Updated:
July 16, 2025
11 min
The "Free Traffic" Lie: Why Marketplace Access Costs More Than You Calculate
# Marketplace Economics: The Hidden Tax on Your Product Business (And When to Pay It Anyway)
Selling on Amazon, eBay, or other marketplaces feels like a shortcut. Instant traffic, built-in trust, established checkout flows. What's not to love?
The economics, mostly. What appears as access to millions of customers is actually a complex fee structure designed to extract maximum value from every transaction you process through their platform. Seller fees have 19% to 29% growth of Amazon's non-AWS revenue between 2019 and 2024-a 53% increase in five years. That growth didn't come from nowhere. It came from seller margins.
This isn't an argument against marketplaces. Third-party sellers account for 62% of all units sold on Amazon, and many build substantial businesses there. The argument is for understanding marketplace economics clearly enough to make rational decisions about when marketplace presence adds value and when it destroys it.
The prevailing wisdom says marketplaces solve the customer acquisition problem. "Fish where the fish are." "Let Amazon do your marketing." "Tap into existing demand."
This advice is dangerously incomplete.
The assumption that marketplace traffic is cheaper than direct-to-consumer acquisition ignores a fundamental reality: marketplaces don't give you customers-they rent you access to customers who belong to the platform. Every transaction, every fee, every advertising dollar goes to a platform that maintains complete control over the relationship.
The failure rate is instructive. Most sellers fail to achieve sustainable profitability on Amazon within their first year. Not because their products are bad, but because they underestimate the true cost structure and overestimate the "free" traffic benefit. When advertising, fees, and fulfillment costs consume 75-90% of revenue before profit, the traffic wasn't free-it was prepaid at usurious rates.
The standard approach-list products, optimise listings, run ads, hope for profit-is economically reckless. Without rigorous cost analysis before marketplace entry, you're gambling that the sum of unknowable fees will be less than your margin. Most operators lose that bet.
The True Cost of Marketplace Access
Most operators dramatically underestimate marketplace costs because they focus on the referral fee-typically 15%-while ignoring the ecosystem of charges that accumulate around every transaction.
The full Amazon cost stack:
1. Referral fees: 8-45% depending on category (most categories 15%) 2. FBA fulfillment fees: 20-35% of sale price depending on size and weight 3. Storage fees: Monthly and long-term storage charges 4. Advertising: 10-15% of sales for competitive visibility 5. Returns processing: Amazon's generous return policy often exceeds your own 6. Other fees: Removal, disposal, labelling, prep services
The typical FBA seller faces referral fees of 15%, FBA fulfillment fees of 20-35%, and advertising costs of 10-15% of sales. Add COGS at 30% and you've allocated 75-95% of every dollar to costs before profit.
The maths on a $30 product:
COGS: $9 (30%)
Referral fee: $4.50 (15%)
FBA fulfillment: $7.50 (25%)
Advertising: $3 (10%)
Other fees: $1.50 (5%)
Total costs: $25.50 (85%)
Profit: $4.50 (15%)
That 15% margin sounds manageable until you factor in the reality: any cost increase, pricing pressure, or advertising spike can eliminate it entirely. Many sellers report margins over 15%, but this requires exceptional operational discipline and often benefits from scale that small sellers can't achieve.
The Amazon Economics Pressure Point
Amazon's platform economics create systematic pressure on seller margins:
Rising advertising costs: As more sellers compete for visibility, cost-per-click increases. The advertising portion of Amazon's revenue has grown to over $56 billion annually-that growth represents margin transferred from sellers to platform.
Fee structure creep: Amazon ads can consume 20-33% of sales, compared to Shopify sellers spending 15-25%. The difference is the marketplace advertising tax.
Competitive pressure: With millions of active sellers and low barriers to entry, pricing trends toward cost-plus-minimum-margin. Differentiation is difficult when product pages are standardised and search algorithms reward price competitiveness.
Data asymmetry: Amazon knows exactly which products sell, at what margins, through what keywords. Sellers operate with partial information. This asymmetry benefits the platform in every negotiation and competitive situation.
