What is Amazon FBA?
When you hear people referring to selling on Amazon, the experience is very different from selling on eBay or other ecommerce platforms. In a normal ecommerce site, you list products and it’s completely up to you to ship each single product whenever it’s sold. Although this can be good at first, it becomes very strenuous if you scale your business. Amazon separates itself from other competitors by its ability to let sellers leverage their vast logistics. Instead of listing and shipping each product, Amazon allows sellers to send in their products to their warehouses and they get shipped out from Amazon’s warehouses when it’s sold. This process is called Fulfillment by Amazon (FBA) and it’s commonly referred to as Amazon FBA. With FBA, Amazon picks, packs and ships all the products you send it to the warehouses as soon as they’re sold.
Some sellers can choose to do merchant fulfillment, this is just a fancy term that means you have to ship the products yourself when they are sold. Amazon FBA has its benefits and drawbacks, but it’s by far the most popular way that sellers choose to sell their products. Almost all of the ultra successful sellers (>$1 million in revenue per year) use FBA as their way to scale their business. Below are some of the advantages and disadvantages of using FBA. After reviewing for yourself, you can decide what is best for you.
What are the advantages of FBA?
Access to prime members: When you use FBA as your way to sell on Amazon, you get access to the most successful subscription program in modern history: Amazon Prime. If you’re reading this, you are likely a prime member yourself. More than half of households in the U.S. have Amazon prime and there’s over 150 million prime users. Amazon Prime is a huge factor in increased sales because customers with prime memberships are able to get 2-day shipping on products. Many customers will pay a premium price for prime products for the sake of convenience. When you use FBA, your products will be sent to Amazon warehouses and any customer who orders will be able to receive in 2 days. Prime members generally have higher disposable incomes, so using FBA will give you access to that valuable customer base. The average customer spends $700 per year on Amazon, while the average prime member spends over $1,300 per year.
Shipping: There are several benefits associated with shipping that you receive if you choose to use FBA. Managing your shipping fees is an important part of having a profitable Amazon business. When you choose to send your products into an FBA warehouse, you only have to pay one price for picking, packing and shipping. Also, Amazon has contracts with shipping companies like FedEx, USPS and UPS; this allows sellers to get discounted prices on shipping.
A great shipping benefit is that you will not have to ship the items yourself. Although you may not be thinking about your business one to two years from now yet, it’s likely that you will be sending hundreds if not thousands of products weekly. In order to manage this by yourself, you would need several employees and it would be costly. With FBA, you can scale your shipping operations without having to add a lot of overhead on your business in terms of employees and shipping costs.
No customer service: If you have had any experience with selling items online, you will know one of the most frustrating experiences is having items returned. When you list, sell and ship items online by yourself, handling a return is very costly in terms of time and money. With FBA, Amazon handles all of the returns, customer complaints and other issues that can come with a product. With their 24/7 great customer support, the customers who purchase your products will have their issues resolved relatively quickly. If you were to have an Amazon business at scale that uses merchant fulfillment, you would need at least one or a few employees to deal with customer services because that is expected with any business with scale. By outsourcing your customer service, you have more time to focus on revenue generating aspects of your business like finding products and shipping them in.
Opportunity to get the buy box: One of the most powerful ways to increase your Amazon sales is to win the buy box. When customers land on the product page, they will see a button on the right hand side that says “buy now”. This is the buy box; whichever seller has the buybox will win a great portion or the majority of sales. Each product on Amazon generally has multiple sellers that compete for sales. One of the best ways to beat the competition is to use FBA for your products because it will appear as a prime product. Amazon uses an algorithm to figure out the buy box, but having a prime-eligible product is one of the leading factors in winning the buy box. Even if your pricing is higher than other competitors, if your product is prime-eligible, there’s a much higher chance that you will win the buy box.
With FBA, there aren’t many drawbacks since the benefits are so great. Here are a few of the top concerns with FBA.
Fees: Even if you have gross revenues that are six figures or more, your profitability is impacted greatly by your ability to account for fees. When you sell on Amazon, there are several fees you need to account for and an FBA fee is another crucial fee. There’s a referral fee for Amazon for connecting you with their customers, but there’s an additional fee for using their FBA warehouses. The FBA fee is a flat fee that depends on the size and weight of the product you are selling. Many sellers see this just as a part of doing business on Amazon, this is not something you can control. It’s important to be mindful of FBA fees when selecting a product to ensure it is profitable before you send in to the warehouse. Additionally, if your product doesn’t sell over a long period of time, you’ll be subject to additional storage fees. You can check out the FBA calculator here to see the fee for a given product.
Prepping: Product prepping can be confusing and difficult when starting out with Amazon FBA. Depending on the product you are selling, you may be asked to prep in a certain way. For example, if your product has glass, you’ll need additional prepping items to prevent breaking. This can cause additional prepping fees, but you’ll be able to see this on the seller central portal when doing shipping prep. The prepping requirements may cause you to avoid several kinds of products that may contain glass, be choking hazards, etc.
This covers most of the basics about FBA, in the following blogs we will cover what you need to get started with selling on Amazon and what you need to do to get your first products into an FBA warehouse.