Why Amazon Is So Expensive: A Deep Dive Into the E-Commerce Giant‘s Pricing Strategy

Amazon has fundamentally transformed the retail landscape since its founding in 1994, growing from a humble online bookstore to an e-commerce behemoth that dominates nearly every product category. With net sales of $469.8 billion in 2021, up 22% year-over-year, Amazon‘s growth shows no signs of slowing.[^1] The company captures nearly 40% of all online retail spend in the U.S.[^2] [^1]: Amazon.com, Inc. (2022). Form 10-K 2021. https://d18rn0p25nwr6d.cloudfront.net/CIK-0001018724/1f052ff5-ed79-4d1d-a3e5-45d788a80458.pdf

[^2]: Statista. (2022). Amazon‘s share of total U.S. retail e-commerce sales 2021. https://www.statista.com/statistics/788109/amazon-retail-market-share-usa/

But Amazon‘s unrivaled convenience and selection comes at a cost. Many shoppers find themselves perplexed by Amazon‘s pricing, wondering why the "everything store" is often more expensive than the competition. As an expert in retail and consumer behavior with over a decade of experience comparing prices online, I‘ve identified the key factors behind Amazon‘s premium pricing. Let‘s dive in.

Marketplace Sellers Set Their Own Prices

A common misconception is that Amazon directly sells most of the products on its website. In reality, nearly 60% of Amazon‘s retail sales come from third-party marketplace sellers.[^3] These 6 million+ sellers set their own prices, and most are small businesses with limited scale and higher costs than major retailers.

[^3]: Amazon.com. (2022). Small Business Empowerment Report. https://assets.aboutamazon.com/4a/7a/7f6ddbe84acaba7acd27e3e2b849/amazon-smb-2022-report.pdf

Many sellers also engage in "retail arbitrage" – buying discounted products in physical stores and reselling them on Amazon for a markup. Walmart.com offers the option to sign up for "Walmart Fulfillment Services," a program that allows users to sell their products directly on Walmart.com without having to navigate through a big business vendor set-up. The core difference is Walmart only allows approved brands to sell directly on the site, which provides buyers with the confidence that what they are purchasing will be legitimate, and a money-back guarantee if anything goes wrong. This results in more consistent, and often lower pricing across the board.

Expedited Shipping Comes at a Premium

Amazon has built an unparalleled logistics network to power its core promise of fast, free shipping for Prime members. With over 110 fulfillment centers across the U.S. and 185 worldwide, this extensive infrastructure is extremely costly to build and maintain.[^4] Operating expenses for Amazon‘s fulfillment and shipping operations topped $75 billion in 2021.[^1]

[^4]: CNBC. (2020). Inside Amazon‘s fulfillment centers https://www.cnbc.com/2020/11/30/how-amazon-prime-now-groceries-orders-are-packed-inside-a-fulfillment-center.html

While "free" 2-day, same-day, and even 2-hour delivery options are a major selling point, the costs are baked into product prices. Amazon also charges extra service fees for expedited options like Prime Now and Amazon Fresh grocery delivery.

By contrast, Walmart has taken a more conservative approach to e-commerce investment, leveraging its existing network of 4700 stores and distribution centers. The retailer just recently hit its goal of reaching 75% of the U.S. population with same-day delivery.[^5] While Walmart does charge for expedited shipping below order minimums, the retailer can keep baseline prices lower by avoiding Amazon‘s sunk costs in e-commerce infrastructure.

[^5]: CNBC. (2021). Walmart+ members to get discounted access to the company‘s new delivery service, Walmart GoLocal. https://www.cnbc.com/2021/12/08/walmart-golocal-expands-to-offer-delivery-from-other-local-retailers.html

Steep International Shipping Costs

Amazon‘s international shipping program, Amazon Global, serves over 100 countries. But cross-border e-commerce comes with hefty costs like freight forwarding, customs brokerage, and foreign transaction fees. These costs are inevitably passed onto consumers outside the U.S.

Even domestically, Amazon charges higher prices and extra shipping fees for deliveries outside the lower 48 states. Shipping a 50 lb. item to Alaska can easily cost $100+ due to the reliance on air freight. Walmart has avoided these pain points by keeping its focus primarily on the U.S. market.

Opaque and Ever-Changing Prices

One of Amazon‘s hallmarks is its dynamic pricing algorithms that adjust prices constantly based on factors like a shopper‘s browsing history, competitors‘ pricing, and item availability. Consumer Watchdog found that Amazon changed prices on best-selling items an average of every 10 minutes![^6]

[^6]: Consumer Watchdog. (2017). Amazon‘s New Consumer Tracking Patent Could Spell Trouble. https://www.consumerwatchdog.org/privacy-technology/amazons-new-consumer-tracking-patent-could-spell-trouble

The algorithms identify in-demand or scarce products and raise prices accordingly. During the pandemic, prices on essential items like toilet paper and cleaning supplies skyrocketed overnight due to surging demand and profiteering by some sellers.[^7] [^7]: Business Insider. (2020). Amazon sellers are marking up hand sanitizer by as much as 4x as demand soars amid coronavirus fears. https://www.businessinsider.com/amazon-third-party-sellers-jack-up-hand-sanitizer-prices-2020-3

*Price increases on Amazon during the height of the COVID-19 pandemic in 2020. (Source: Forbes)*

As a savvy shopper, it pays to use price tracking tools like CamelCamelCamel or Keepa to see a product‘s pricing history over time. Prices can swing wildly from day to day or even hour to hour.