Comparing Marketplace vs. DTC Economics
Understanding when marketplaces make sense requires comparing economics across channels:
DTC (Direct-to-Consumer) cost structure:
COGS: 30-40%
Marketing (CAC): 20-30%
Shipping/fulfillment: 10-15%
Payment processing: 2-3%
Platform/tech: 1-3%
Total: 63-91%
Potential margin: 9-37%
Marketplace cost structure:
COGS: 30-40%
Referral fee: 15%
Fulfillment fees: 20-35%
Advertising: 10-15%
Total: 75-105%
Potential margin: -5% to 25%
The ranges overlap, suggesting marketplace presence can be economically sound-but only under specific conditions: low-COGS products, minimal advertising requirements, and efficient fulfillment profiles.
When DTC customer acquisition costs are exceptionally high, marketplace access can be more economical despite fees. Shopify merchants have 18% lower CAC than Amazon, but this comparison varies dramatically by category and competitive intensity.
The Marketplace Profitability Protocol
Rational marketplace strategy requires systematic evaluation of when marketplace presence creates or destroys value. The Marketplace Profitability Protocol replaces gut-feel marketplace decisions with rigorous economic analysis across four components.
My view is that most brands approach marketplaces emotionally rather than analytically. They see competitors there, they see the traffic numbers, they assume presence is mandatory. This protocol forces explicit economic analysis before-not after-committing to marketplace channels. The question isn't "should we be on Amazon?" It's "under what specific conditions does Amazon presence create value?"
Component 1: Product-Marketplace Fit Assessment
Not every product suits marketplace economics. Evaluate fit across several dimensions:
Margin tolerance: Products need at least 40-50% gross margin to absorb marketplace fees while leaving reasonable net margin. Below this threshold, marketplace presence likely destroys value.
Fulfillment profile: Small, light, shelf-stable products optimise FBA economics. Large, heavy, or fragile products face punitive fulfillment fees that may exceed DTC alternatives.
Differentiation potential: Commoditised products face intense price competition on marketplaces. Differentiated products with unique value propositions can maintain pricing power.
Search visibility: Products searchable by obvious keywords have better organic discovery potential. Obscure or discovery-dependent products require heavy advertising to achieve visibility.
Review momentum: Categories where reviews significantly influence conversion require substantial investment to achieve critical mass. Categories where reviews matter less can compete without that disadvantage.
Component 2: Channel Role Definition
Marketplaces shouldn't be your only channel, nor should they be an afterthought. Define the strategic role each channel plays:
Marketplace as acquisition: Use marketplace presence to capture customers searching for your product category, then migrate them to DTC through insert cards, email capture, or brand awareness. Marketplace margins are the acquisition cost; DTC repurchases are where profit accrues.
Marketplace as overflow: When DTC advertising reaches saturation, redirect excess inventory or manufacturing capacity to marketplaces. The margin may be lower, but it's better than carrying cost or liquidation.
Marketplace as testing: Launch new products on marketplaces to validate demand before investing in DTC marketing. Faster feedback, lower risk, even if unit economics are inferior.
Marketplace as primary (dangerous): Building your entire business on marketplace dependency creates structural fragility. Fee increases, policy changes, or competitive shifts can destroy profitability overnight.
Component 3: Unit Economics Requirements
Before listing any product on a marketplace, calculate minimum viable economics:
The calculation:
Marketplace Contribution = Sale Price - COGS - Referral Fee - Fulfillment Fee - Estimated Advertising
Marketplace Contribution Margin % = Marketplace Contribution ÷ Sale Price × 100
Minimum thresholds:
Below 10% contribution margin: Do not list (loses money after overhead)
10-15% contribution margin: List only for strategic reasons (acquisition, overflow)
15-20% contribution margin: Viable for sustained presence
Above 20% contribution margin: Optimise for growth
Component 4: Competitive Position Analysis
Marketplace economics depend heavily on competitive position:
Category saturation: In saturated categories, advertising costs escalate and pricing pressure intensifies. Entering saturated categories requires exceptional differentiation or acceptance of slim margins.
Review position: Products with established review momentum enjoy conversion advantages. New entrants face chicken-and-egg dynamics: need sales for reviews, need reviews for sales.
Brand registry and protection: Private label brands achieve 50-60% gross margins on Amazon by employing automated repricing tools and brand protections unavailable to resellers.
Australian Marketplace Considerations
For Australian operators, marketplace economics include specific factors:
Amazon Australia vs. Global
Amazon Australia is smaller and less competitive than Amazon US, creating different dynamics:
Advantages:
Lower advertising costs (less competition)
Less price pressure in many categories
Easier to achieve visibility with smaller investment
Disadvantages:
Smaller customer base limits absolute volume potential
FBA Australia fees can be higher relative to product value
Fewer third-party tools and services optimised for the market
eBay Australia Remains Relevant
Unlike the US where Amazon dominates, eBay Australia maintains meaningful market share. For some categories-especially secondhand, collectibles, and automotive parts-eBay may offer better economics than Amazon.
