If you’re into e-commerce and you’d like to focus more on the entrepreneurial aspect of your business rather than dealing with day-to-day operations, then you might be attracted to the Fulfillment by Amazon (FBA) program.
FBA is an outsourced shipping and handling solution that’s offered to Amazon sellers. People who take advantage of the program literally let Amazon do the heavy lifting for them.
Here’s how it works: Amazon sellers register with Amazon’s FBA program. Then, they create their product listings on Amazon. After that, they prepare their products and ship them to an Amazon warehouse.
From that point, Amazon handles all the routine tasks associated with fulfilling the orders. That includes customer service and returns.
If you’re thinking about using Amazon’s FBA to handle your orders, here are several things you need to know.
It Will Cost You
There ain’t no such thing as a free lunch. That’s just a true of Amazon’s FBA program as it is of anything else.
You’re going to spend money when you use FBA.
Amazon charges FBA sellers for both storage and fulfillment. So keep in mind that you’ll essentially be paying “rent” for the space that your products occupy in the Amazon warehouse as well as the costs associated with fulfilling the order.
You will not, however, pay for shipping outright. That’s because the shipping cost is considered part of the fulfillment cost.
There’s some good news, though. As an Amazon FBA seller, you’re eligible for the company’s free two-day shipping offer to prime customers.
That means hardcore Amazon customers can order your product online and receive it in just two days. And it doesn’t cost either one of you an additional dime.
So the Amazon FBA program gives you a great opportunity to go back to your MBA days and do an old-fashioned cost-benefit analysis.
The benefits associated with using FBA include outsourced shipping, quality customer service, and appeal to Amazon Prime members with free two-day shipping. If you were handling shipping yourself, then you can factor in the reduced opportunity cost as you save time with FBA.
The cost associated with using FBA includes the storage and fulfillment costs. Those will vary based on the size of your products, how many you want to store in an Amazon warehouse, and how often you fulfill your orders.
Fortunately, Amazon makes it easy for you to analyze your income and expenses with FBA. Check out the company’s fee calculator.
The bottom line, though, is that it’s all about the bottom line. View Amazon FBA as an investment in inventory management, operations, and marketing. Is that investment worth the return generated by sales on Amazon?
If so, then you have no reason not to pursue FBA.
You Don’t Have a Quota on Sales
You might think that a company as large as Amazon will require you to move a certain amount of merch every month if you want to be part of the FBA program.
With FBA, you can sell only a few products a month or you can sell thousands of products every month.
Amazon understands that not all products are created equal and that demand for some items is softer than for others. The company is more than happy to offer FBA services to small business owners who don’t move a whole lot of products.
FBA Isn’t Mandatory
You are more than welcome to sell your products on Amazon without using FBA.
Some sellers find that they can handle the whole pick, pack, and ship process themselves for less money than it would cost to use Amazon’s service.
Of course, they also have to find a place to store their products and handle the hassles associated with customer complaints and returns.
To them, though, it’s worth it.
Again: think of FBA as an investment. Selling your merchandise with FBA might generate a positive return on investment. On the other hand, you could stand to make a lot more money by handling fulfillment yourself.
You Can Fulfill Orders Through Other Channels Using FBA
You might be under the impression that FBA will only fulfill orders from the Amazon website.
One of the biggest attractions to FBA is that Amazon will fulfill orders from various other marketing channels. You aren’t confined to using FBA only for your listings on Amazon.
As an experienced e-commerce Internaut, you might find that you attract customers from all over the world by listing your great products on a variety of websites. If that’s the case, you should know that Amazon FBA will fulfill orders from those other sites as well.
So here’s what you get with FBA: a centralized shipping and customer service operations center that will handle orders placed on any number of marketing channels from all over the world.
That might be something you want to take a look at.
You Still Have to Pay for Shipping to Amazon Fulfillment Centers
Although your shipping cost to customers is baked into Amazon’s fulfillment costs, you’ll still need to fork over some cash to get your products to the fulfillment center.
So, technically, you are still dealing with shipping. But only to a limited extent.
There’s good news on that front, though. Amazon has Partnered Carrier options that enable sellers to ship products to Amazon fulfillment centers at a sharply reduced cost.
When you use an Amazon-partnered carrier, the company provides you with a shipping label that you slap on the boxes you’re sending to the warehouse. The cost is billed to your account as an “Inbound Transportation Charge.”
If you’ve got a huge amount of merch that you need to send to a fulfillment center, Amazon also offers partial truckload and full truckload options with partnered carriers. You’ll typically need a dock or forklift if you want to use that service, though.