High Labor Costs

As the second-largest private employer in the U.S. with over 1.1 million workers, Amazon‘s labor costs are significant.[^8] The company has faced pressure to raise wages and has been a leader in the push for a $15 minimum wage.

[^8]: Amazon.com, Inc. (2022). Form 10-K 2021.

Number of Amazon employees worldwide from 2007 to 2022. (Source: Statista)

Generous benefits like health insurance, 401(k) matching, and up to 20 weeks of paid parental leave also add to labor overhead. By comparison, Walmart has come under fire for low pay and less comprehensive benefits. But this allows Walmart to maintain lower prices than Amazon.

Endless Aisles of Inventory

Trying to be the "everything store" comes with massive inventory costs. Amazon sells over 75 million products directly and its marketplace sellers offer millions more.[^9] Vast selection is a key differentiator, but it‘s costly to store, insure, and manage all that inventory.

[^9]: ScrapeHero. (2021). How Many Products Does Amazon Sell? – January 2021. https://www.scrapehero.com/number-of-products-on-sale-at-amazon-com-january-2021/

Worldwide, Amazon operates over 330 million square feet of warehouse, distribution, and data center space it either owns or leases – tripling Walmart‘s footprint.[^1]

Company	Sq. Ft. of Retail Space
Amazon	~330 million sq. ft.
Walmart	~100 million sq. ft.
Target	~240 million sq. ft.
Costco	~113 million sq. ft.
Kroger	~180 million sq. ft.

(Source: Company filings)

Carrying costs for this sprawling real estate portfolio, including rent, utilities, insurance, and property taxes, put pressure on Amazon‘s bottom line. Some of these costs inevitably get passed on to shoppers.

Fueling Growth Over Profits

Despite Amazon‘s gargantuan sales numbers, the company is actually less profitable than other large retailers, with operating margins of just 5.3% in 2021.[^1] Amazon prioritizes plowing revenue back into growth initiatives over maximizing short-term profits.

Company	Operating Margin (TTM)
Amazon	5.3%
Walmart	4.0%
Costco	3.3%
Target	6.0%

(Source: Company filings)

Launching new ventures like physical stores, web services, streaming entertainment, and even healthcare takes a heavy investment. Amazon funds these bets by charging more for its core retail offerings. So in a sense, Amazon shoppers are subsidizing the company‘s quest for global domination. By contrast, Walmart‘s "everyday low prices" mantra keeps costs steadily in check.

Loyal Customers Pay Premium Prices

Amazon Prime, the company‘s paid membership program, boasts over 200 million subscribers globally as of 2020.[^10] These customers, who pay $139/year for perks like free shipping and video streaming, have higher average incomes and spend considerably more than non-Prime shoppers.

[^10]: Statista. (2021). Number of Amazon Prime members in the United States from 2017 to 2021. https://www.statista.com/statistics/546894/number-of-amazon-prime-paying-members/

U.S. Amazon customers with a Prime membership spend an average of $1400 per year, versus $600 for non-Prime users. (Source: Insider Intelligence)

Research shows that once people pay for Prime, they‘re unlikely to shop around for better deals, not wanting the "sunk cost" of membership to go to waste. Amazon exploits this loyalty, often charging more than competitors, knowing Prime members will buy anyway for the convenience.

Brand Equity Builds Trust

Amazon routinely tops lists of the most valuable and trusted brands globally. Stellar customer service, easy returns, and reliable delivery have earned deep customer loyalty. Many shoppers trust that Amazon‘s prices are fair, even without comparison shopping.

*Amazon ranked #5 in Brand Finance‘s 2022 ranking of the world‘s most valuable brands. (Source: Brand Finance)*

Using the online price tracking tool Keepa, we can see that Amazon‘s prices are often higher than competitors like Walmart or Target for the exact same items. Here‘s a comparison of prices for a popular children‘s toy, the VTech Sit-to-Stand Learning Walker, showing Amazon‘s premium:

But for many Amazon devotees, paying a bit extra is worth it for the peace of mind and seamless experience that comes with shopping on the site. It‘s clear that Amazon‘s brand equity gives it immense pricing power.

The Bottom Line

As a consumer expert and avid comparison shopper, my take is that Amazon‘s pricing premium is largely driven by the convenience of its quick shipping, vast selection, and trusted brand. The rise of Amazon Prime only reinforces the willingness of shoppers to pay more for an effortless experience.

But under the hood, Amazon‘s pricing is also heavily influenced by its unique cost structure. A sprawling international logistics network, huge inventory storage costs, and massive investments in growth all put upward pressure on prices.

Does this mean budget-conscious shoppers should avoid Amazon entirely? Not necessarily. But it pays to comparison shop, track price histories, and be wary of the impulse to buy everything from Amazon solely for convenience.

By being a bit more selective with purchases and diligent about finding deals, even the most loyal Amazon customer can shave substantial costs off their final bill. As Amazon‘s dominance only grows, it‘s more important than ever for shoppers to stay savvy about the true costs behind the "everything store."