What Is Amazon FBA and Who Benefits Most From It?
The numbers alone prove that selling with Amazon FBA (Fulfillment by Amazon) has become a no-brainer for many professional Amazon merchants – 75% of the top 100’000 sellers in the United States and about 2/3 of all third-party sellers on Amazon use the internet giant’s fulfillment service. The first thing you have to know about the Amazon FBA program is that it is not a single service but rather several different services under one roof. This package-deal allows Amazon sellers to transfer many fulfillment duties back to Amazon while at the same time benefiting from sweet side-effects like increasing your chances of winning the Buy Box. But more on that later.
Like with all other package deals, informing yourself about every factor the deal encompasses is an absolute must. What is Amazon FBA? How much does Amazon FBA cost? In regard to inventory, is Amazon FBA worth it for me in particular? These are all questions you have to work out for your business, and we are here to help you as best we can.
With this article, we aim to give sellers a general overview of the topic of Amazon FBA. Learn how to start your FBA business here, or – if you are already a seasoned veteran in that regard and looking for more in-depth content – feel free to check out this article on Amazon selling strategies.
What Is Amazon FBA?
Amazon themselves describe the nature of FBA very well in five words: “You sell it. We ship it.”
For a certain fulfillment fee, marketplace sellers can book this service and then let Amazon take over all logistical steps for FBA products that are necessary to process an order. This includes, among other things
- the warehousing of goods,
- the compilation of orders,
- 24/7 customer service in respective languages,
- as well as refund and return management.
To this end, an FBA seller sends the product to the Amazon fulfillment centers, from where the e-commerce giant takes care of all further steps. This includes, for example, the distribution of the inventory to the other logistics centers according to the specific order demand. So what are the concrete benefits of Amazon FBA for your business? From the warehouse to the customer’s doorstep (and back to the inventory of the Amazon FBA warehouse, if necessary), Amazon takes care of this for you, leaving you with more time for other things, like working on your listing with Amazon A+ Content … Or, you know, taking a nap or something.
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Who Benefits the Most from Fulfillment by Amazon?
In 2006, Amazon decided to make their logistics network and customer support available to third-party sellers as well. The idea was to help sellers get on the same level as the tech giant in regard to logistics and customer-centricity. Even with the fulfillment fee deducted from the revenue, FBA was (and still is) a good deal for two types of sellers in particular.
- Those selling small and rather low-priced items, where packaging and shipment cut considerably into the margins.
- Small business that cannot afford the same infrastructure that Amazon provides for customer support and shipping.
- Businesses that do not have the funds for huge inventory space, but are too large to sell out of their garage.
What does this mean specifically? Even if you run a small company with little e-commerce experience, you can build up a large product range and gain access to millions of customers through Amazon FBA alone. One of the reasons for this is because using the service also enables automatic participation in the Prime program, which is popular with customers primarily because it guarantees fast delivery, no matter what location you’re shipping to.
In fact, Amazon FBA – and the automatic Prime program you acquire through it – is a must for many sellers. Countless Amazon users only purchase Prime products and actively hide other offers in the search results. Although selling on Amazon without FBA but with Prime status is possible, retailers must first prove that they can meet the high standards with their in-house logistics. For many smaller retailers, this is impossible.
What Are the Requirements for Selling with Amazon FBA?
While it is true that Amazon handles your entire logistic scheme for you once you register for the FBA program, you still have to send your goods to Amazon’s warehouses and make sure that everything complies with the seller agreement, Amazon’s program policies, and further relevant rules and regulations. There are also quite a few restrictions in place that you have to take into account. The following points apply to Amazon FBA in the United States. For info regarding other countries, you can visit Seller Central and select your specific region.
- Certain products are prohibited from the FBA program, due to being hazardous or other reasons. This applies, for example, to alcoholic beverages but can also extend to replicas and loose packaged batteries. We suggest you keep a close eye on this list and also talk to seller support whenever you’re unsure whether a product of yours may fall under this list. The reason we say this is because Amazon reserves the right to dispose of these products without reimbursement – even if they weren’t included in the list before.
