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The Michigan attorney general’s second claim is that Amazon is “coercing sellers to use Amazon’s fulfillment service.”[14] Fulfillment by Amazon is the company’s program that allows merchants to outsource order processing and shipping to Amazon. The program provides sellers with inventory storage, handles the shipping process and returns, and provides customer service. It gives merchants access to the nearly 200 million purchasers who are Amazon Prime members.[*] Amazon certifies to its Prime members that sellers offering Prime products meet Amazon’s standards for fast and reliable shipping.
Michigan’s lawsuit against Amazon claims that Prime status is something most merchants want because it is a seal of approval for their business. That is true and hardly a controversial claim. Where the lawsuit goes wrong is in claiming that enrolling in Amazon’s fulfillment program is a requirement for gaining Prime status as a seller.
Sellers can become certified as Prime merchants in two ways. First, they can outsource their fulfillment process to Amazon and pay the fees associated with Amazon’s warehousing and logistics services. What the Michigan lawsuit fails to recognize is that there is a second path to Prime status — sellers can become certified in Amazon’s Seller Fulfilled Prime program, which avoids entirely the fees that the Michigan lawsuit claims are mandatory.[†]
To become certified in this program, sellers go through a 30-day probationary period in which they demonstrate that they can provide fulfillment services on their own that meet the Prime standards. The current standards for merchants participating in the program include offering one- and two-day shipping options, having a seller-initiated cancellation rate of less than 0.5%, maintaining a 93.5% on-time delivery rate and using a shipment tracking system that is valid 99% of the time. If they can do so, their products can use the Prime label, but sellers are allowed to handle fulfillment on their own and do not need to purchase Amazon’s services.[15]
Thus, Amazon’s own fulfillment service is not actually bundled with Prime status, as the Michigan lawsuit claims. Merchants can choose between obtaining Prime designation through the fulfillment program, which charges fees for Amazon’s services, or the self-fulfilled option, which does not require paying any services fees to Amazon.
The Michigan lawsuit alleges that a key purpose for Amazon supposedly bundling fulfillment services with Prime status was to make sellers dependent on the program. This would supposedly discourage them from selling through other online channels that compete with Amazon. In other words, the lawsuit claims that this policy deters merchants from using competing fulfillment services once they decide to sell their products under the Amazon Prime banner. But if the Fulfillment by Amazon program is not mandatory, then that can no longer be a concern.
To understand why Amazon shoppers will be worse off if the lawsuit forces Amazon to let merchants use the company’s Prime brand and fulfill orders with third-party services, it is important to consider why Amazon would want to set standards for merchants to sell goods with the Prime logo. Prime status is Amazon’s promise that buying from the merchant will result in fast and reliable shipping of the purchase. Amazon has a very strong reputational interest in making sure that any merchant operating under the Prime brand will deliver as promised. Poor shipping experiences will undermine the value that consumers place on the Prime brand, for both Amazon and for every other merchant selling Prime products on the platform.[‡]
Thus, the way Amazon administers its two paths to Prime certification can be seen as necessary for protecting the brand and consumers’ expectations for Prime products. Amazon can control shipping quality when it handles fulfillment directly through its fulfillment service. This is why the self-fulfilled option includes a 30-day probationary period and ongoing monitoring of sellers’ fulfillment record. Amazon must protect the reputation of the Prime brand and ensure that consumer expectations for delivery services are met.
Amazon’s logistics network allows it to achieve its next-day shipping. If the Michigan lawsuit against Amazon is successful, it is likely to seriously undermine the benefits Amazon customers receive from these key features of the Amazon platform. If that happens, the inevitable result will be higher prices and slower deliveries for Amazon customers, as well as lost opportunities for smaller merchants to use all of the distribution services provided by Amazon.
[*] Amazon Prime is a membership program. Customers pay an annual fee to Amazon in exchange for exclusive discounts, free and fast shipping and easy returns. Primer membership also includes access to Amazon’s streaming and digital storage services, such as Prime Video, Amazon Music and Amazon Photos.
[†] Jake Pool, “How to Sell on Amazon Prime: 3 Ways to Get the Prime Badge,” February 23, 2024, accessed March 12, 2024, https://perma.cc/U9Y2-BEEA. There is a third way for sellers to get their products Prime status on the Amazon site, but it does not involve selling directly to consumers. Instead, sellers in this program are wholesale suppliers to Amazon. Vendor Central is a program where Amazon buys in bulk from hand-picked vendors, whose products then are sold on the platform under the Prime label.
[‡] Moreover, the lawsuit makes it clear that there is a huge value in selling products under the Prime logo. It claims that “Prime eligibility alone regularly triples a seller’s sales on Amazon.” If that claim is true, Amazon would be justified in making sellers pay for this privilege, based on the value Amazon adds to sellers participating in its Fulfillment by Amazon program. “Complaint, FTC et.al., v. Amazon.com, Inc.” (U.S. District Court Western District of Washington, November 2, 2023), 108, https://perma.cc/8KU2-RGVU.
