And best of all, no matter where the item was shipped, fees were predictable.
Traditional third-party logistics companies—who charge variable receiving fees, order handling fees and storage fees, with the final shipping fee being based on the shipping zone and carrier used—were understandably concerned. Some worried that FBA would eat into their business, others were indifferent, and the rest saw the competition as an impetus to increase their efficiency.
“Amazon actually revolutionized pricing for 3PLs to have a simple catch-all rate. Previously, pricing for fulfillment was highly unpredictable,” says Michael Krakaris, cofounder of Deliverr, which offers FBA-like services to sellers on non-Amazon marketplaces. “Sellers need to know their exact shipping costs, without variability.”
Fulfillment by Amazon: The Basics
But what is Fulfillment by Amazon (FBA) anyway? FBA is a paid service that allows any business registered as a seller on Amazon to store inventory in its distribution centers until customers place an order. Amazon then picks, packs and delivers the item to the customer when an order comes in.
FBA to that extent functions as Amazon third party logistics, but with an added layer of customer service for handling queries, including returns, so that sellers don’t have to. Amazon FBA is ideal for all the fast-moving, easy-to-handle products you sell on Amazon, generally those priced under $100.
But is selling on Amazon FBA worth it? As in, can you make money from Amazon FBA? When you consider that Amazon is the largest online retailer in the world, generating $232.9 billion in revenue in 2018 and net income growth of 30.9%, the answer is a resounding yes. This year alone, 1,029,528 new sellers joined Amazon. That’s 2,975 new sellers every day.
Sell more, reach more people, do less. In one case study, a seller saw a net profit of 35% to 40% over 30 days, less manufacturing costs, shipping costs, returns and Amazon fees. Amazon 3PL services handle everything, including shipping and returns. All you have to worry about is sending your items to Amazon and your listing. What’s not to love?
And FBA offers another big benefit for sellers: Your product(s) will be available for Amazon Prime shipping, which means it’s guaranteed to arrive within two days of order processing. For buyers, free two-day shipping is a huge incentive. And with 100 million Amazon Prime members, sellers are definitely going to see more sales: The average Amazon customer spends $700 per year while Prime customers spend roughly $1,300 per year. And now Seller Fulfilled Prime 3PL allows Amazon sellers to list their products as Prime-eligible then ship them to customers from their own warehouse or a qualified 3PL.
You’ll also be able to leverage Amazon promotions, enhanced content and advertising opportunities like the Buy Box, where more than 80% of Amazon’s website sales take place and which more often than not go to FBA users. Furthermore, Amazon’s Multi-Channel Fulfillment option makes it theoretically possible to use FBA without ever actually selling via Amazon marketplaces. Sellers can take orders through Amazon, their own eCommerce websites or through eCommerce platforms.
How Much Does FBA Cost?
While Amazon seller fees are predictable, they will still vary. You can use Amazon’s Fulfillment by Amazon Revenue Calculator to compare your current fulfillment costs to those of FBA (or just see how much it will cost for any given product, without a comparison). Just punch in the item’s Amazon Standard Identification Number (ASIN) and it will give you the exact cost and breakdown, including your net profit and net margin.
Your cost of selling using FBA is made up of two main components:
- Selling on Amazon fee = 15%. This commission is always 15% of the sale price of your item. You pay only when your item sells.
- Fulfillment by Amazon Fee = fulfillment + storage. So that covers picking and packing the item plus and a monthly storage fee. Standard-size inventory storage fees are $0.64 per cubic foot and increase to $2.35 per cubic foot during the holiday months.
So say you have a backpack whose ASIN is B073CNXM95 (found in the URL). With a selling price of $25.99, the Amazon fee is $3.90 and the FBA fee is $6.20. You net the difference, $15.89. Sounds easy, doesn’t it?
FBA vs 3PL: The Cons
While FBA offers efficiencies similar to that of 3PLs (warehousing, shipping, picking and packing), suppliers should consider the cons, which are mostly a product of Amazon’s rules:
- Product-category restrictions that exclude particular sectors, such as beer-brewing. 3PLs, especially those who specialize in particular sectors, will offer more choices and greater flexibility.
- Specific packaging and labeling requirements that may not suit an oversized or unusually shaped product.
- Extra charges for handling orders in Multi-Channel Fulfillment, holding inventory more than six months, printing barcode labels, removing dead inventory and processing returns. FBA also charges a percentage on sales made through its marketplaces.
- Storage-price changes will also likely decrease your gross profit on slow-moving products.
- Other restrictions that limit the use of FBA. For example, Amazon announced that it would not be accepting new-to-FBA users in the lead-up to Christmas, giving an advantage to existing users with products ready to ship for the holiday shopping season.
Many companies that use FBA report a significant decrease in cost of goods sold (COGS). But value to suppliers, compared to 3PLs, will depend on your business model. FBA may be perfect for you if you have products that sell quickly and you’re making Amazon part of an omnichannel sales approach, but if you need more flexibility and control, you may be better off with a 3PL.
Other Cons of FBA
- Tracking inventory can be difficult. If you’re selling hundreds or even thousands of products, many of them won’t sell as quickly as you may hope. Keeping track of what you have on hand, what you need, and what you should reduce your holdings of can be tricky—especially when your products are stored at Amazon’s fulfillment centers and are costing you money. (As with 3PLs, payment is based on how much inventory Amazon is storing for you and for how long.) Fortunately, Cin7’s automated inventory management integrates with FBA to give you accurate inventory and sales records in real time.
- Returns may increase. Because Amazon’s “easy returns process” is so easy, almost too good to be true, expect your fair share of returns resulting from impulse buys. While you don’t have to handle the returns yourself, it’s still a lost sale.
- Shipping procedures are complicated. Amazon’s strict ASIN/UPC system requires you to pack and label your products individually. Cin7’s Amazon FBA integration can simplify the process by managing FBA distribution plans and eliminating redundant data entry. Cin7’s Shipping Dashboard also tells you when your shipment has been received in an Amazon Fulfillment center.
But overall, FBA is a pretty attractive proposition for the average seller, especially smaller entrepreneurs. Your inventory management system needs only to action events using the order status in Amazon Seller Central. Amazon will do the fulfillment work for you, and you can use Amazon Seller Central to get the information you need including, Shipping Status and FBA Stock Availability.