Evaluate both platforms rather than assuming Amazon is the default choice.
Multi-Marketplace Strategy
Australian operators can sell through Amazon Australia, eBay Australia, and potentially Amazon US, UK, or other markets. Each adds complexity but diversifies channel risk.
The question is whether management overhead of multiple marketplaces is justified by margin contribution. Often, concentrating on one platform and building DTC presence delivers better returns than spreading across many marketplaces with fragmented attention.
The Playbook: 60-Day Marketplace Optimisation Sprint
Phase 1: Economics Audit (Days 1-14)
Before expanding or optimising marketplace presence, understand your current state with ruthless precision.
Week 1: True cost calculation
Day 1-3: For each SKU sold through marketplaces, document every cost:
Referral fees (by category)
FBA fulfillment fees (by size tier)
Storage fees (monthly and long-term)
Advertising spend (by campaign)
Returns processing costs
Removal and disposal fees
Day 4-5: Calculate total fees as a percentage of sale price for each SKU. Many operators discover their "profitable" products are actually losing money when all fees are included.
Day 6-7: Compute true contribution margin by SKU. Rank products from highest to lowest contribution margin.
Week 2: Strategic fit assessment
Day 8-10: For products meeting margin thresholds, assess strategic questions:
Does marketplace presence complement or cannibalise DTC sales?
What role does marketplace play in overall channel strategy?
Are there products that should be marketplace-only or DTC-only?
Day 11-14: Compare marketplace contribution margin to DTC contribution margin for the same products. Create a decision matrix identifying which SKUs belong where.
Phase 2: Portfolio Optimisation (Days 15-45)
With audit complete, optimise your marketplace portfolio ruthlessly.
Weeks 3-4: SKU curation
Remove products with below-threshold contribution margins immediately
Increase advertising investment in products with above-average marketplace performance
Test price increases on products with strong conversion and review position
Identify products that perform better through DTC and consider marketplace exit
Weeks 5-6: Advertising optimisation
Marketplace advertising often represents the largest controllable cost. Optimise mercilessly:
Eliminate campaigns with negative contribution after ad spend
Concentrate budget on highest-converting keywords
Test organic ranking sustainability at reduced advertising levels
Implement dayparting and budget caps to prevent overspend
Phase 3: Strategic Positioning (Days 46-60)
Weeks 7-8: Channel role definition
Document the strategic role each marketplace plays. Exit marketplaces that don't serve a clear purpose. Double down on platforms where economics work. Establish quarterly review cadence to reassess as conditions change.
The North Star: Marketplace Contribution After Overhead
Your ultimate marketplace metric is contribution after all fees, advertising, and management overhead.
The calculation:
Marketplace Profit = Total Marketplace Revenue - (All Fees + Advertising + COGS + Allocated Overhead)
Where overhead includes team time, tools, and systems dedicated to marketplace management.
Benchmark expectations:
The average SMB seller brings in about $140,000/year with an average profit margin of approximately 21%-roughly $29,000 in annual profit. This represents the outcome for sellers who have optimised their operations and selected appropriate categories.
If your marketplace contribution margin falls significantly below 15%, or if DTC alternatives offer substantially better returns, question whether marketplace presence deserves continued investment.
The Marketplace Strategy
From Marketplace Dependency to Marketplace Strategy
The operators who extract real value from marketplaces treat them as one channel among several-not as their primary business.
They understand that marketplace access comes at a price, and they calculate that price precisely for every SKU. They define the strategic role marketplace presence plays in their overall business. They exit categories where economics don't work rather than hoping for improvement.
Most importantly, they recognise that marketplaces are businesses themselves, with incentives that don't always align with seller success. Seller fees 53% fee growth in five years isn't an accident-it's a business strategy. Understanding that reality is the first step toward navigating it profitably.
The opportunity is real. Over 55,000 independent sellers achieved more than $1 million in sales during 2024. But opportunity doesn't guarantee profitability. The brands that succeed are those who understand exactly what marketplaces cost, what they deliver, and when the trade-off makes sense.
That's marketplace economics-not the simplistic view that says "fish where the fish are," but the rigorous view that calculates whether the fishing license fee exceeds the value of the catch.
