "anti-discounting strategy."
- Loss of the buy box can be costly: The buy box is crucial for sellers on Amazon, with nearly 98% of sales going through that button. Losing the buy box can result in plummeting sales and a significant loss in profit for brand owners.
- Sellers are caught in a cycle of discounting: With resellers often sourcing products at lower prices offline and selling them at a markup on Amazon, brand owners are forced to lower their prices on the platform to remain competitive, potentially leading to reduced profit margins.
- The impact on brands is significant: The loss of sales during Circle Week has impacted many sellers, some of whom have lost hundreds of thousands of dollars in revenue. This underscores the need for a more nuanced approach to pricing that protects both sellers and consumers.
A Tale of Two Sellers
Brandon Fishman, the owner of VitaCup, a vitamin-infused coffee brand, saw his Amazon sales "fall off a cliff" during Circle Week, as Target listed his coffee for sale at a lower price than his Amazon listing. "I’ve had to purposely lose the buy box all week because of this Target issue, and my sales went way down on Amazon," he said.
Similarly, Mason Arnold, the owner of Sunwink, a herbal tonic brand, experienced a sharp decline in sales due to losing the buy box to resellers who had purchased his products at a lower price from offline discount retailers. Both sellers were forced to reduce their prices on Amazon to regain the buy box, but this strategy came at a significant cost, leading to reduced profit margins and potentially losses.
Target’s Role
In the past, Target would mask its discounts by displaying them as percentages, avoiding triggering Amazon’s algorithms. However, this year, the company listed actual sale prices, inadvertently creating a pricing war between brands and resellers on Amazon.
While Target has disputed the claim that it directly caused the issue, some sellers, like Fishman, stated that Target changed their Circle Week promotional strategy, shifting from displaying discounts to showing actual prices, which ultimately triggered Amazon’s algorithm.
Amazon’s Response
Amazon has refuted the FTC’s antitrust allegations, arguing that its pricing tools are a necessary component of its business model and that the company does not control the prices set by third-party sellers. However, the company has declined to address the specific concerns raised by sellers who have experienced significant losses during Circle Week.
This issue highlights the complex world of e-commerce, where algorithms play an increasingly important role in shaping pricing and market dynamics. While the pursuit of the lowest price may seem beneficial for consumers, it can have unintended consequences for sellers, potentially leading to a reduction in competition and innovation.
Looking Forward
The episode raises important questions about the role of algorithms in e-commerce, the impact of pricing practices on small businesses, and the need for a more nuanced approach to promotional events that do not unfairly disadvantage brand owners. As Prime Day looms, it will be interesting to see how Amazon responds to these concerns and whether it will make any changes to its pricing algorithm to prevent similar issues from arising in the future.