There’s No Limit to How Many Items You Can Send to a Fulfillment Center in One Shipment
Amazon doesn’t place any restrictions on how much merch you ship to a fulfillment center in one shipment.
That’s good news because it’s likely that your transportation costs would be much higher with several, smaller shipments than with one large shipment.
Fortunately, you don’t have to worry about that problem if you’re an Amazon FBA seller. Feel free to throw as much of your product line on the truck as you can fit.
Amazon Uses the FIFO Method to Determine Storage Fees
As we’ve seen, Amazon charges for storing your products in its warehouse.
If you’re an accountant in addition to being an entrepreneur, then you might be curious about how Amazon charges for storage. It uses the First In, First Out (FIFO) method.
In other words: your first batch of products that arrived at the warehouse will also be the first to go out the door when customers order them. Once they’re gone, they won’t be subject to a storage fee.
Of course, new items that arrive to replace the old ones will be subject to a storage fee until they’re sold.
Amazon Charges a Long-Term Storage Fee
If your merch moves very slowly, you might be slapped with a long-term storage fee.
Items left in the warehouse for longer than six months are subject to the long-term fee. If you have products that are in very low demand, you’ll have to factor that fee into your cost-benefit analysis.
You Can’t Avoid the “Pick and Pack” Fee
You might think that you can save the folks at Amazon some time – and yourself some money – by packing up your merch just as you’d like it to be sent to the customer.
The idea has merit. If you basically manage the handling and packing yourself, then Amazon has less work to do. So the company should pass the savings on to you, right?
The “pick and pack” fee simply can’t be avoided. So save yourself some time and ship the products to Amazon in the easiest way possible.
It’s Best to Start Slow
As with so many other things in marketing (if not life in general), it’s best to start out slow with Amazon FBA.
That’s because you don’t know what you don’t know. Even after reading this overview, there will always be unforeseen expenses and unexpected challenges. It’s best if you face those problems on a small scale.
Start by offering only a limited number of products available for sale via Amazon FBA. Give that a shot for a few months.
After the few months are up, evaluate your costs and income. Determine if you can make a lot more money by using the service for a larger portion of your product.
If everything goes well, you can eventually offer everything for sale with FBA.
Money From Sales Is Held in Escrow
Once you’ve shipped your products to the Amazon warehouse and they go live on the site, customers can start ordering them.
But you won’t get paid immediately after every order.
Here’s what happens: Amazon charges the customer the price of the item plus any related sales taxes. Then, Amazon takes out its cut from the sale and puts the money in escrow for a couple of weeks.
The reason that the money is kept in escrow is because the customer might return the ordered product.
So, as with so many other things in life, you have to wait to get what’s coming to you with Amazon FBA.
Amazon FBA Fees Are in Addition to Commissions
Remember: your Amazon fulfillment and storage costs are in addition to your commission expense.
If you decided to handle shipping on your own, you’d still owe Amazon a percentage of your sale as a commission. That commission doesn’t go away just because you’re using FBA.
So be sure to factor in commission in addition to all the other expenses associated with selling items on Amazon and using FBA.
By the way: the referral fee, as of this writing, is from 12-15%. To view all fees refer here.
You Can Save Money by Creating Your Own FBA Shipping Plan
When you ship your products to Amazon for fulfillment, then the company will decide which warehouse is best suited for your products.
After a while, though, the folks at Amazon might think it’s a good idea to move your products to another warehouse.
And what that happens, guess who pays the shipping cost? You do.
But you can avoid that by requesting your own shipping plan.
Of course, if you want to develop an effective shipping plan, you’ll need to understand your target market. That will require some market research on your part.
Your FBA Account Can Be Suspended
When you sell on Amazon, you have to play by the company’s rules. If you don’t, then you could lose your account.
Specifically, here are some infractions that will cause you to lose your selling privileges on Amazon:
- Having more than one seller account – If you want a second account, you’ll have to ask permission from Amazon.
- Manipulating reviews – Amazon has been cracking down lately on fake reviews. If you want to maintain your account in good standing, don’t become part of the problem by purchasing bogus reviews.
- Poor quality products – If enough people complain about the quality of your products, Amazon will pull the plug on your account.
- Violating intellectual property laws – If you’re passing off someone else’s creative work as your own and Amazon finds out, you can expect to have your account suspended.
Wrapping It Up
Fulfillment by Amazon is a great way to delegate a lot of the hassles associated with e-commerce to a company with an outstanding reputation online. However, you’ll pay a price when you enlist Amazon’s aid. Make sure that you calculate the cost and factor it in to your potential profit margin before you enroll in FBA.