Amazon's Prime Algorithm Linked to Increasing Retail Prices

In the ongoing battle between the Federal Trade Commission (FTC) and Amazon, significant details have emerged regarding Amazon's "Project Nessie" — an algorithm designed to counter unsustainable price adjustments.

This algorithm aimed to determine how high Amazon could raise its product prices while still ensuring that competitors would follow suit.

For the FTC, Project Nessie is the “prime” suspect in raising consumer prices across the board in many retail categories (queue CSI: Miami intro 😎).

🌴 Amazon Basics

As per Amazon’s rules, “your price has to match the lowest price online,” said Pilothouse’s Lead Amazon Buyer.

They continued, “Amazon scrapes the web to find the lowest price for that product. So if your product is sold on your website for $24.99 – and on Amazon for $29.99 – you'll lose the ‘buy box.’

The “buy box” they refer to is the set of features that push consumers into making a purchase. These features include:👇

  • The “Add-to-Cart” button
  • The “Buy Now” button
  • and Product Price

If your prices are lower on websites other than Amazon, these will be hidden from your listing. Without this information, your conversion rate will be stifled and your product will be less prioritized in search results. It’s certainly not a good look and a compelling enough reason to keep your price as low as possible on Amazon.

🛡️ The defense

Amazon defended Project Nessie, but not in the way you’d expect. As it turns out, Amazon’s price-match rule also worked against them in some instances. 👀

Pilothouse was able to elaborate on how exactly this works:

“For example, if an item has an MSRP of $29.99, and Walmart is at $24.99, then Amazon will sell it at $24.99 or possibly slightly below.

When Walmart prices back up at $29.99, Amazon may go all the way back up as well, or they may maintain at $24.99, or somewhere in between because that drove enough volume to maximize profitability.”

If retailers offered lower and lower prices, Amazon would need to continuously match the lowest available price per their own rules, which could get out of control very quickly.  

👉 Enter Project Nessie

An Amazon spokesperson stated:

“Project Nessie was a project with a simple purpose—to try to stop our price matching from resulting in unusual outcomes where prices became so low that they were unsustainable. The project ran for a few years on a subset of products but didn’t work as intended, so we scrapped it several years ago.”

😓 The struggle is real

It comes with little surprise that Pilothouse acknowledges the frustrations many brands in retail have with Amazon’s rules. Selling as a vendor or “1P” to Amazon releases control over their product’s price.

🤔 So what’s with all these rules and fees?

A recent Institute for Local Self-Reliance report revealed that Amazon's share of third-party seller sales increased significantly from 19% to 45% between 2014 and 2023.

Unlike the report, Pilothouse attributes these costs to:

The Referral Fee: Roughly 15% of the retail price for your products covers Amazon’s payment processing and access to the platform and its user base.

Fulfilled-By-Amazon (FBA) Fee: The charge for Amazon to pick the item, box it up, ship it to the customer, handle customer service, and handle returns. It is typically cheaper than any comparable 3PL provider, and they provide way faster shipping than basically anyone out there.

Advertising: This has become a lot more sophisticated on the platform as the years have passed, so Amazon has used its advancements to justify the rise in cost.

Marketplace Pulse shows the rise in click costs for Amazon Ads from 2019 to 2021, and it’s likely far more stark when encompassing data from 2014 onwards.

☝️ Our verdict… so far

While the FTC's battle against Amazon continues, it appears that Amazon placed consumers' best interests over brands' needs in classic Bezos-style.

Many decisions by Amazon, including additional costs to businesses, appear to keep product costs as low as possible for consumers despite alleged temporary increases from “Project Nessie.”

If the FTC is fighting partially on behalf of consumers, that battle for lower prices may have already been won. Perhaps the FTC should be looking at these areas instead.