Always a key event on the online seller’s calendar, Amazon Prime Day is fast approaching. So, now is the best time to get prepared.
Fulfilled by Amazon (FBA) is a fulfilment service used by many large sellers but also offering benefits to new or small-scale sellers looking to really get to grips with ecommerce. Indeed FBA is considered by many to be a service that offers the most immediate and significant impact on a seller’s business.
That said, FBA is not appropriate or cost-effective for every business. You need to look closely to see if it is the right move for you.
This article considers FBA for the new seller and sets out the advantages and disadvantages that should be considered.
Let’s start with an overview of exactly what FBA is.
FBA is a service offered by Amazon to:
- Store your inventory in an Amazon fulfilment centre
- Pick, pack and ship orders to your customers
- Provide return management and 24/7 customer service for those orders, in the local language.
FBA services are provided at an additional cost over and above the usual Amazon fees. The nature, quantity and value of what you are selling, however, will determine whether or not these costs are affordable for your business.
The benefits of FBA for a new seller
The main benefit is that FBA can help you to grow your business, reach more customers and achieve a higher conversion rate.
1. FBA products are automatically enrolled in Amazon’s Prime programme
That means your products could be exposed to an audience, which according to some estimates is as high as 60 - 80 million members globally - and it has been proved that Prime members shop more often and spend more than non-Prime members.
Plus, as many Prime members automatically filter out non-Prime products in their search results, being part of the programme means your products have a much higher chance of being discovered by potential buyers.
And your products can be offered with Prime’s free two-day delivery, which is likely to increase customer satisfaction.
2. FBA removes the fulfilment burden, including customer service and returns management….
This is a big benefit if you’re a part-time seller or just starting out, as these are time-consuming activities for which you are unlikely to have the necessary resources or systems in place.
3. Leaving you with more time available to focus on growing your online business
With FBA taking care of fulfilment, you can focus your attention on researching new products and suppliers - and monitoring the success of your current lines.
4. FBA is a huge help in winning the Buy Box
It has been estimated that anywhere from 70% to 82% of all sales on Amazon go through the Buy Box. In 2013, for example, $61 billion of the total $74.5 billion revenue on Amazon went through the Buy Box, with $30 billion going directly to third-party merchants. Buy Box is definitely something worth attaining.
While FBA alone is not a guarantee of Buy Box success (price plays a major part too - as do other elements which are combined in Amazon’s secret algorithm), Amazon will give preference to FBA sellers because the company has control over the fulfilment part of the customer experience. In addition, FBA sales tend to have higher customer ratings than fulfilled by merchant (FBM) transactions.
With the FBA advantage, you may also be able to price your products slightly higher than FBM competitors and still win the Buy Box.
5. FBA provides a level of reassurance to your potential customers
This is particularly important for new or little-known sellers as this reassurance can encourage customers to proceed to purchase. Through FBA, you can offer multiple shipping options, fast delivery, an easy returns process - all backed by the Amazon guarantee of excellent customer service.
Sounds pretty convincing doesn’t it – which is probably why so many third-party sellers are flocking to be part of FBA.
But don’t forget to look too at the other side of the coin.
Fees are always a negative. However, it would be wrong to think of FBA fees as just another layer of Amazon charges. FBA fees would basically replace your FBM costs and as such represent a cost to your business that you would incur anyway. This should be kept in mind when you are working out if FBA is cost-effective for you or not. If your FBM costs and effort required are low, then FBA fees might be uneconomic – except you would also be missing out on the opportunity to be discovered and selected by more buyers through Prime and Buy Box.
2. Complexity of fees
Things start off fairly straightforward. FBA fees consist of two basic elements: a fulfilment fee and a storage charge.
The fulfilment fee depends on:
- Type of product you are selling (media or non-media)
- Size of the product (Note: Oversized items incur additional handling fees per shipment)
- Sales channel ie selling through Amazon local marketplace or internationally, versus non-Amazon channels.
Note, there is an uplift for storage fee rates pre –Christmas ie October-December.
And because Amazon is not in the long-term storage business, each February and August long-term storage fees will be charged for inventory older than six and twelve months. So to avoid being caught out by this deterrent you need to continually monitor the age of your inventory and either sell it off or remove older items to avoid paying these penalty fees.
Returns fees are chargeable to the seller where the customer is offered free returns service.
If you use FBA to fulfil your orders from other sales channels, your own website or other third-party sites, using your inventory from an Amazon fulfilment centre, you will incur the following fees:
- Pick & Pack Fee (flat fee per unit)
- Weight Handling Fee (variable per shipment fee based on weight and dimensions)
- Storage Fee (per cubic foot per month - pro rata charges)
The complexity really kicks in when calculating what the fees will be for each of your products. Amazon offers a ‘Fee wizard’ to help you through this – but it can be a time-consuming process if you have multiple product lines.
3. No direct access to your stock
Once your inventory has been delivered to Amazon’s fulfilment centre – possibly directly from the supplier, you have no direct access to review items. This means that if there are quality issues, or the wrong product is being sent out to customers, you will either have to ship the stock back for your inspection or rely on Amazon’s employees to carry out the checks for you.
4. Commingling merchandise
This has been flagged as an issue in various forums because the practice can result in fake or sub-standard products being used to fulfil an order for your customers.
‘Commingling’ means that Amazon combines the same products from different sellers for ongoing processing and shipment, enabling them to ship faster from the nearest fulfilment centre.
FBA requires sellers to identify their products for the fulfilment centres using unique product identifiers:
- UPC or EAN barcode
- FBA label (which you print from your Seller Central account)
The FBA label identifies the products you send as linked to your seller account.
The alternative is to send units to Amazon as ‘commingled inventory’. In other words, Amazon uses the item’s bar code to pool your products with those of other sellers, thus saving you the time and effort of printing and sticking FBA approved labels to each of your items - or paying Amazon to do it for you.
But what you gain in time and cost, you may lose in customer satisfaction if your order is fulfilled by damaged or fake items bought and stored in the Amazon fulfilment centre by another seller.
How do I know if FBA is right for my business?
You need to weight up the costs of FBA against the potentially higher ‘discoverability’ and sales benefits you can achieve.
Focus on three aspects in particular.
The type of product you are selling – and the price you are selling it at
FBA fees vary according to product size and weight; and there is a separate category for oversized items. Bear in mind you would in any event need to pay the storage and shipping costs for these items, but if they are low-priced products, the FBA fees could have a big impact on your margins. From this perspective, if your products are small, light and higher value (jewellery, for example), then FBA fees can be more easily absorbed.
How well your products are selling
If you are selling in high-volumes – and particularly if these products are bulky or difficult to store, FBA can ensure you won’t be overburdened by customer demand and resolve your storage problems too. Plus, if you will have a rapid turnover of inventory, you will be less likely to rack up long-term storage fees from Amazon.
How much you can do by yourself
New or small-scale online sellers are likely to be doing everything themselves, so FBA is a huge help, saving time, organisational effort – and ensuring that your customers benefit from rapid delivery and high service levels without you having to be directly involved. This is particularly the case for seasonal products, when you could be flooded by orders over a short period of time.
Harness Amazon’s strength
With the most sophisticated logistics network in the world, Amazon has totally changed the expectations of online shoppers in terms of delivery speed, cost and returns policy. The fact that it makes this network and resource available via FBA, means that third-party sellers have access to an extremely valuable tool, which can deliver increased visibility and discoverability for their products, combined with excellent customer service - at the same time as removing the fulfilment headache.
If you’re still not sure, don’t forget, you don’t have to go 100% FBA. Try it out on a selected number of products and track the difference. You should soon see if it’s right for your business!