Amazon FBA Explained: Features, Pros And Cons
The Amazon marketplace has earned quite a reputation for its consumer-centric approach. Each element of this e-commerce platform is designed to ensure an optimum consumer experience. But what about the huge number of third-party sellers who contribute towards making Amazon a highly competitive and lucrative marketplace? Amazon FBA ensures that these sellers are not burdened with the complexities involved with the order fulfillment tasks.
In this blog, we will take you through the major aspects of Amazon FBA, the benefits and drawbacks of using it, and whether is ideal for your business.
What is Amazon FBA & How Does It Work?
When trading on Amazon, sellers have two options at their disposal for order fulfillment. The first is, they can opt for the self-fulfillment method wherein they have to pack and ship the product themselves. Alternatively, they can outsource this task to Amazon itself by the means of Amazon FBA.
Fulfillment By Amazon (FBA) is a service offered by Amazon that enables sellers to completely automate their order fulfillment process. Simply put, if you sign up for FBA then Amazon takes care of the storage, packaging, and shipping of your products. Not only that, but it also takes care of returns and refunds, thereby ensuring a complete consumer experience on your (seller's) part.
Amazon FBA is highly advantageous in the sense that it relieves the sellers of the arduous and time-consuming task of order fulfillment. This gives sellers a great room for flexibility wherein they can focus more on scaling their businesses. Even the storage of inventory is taken care of under the Amazon FBA program.
How Amazon FBA Works
Indeed, Amazon's motto has always been to offer the best consumer experience. But in the process, the e-commerce giant also made sure that the marketplace ensured ease of doing business for the sellers. As a step in that direction, Amazon introduced the revolutionary FBA program to help sellers deal with order fulfillment so that they can devote undivided attention to their selling practices.
The entire FBA process is quite straightforward and simple to follow:
(1) Amazon sellers are required to dispatch their products to one of Amazon's warehouses. They will be provided the necessary contact and address details by the company itself.
(2) The products are then safely stored at the warehouse until an order is placed.
(3) Once a customer places an order, Amazon executives manage the entire transaction - from payment to updating inventory.
(4) The product is then packed and shipped to the customer by the logistics division of Amazon.
(5) Amazon takes responsibility for the majority of the customer service duties including tracking, returns, or refunds.
(6) Every two weeks, sellers receive the profits earned from the sales of their products.
In this way, Amazon handles every aspect of the order fulfillment task while ensuring optimal customer experience.
But just as any other third-party logistics partner, Amazon FBA isn't free of cost. Every month, sellers are charged a predetermined fee for the FBA service. That said, let's understand how the FBA fees system works.
Understanding Amazon FBA Inventory Fees System
The FBA program is basically a 'service' offered to the sellers, so it is only natural for Amazon to charge a fee. But the costs are quite competitive and entirely worth the value. Under the FBA program, Amazon charges various kinds of fees to the sellers:
(A) Standard Seller Fees
This is the fee charged by Amazon when a product is sold. Amazon charges approximately 15-18% of the product's price as the standard seller fee. The actual figure, however, varies from product to product since hidden costs are often associated with certain products. For instance: Refunds that are not fully charged back raise the overall charge to the seller.
(B) Inventory Storage Fees
Amazon has an endless chain of fulfillment centers where the products of the FBA-member sellers are stored. In that regard, Amazon charges a monthly storage fee from the concerned sellers. Sellers are charged an inventory storage fee every month based on the size and weight of their products. In simple words, sellers have to pay a fee for every cubic foot of space that their inventory takes up. Moreover, the storage fees are hiked up during the holiday seasons (October-December) due to increased demand.
Under the FBA program, sellers are also liable to pay a long-term storage fee for any inventory that has been stored for more than 365 days. This fee is in addition to the monthly charges.
(C) Fulfillment Fees
For every unit sold, sellers are required to pay fulfillment fees to Amazon. The exact figure varies from unit to unit and depends on certain factors like whether the product is standard-sized or oversized and includes picking and packing, shipping and handling, customer service, and product returns.
Sellers must keep in mind that they are being charged fees based on the volume and size of the product, and not the cost. This implies that the storage fees (and overall FBA fees) are directly proportional to the amount of inventory stored; the more a seller stores, the higher they will be charged regardless of the product cost. Accordingly, sellers must carefully choose the products to be listed through the FBA program. For instance, signing up a low-priced item for FBA might cost more than the product's actual worth.
Also, peak holiday time witnesses a surge in storage fees due to higher demand. Sellers must remember to cross-examine their inventory at this time and remove any item that has a low potential for selling to avoid additional costs.
Although there are a few different costs associated with FBA, sellers must not be deterred from leveraging this service and making the most out of it. Yes, there are some other factors for pricing to consider but Amazon does a pretty good job at providing all the necessary details to the sellers and in doing so, ensures maximum transparency.