- The prohibitions mentioned above also apply to products that are not packaged and prepped correctly. This is especially important when it comes to products you want to sell as a set. While Amazon will not throw these improperly packaged items away, they will charge you a preparation fee that can easily be avoided by complying to Amazon’s rules. The question is how to correctly pack your Amazon FBA product before sending the goods to any of the Amazon fulfillment centers. Take a look at the packaging guidelines (link above) before sending their product on their way. For example, the individual parts of an SKU must be contained in a single package, each unit must be labeled with a scannable barcode, and clear product identification is required on the packaging. For special products such as fragile goods, Amazon also requires a specific FBA packaging.
- Another close eye should be kept on expiration dates for FBA products. Failure to comply with Amazon’s rules and regulations will result in customer complaints, purchase order exclusions, account-level exclusions, and chargebacks.
As you can see, there are many benefits and downsides to take into account here. Check out this text on whether selling on Amazon FBA is a boost or a burden for your company.
The Downside – Fees, Fierce Competition, No Guarantee for Success
For beginners, selling over FBA can be particularly enticing because setting up shop on Amazon is relatively easy compared to setting up a regular online store. You don’t have to build your own website from scratch and the whole organizational component in regard to logistics and customer support is taken care of. However, registering as an FBA seller also means you have to fulfill the tough requirements of the American online giant and consider the costs. Even though the fees might be adequate, they will still cut into your possibly very widely stretched budget if you are just starting out.
What you also have to take into account is that you will lose any direct contact opportunity with your customers. This is especially detrimental when you think about the good reviews that you need in order to build rapport with the customers. Many sellers add a little handwritten note to their orders. Through this note, they thank the buyers for shopping with them – a nifty way of driving up those online reviews and seller ratings that everyone needs. This option is not possible with Amazon FBA, since the online giant takes overall customer contact from there on out.
So why does the Amazon’s road not lead to fast riches anymore? To a large extent, this is due to the high competitive pressure on the marketplace, especially since Amazon themselves often act as a seller. Many products are now offered by several retailers, so the competition not only takes place between different products but also for the same product. The Buy Box in particular is fiercely contested.
Good Seller Performance + Fulfillment by Amazon = Buy Box
One thing nobody can deny is that selling with Amazon FBA it will make winning the Buy Box easier!
Let’s talk about the Buy Box for a minute and why it is so important. Have a look at our example with this gaming mouse:
There are four sellers who have this mouse in their inventory but only one of them can be in the Buy Box. In this case, it is a seller named “Vtech EU”. The other three are rather inconspicuously placed further down and require that you open a dropdown menu just to see their names.
Now our question to you: How many customers do you think even recognize that there are other sellers on that page, let alone bother opening the dropdown menu to see their product offer? You guessed it – not so many. As a matter of fact, 90% of all purchases take place in the coveted yellow “Add to Cart” field, which is indeed very uncool for the other three sellers that are not in it, since they end up with 3,333% of the sales respectively.
Amazon Prefers FBA Sellers for the Buy Box
We can’t pinpoint all the factors why this particular seller has won the Buy Box from looking at this page alone, but being in the Amazon FBA program is definitely one of them. The reason for this is that on-time delivery and pristine customer service are factors that win you the Buy Box. Once you use Amazon FBA, the online company takes over delivery and customer service for you and therefore awards your company the best grades for these services.
To clarify: Is Amazon actually awarding itself the highest possible grade? Yes, totally. But then again, they are the best at it, and keeping up with Amazon in terms of delivery speed and customer service as a company is very difficult.
Amazon FBA Fees and Returns
Naturally, the service is not offered for free. Amazon FBA prices are charged in addition to the obligatory sales fee. These depend, in particular, on the storage location, the product type, the dimensions, and the weight of the item.
Furthermore, the use of Amazon FBA results in additional storage costs per cubic meter and month. Keep in mind that storage fees increase for items that you have stored in your inventory for longer than 365 days (e.g. 170 euros a month per cubic meter in Germany). In addition, starting May 15, 2022, Amazon will charge the sellers a fee for items from several categories which have been stored in a fulfillment center for 331 to 365 days (e.g. 37 euros per cubic meter in Germany).
