Amazon sellers make the same profits on Temu?

Temu’s rapid rise can be bewildering to many ecommerce veterans and watchers in the developed world. 

Yes it is more efficient than many of its competitors, a fact that we have covered in Momentum Works “Transforming Alibaba” report. We have also shared a lot on the company’s culture of efficiency obsession on TheLowDown blog. 

Many are still asking us – could (or would) Temu challenge Amazon? What would be its leverage? As Temu is shifting its focus from cross border to local sellers in the US, why would US-based sellers sell on Temu? 

An excellent article published recently by LatePost offers some clues. Below is an excerpt:  

Temu’s rapid rise further highlights the problem faced by industry giant Amazon: it can’t lower its prices.

Amazon, as it stands today, is a platform oversaturated with sellers, giving it significant bargaining power. As a result, Amazon has raised the cost of traffic distribution to sellers. This trend was particularly evident in Amazon’s Q1 2024 financial report: advertising revenue increased by 24.3%, far outpacing the 12.5% growth in GMV. 

This means sellers spent more on advertising, but their sales didn’t increase correspondingly. The more sellers spend on ads, the more they have to increase the prices of their goods.

In the US ecommerce landscape, Chinese players are already numerous, but Temu offers these sellers an alternative that might be more favourable than Amazon at the moment.

Some ecommerce professionals give an example: imagine 50 folding chairs, each costing $6 to produce and sold for $19.99. Amazon charges an additional $10 for fulfilment services. Sellers also need to cover the cost of shipping goods from their warehouse to Amazon’s. On average, each chair yields about a $3 profit.

On Temu, the platform pushes the price down to $16. Shipping for each chair is about $7. The seller pays storage fees of $15 per month to store these 50 chairs in a US (non-Amazon) warehouse. Thus, the profit per chair is still around $3.

Temu can offer lower prices than Amazon while maintaining the same profit margin for sellers.

This calculation is based on an ideal scenario on Amazon. In reality, sellers also need to pay for traffic (i.e. advertising) and sometimes even spend money to “generate reviews”. With the current traffic on Temu, sellers are confident that they can sell out their inventory quickly without spending on ads. 

On Amazon, not only is it challenging to sell out, but returning unsold goods incurs additional fees. Moreover, some sellers report that while Temu’s return process is simpler, their return rate is only 2%, compared to Amazon’s 5%-8%.

This situation motivates a large number of former Amazon sellers to also set up shop on Temu. 

Temu is also more attuned to Chinese sellers than Amazon. Amazon is not particularly friendly to these sellers—it’s hard to gain traffic, it’s difficult to reach a responsible party when issues arise, and sellers often have to figure out most things on their own. 

Some sellers report that the rate of lost items sent to Amazon warehouses has risen from 1% to 5%, meaning 5% of the inventory is lost even before it’s listed for sale. In the past, Amazon would have responded to such issues, but now no one addresses them.

In contrast, Temu operates in a completely different manner. US-based sellers report that any message they send receives an instant reply, dedicated staff teach them how to launch new products, and how to maintain links. 

Temu’s buyers also notify sellers in advance about what the platform will promote next. One seller mentioned that Temu’s operations team promised that as long as they upload a certain number of new SKUs daily, their products will continue to be listed on the homepage of Temu. Another seller stated that Temu’s operations guide them on how to list items that Amazon doesn’t accept, making the platform much more flexible overall. 

Most importantly, Temu helps sellers purchase and direct consumer traffic, whereas Amazon primarily buys traffic for itself, with sellers on the platform generally receiving little to no benefit from the traffic generated by Amazon’s advertising spend.