NOTE: To ease things up and streamline the calculation process, Amazon also offers an FBA Calculator which enables sellers to arrive at an estimated FBA fees figure for their products. Here's a country-wise list of FBA Calculator:
US FBA Calculator; India FBA Calculator; UK FBA Calculator; Canada FBA Calculator; France FBA Calculator
The Bright Side Of Amazon FBA
Signing up for Amazon FBA can result in a lot of benefits for the sellers such as:
(1) Streamlined Logistics & Improved Scalability
Right from storage to sending the follow-up emails, Amazon does all the heavy lifting for the sellers, saving them a lot of time and cost involved with storage and shipping. This leaves sellers with more time and resources that can be devoted to scaling their businesses.
(2) Economical Shipping Rates
Through FBA, sellers can bank on Amazon's massive storage chain and association with logistics companies to save shipping costs. Even though sellers are charged a fee for the service, it is more economical than managing an in-house fulfillment operation.
(3) Customer Service Management
Besides storage and shipping, Amazon FBA also offers customer service management solutions that include managing inquiries, returns, and refunds on behalf of the sellers. The entire service is free sparing the Returns Processing Fee which is applied to select categories.
(4) Automatic Eligibility For Prime
Amazon FBA makes it quite swift and cost-effective for the sellers to deliver their products to customers. Qualified FBA listings directly get the Prime badge and are eligible for the free 1-2 day shipping. Sellers are not required to pay any premium shipping charges for faster delivery because it is included in the umbrella of services offered within FBA.
(5) Multi-Channel Fulfillment
By signing up for the FBA program, sellers can access the groundbreaking Multi-Channel Fulfillment services (MCF) offered by Amazon. The MCF services enable sellers to distribute their products across multiple e-commerce channels using Amazon's logistics support
The Flip Side Of Amazon FBA
Just like everything has two sides, Amazon FBA also has certain drawbacks that might affect your business.
1. The Cost Factor
Amazon FBA can sometimes turn into a heavy expense for businesses. Since the storage fee accumulates month-by-month, products with a low turnover rate become subject to very high storage fees, including the long-term charge. Also, withdrawing inventory from Amazon warehouses can prove to be a costly matter. That said, FBA is ideal for smaller products that usually have a high velocity and are not subject to long-term storage.
2. Inventory Guidelines
As members of the FBA program, sellers are required to send their inventory to Amazon for packing and shipping. But before the inventory is dispatched, sellers must ensure that it strictly adheres to the product guidelines set by Amazon. In case a product fails to meet the requirements, it can get rejected at the warehouse which may result in further delays or even the product being returned. As a seller, you must follow the FBA product guidelines published by Amazon here.
3. Possible Increase In Returns
This may occur in response to Amazon's 'easy return policies'. Since Amazon FBA covers customer service, including returns, customers may be encouraged to make impulse purchases only to return them back later.
4. Missing Out On Branding
Amazon FBA limits the branding opportunities for businesses. Although the product packages will bear the brand logo and details of the company, the shipping boxes will always bear Amazon's branding. So if brand awareness and personalized customer experience are matters of high concern for your business, FBA might not be the best option for you.
5. Commingling
To understand how commingling can affect your business first, let's define the word. Commingling refers to the default fulfillment setting of Amazon wherein the same products from various retailers/sellers are stored together for processing and shipment. Meaning, if a customer places an order with your store/company, Amazon will use the item on hand from this common group of products to fulfill the order.
The disadvantage here is that along with standardized products, certain low-quality or defective products from unreliable sellers can also get mixed in this pool of products. And if one of those products is used to fulfill your order, it may result in negative customer feedback and product return, thereby harming your business's reputation.
Is Amazon FBA The Right Fit For Your Business?
This is a question that requires careful deliberation on a lot of factors. There are already a great number of entrepreneurs who are utilizing Amazon FBA to their advantage and operating profitable businesses. That said, FBA does not yield identical results for every business.
Typically, Amazon FBA is ideal for smaller products that generate a high turnover rate and don't need long-term storage. For instance: A business will be better off by selling a mobile phone through FBA rather than an Air Conditioner or Washing Machine. This will eventually result in lowered storage fees and prove to be more affordable than self-fulfillment.
However, that doesn't mean that you completely disregard FBA as a fulfillment option. Sellers always have the luxury to choose a different fulfillment option for each listing. Numerous sellers combine the FBA and self-fulfillment approaches and plan their Amazon strategies accordingly.
Leveraging FBA for order fulfillment can turn out to be a profitable investment for your business. But before jumping on the FBA bandwagon, it is essential that you carefully understand Amazon's guidelines as well as analyze your target audience and then decide whether it can add to the value of your business.
Essentially, Amazon FBA is a great way to outsource your business's order fulfillment needs only and only if the benefits outweigh the extra costs.