Fees you have to take into account are (Amazon FBA) storage fees for your inventory, shipping costs, and taxes. Also, take into account that there will be order returns and many mistakes that happen in the wake of these returns are often rolled off onto the customer. In order to see if the whole endeavor is worth your while, you can use an Amazon FBA profit calculator. You can find the Amazon FBA calculator (for UK-based companies) here. There are also many different alternative options, the ShopDoc calculator being one of them.
How to Find the Correct Product to Sell on Amazon FBA
Sure, keeping your inventory stocked at all times is a relevant part of being a successful seller. However, you have to find the right things to store. Product research for Amazon FBA is vital whether you sell over Private Label or Wholesale. So before you start researching how safe it is to source products from Alibaba to Amazon FBA, invest some of your time into what you want to be sourcing in the first place. You can find nearly everything you want on the digital marketplace, however, that doesn’t mean that the effort is worth your while especially if you are planning on bulk operations.
You could consider using an Amazon FBA sourcing tool for product research, but you can also just keep an eye on your competitors’ stock or the bestseller rank for inspiration. Products that become slow sellers or have hardly received any orders should naturally be removed from your stock as soon as possible (keep in mind the increased storage fees for “benchwarmer” products we mentioned above).
Amazon vs. the Rest
Quite similar to opening a brick-and-mortar store, you will also have to put some thought into your “location” when opening your online business. Only that instead of a physical location, you will have to choose between different platforms or shipping methods. Here is some food for thought if you are planning to start selling over Amazon FBA.
Amazon FBA vs. Shopify
The two platforms are both hugely successful and can therefore make the decision very difficult for e-commerce enthusiasts. While Amazon FBA offers you a readymade platform with an unparalleled reach regarding customers, Shopify lets you build up your online shop from scratch and gives you an amount of flexibility that Amazon isn’t able to. The answer to your question ‘what is best for my shop?’ is therefore always dependent on the seller and the shop type. Here’s a thought though: If you are unsure where to sell, why not sell on both and see where it works best?
Amazon FBA vs. FBM
If you decide to sell your product on a platform like Amazon, not only will you have to see whether there are any external options to take into consideration, you will also have to see if there are different business models on the platform itself worth checking out. Amazon FBM (fulfillment by merchant) is one of these options and should be taken into consideration when you already have a highly functioning logistics scheme, impeccable customer support and you want more communication with your customers. Especially if the first two are not in place, you should really consider picking Amazon FBA, since the other option means that you will have to live up to Amazon’s extremely high standards in that regard if you ever want to end up in the Buy Box and make any sales.
Amazon FBA vs. Dropshipping
Another popular question revolving around e-commerce forums is whether you should sell over Amazon FBA or Amazon dropshipping. As with many other topics, the answer remains the same: it depends. If you are aiming to start a business with a low budget, a lot of freedom in regard to customer contact and shop customization, then dropshipping might just be right for you. However, you will have to take into account the high shipping risk and small customer base you start out with and the amount of time and energy it will require to expand it.
At the end of the day, you’re the boss and you have to decide whether Fulfillment by Amazon is the right choice for your business. Let’s go through the positive and negative effects in a nutshell.
Naturally, the business model also has several disadvantages. Extra costs and losing the opportunity to get in direct contact with yours customers are just two of the main issues. What’s more, sellers are basically coerced to use Fulfillment by Amazon when it comes to winning the Buy Box.
On the other hand, Amazon FBA offers many advantages. First off, it makes the seller’s job very easy – especially for small business owners. And also: many larger companies appreciate the fact that shipping is fast and smooth, you don’t have to rent your own warehouse, and customer service works around the clock. This is what makes it possible for many retailers to sell successfully on Amazon in the first place.
All things considered, running a business over Amazon FBA is definitely still worth it nowadays, if you keep a few relevant things in mind, for example, which storage costs and which shipping fees are incurred, and what product you want to sell. At the end of the day, proper planning and solid execution will lead you to the profit you have earned, regardless of which platform you choose.
Image credits in order of appearance: © erikdegraaf – stock.adobe.com/ © alphaspirit – stock.adobe.com / © chiew – stock.adobe.com