One of the greatest challenges a growing merchant must face is warehousing inventory. After a certain point, you’ll outgrow your garage or basement and will have to find a location to store your items. The cost of real estate can quickly add up; on top of that, warehouse logistics (picking, packing, and shipping) is a totally different challenge itself.
Luckily, there is a solution offered by Amazon called Fulfillment by Amazon, or FBA for short. In this post, we’ll look at the pros and cons of Fulfillment By Amazon.
What is Fulfillment by Amazon?
Here’s the description Amazon provides for the FBA program:
“You sell it, we ship it. Amazon has created one of the most advanced fulfillment networks in the world, and your business can benefit from our expertise. With Fulfillment by Amazon (FBA) you store your products in Amazon’s fulfillment centers, and we pick, pack, ship, and provide customer service for these products. Best of all, FBA can help you scale your business and reach more customers—in a 2014 survey, 71% of FBA respondents reported that their unit sales increased on Amazon.com more than 20% since joining FBA.”
Amazon is basically taking it upon themselves to be your inventory warehouse, manager, and shipper. For that, they ask for a ridiculously small amount (compared to what you’d pay otherwise) and they get the benefit of more and more products in their selection.
Here’s how pricing pans out when you compare:
Amazon states that storage is $0.50 per cubic foot of storage per month, with the price varying by the time of month. To be a little more conservative, let’s assume a $0.75 rate. That’s still pretty cheap, compared to what you would pay in rent, utility, employee, and supplies costs per month for a decent sized warehouse.
Pros of FBA
Amazon’s FBA program has lots of positive points, for sure. It’s not all roses; there are a few negative aspects, but let’s cover the good stuff first.
No hassle for shipping and returns
When you get an order, packing it and sending it out is a lot of work. You have to print a packing slip, print a shipping label, fold up a box, pack your item properly, tape up the box, stick on the shipping label, and leave it for the shipping guys to pick it up.
Of course it may be an employee doing this work for you – but it’s still quite a bit of work. Now if you got 10, 20, 30, or even more orders per day, a good chunk of your time would just be lost in shipping!
Enter Amazon FBA. You send your stuff to Amazon, they do everything else for you. You literally just have to watch the sales come in and your numbers rise.
That was just shipping. Now for returns! You have to communicate with your buyer, send them an RMA, receive the item, inspect it for faults, send a replacement or a refund, and resell your item.
The logistics aren’t too difficult, but the communication can get quite tricky and tedious, especially if you are dealing with a few returns per day.
Amazon FBA puts your products into Amazon’s ridiculously simple returns process. You don’t even have to deal with the customer – all of that is done through Amazon, and they handle all of the logistics, too.
The next big advantage of Amazon is really cheap shipping and packing costs. You can find the details here. If your product sells through Amazon itself, you’re looking at $1.04 per unit in packing costs, and between $0.50 to $0.60 per pound of weight in handling costs – shipping is free. So if you sell items that weigh 3 pounds on average, you’d pay about $2.50 per order for shipping.
If your item sells through any other channel and Amazon is fulfilling it for you, then your standard(media) sized parcel ships for $1.90 for standard shipping, $0.60 for packing, and $0.45 per pound of weight in handling. So for the same 3 pound product, you’re looking at $3.80 per order for shipping, which is still very cheap compared to what you’d have to pay if you are doing this in house.
When you fulfill with Amazon FBA, your items automatically qualify for Amazon Prime shipping, so all Prime members can get free two-day shipping for your products.
Amazon Prime is a huge sales motivator – the prospect of getting your products delivered in just two days, and for FREE, is awesome. Most of the time, if an item is available from two sellers, one via Prime and the other via regular shipping, the Prime seller will get the sale.
What’s more, you don’t have to pay anything more as a Prime seller – you’ll be charged the same rate, regardless of whether or not your customer ordered via Prime or regular shipping.
Just the benefit of Prime makes FBA one of the most lucrative online business opportunities around right now.
Buy box priority
Along with Prime, you may have noticed two things: sellers using FBA are higher up in the buy box, and they also have a little emblem saying “Fulfilled By Amazon.” In listings where 20 or more people are selling the same product, every inch you can move yourself higher in the buy box could mean hundreds of orders.
Finally, when you use FBA, you’re not limited to just selling on Amazon’s marketplace. You can sell your products through any channel you wish to sell on, and fulfill your multi-channel orders with FBA. There are even solutions that will automatically send your orders to FBA for you.
Amazon sees FBA as a win-win situation. Not only are they getting paid to store your stuff, they also grow the selection of items in their catalog every single day – when sold through the Amazon marketplaces, these are all more things for Amazon to make their 15% cut on.
Cons of FBA
Despite all of these overwhelming pros, there are a few cons to the FBA program that you need to consider.
Stale inventory/losing track
Like any other warehouse operation, if you have hundreds, if not thousands of products in Amazon FBA, it’s highly likely that not all of them will sell. You’ll probably end up with quite a bit of stale inventory that you are paying rent for and not selling.
The other issue is that it’s difficult to keep track of FBA inventory once it becomes too much. A hundred to a couple of hundred products are easy to keep track of, and they’ll fit on one page of your Seller Central dashboard.
Once those products reach the thousands, though, it will be hard to really be abreast of what inventory you have, what you need, and what you should cut back on. Sure, you’ll be able to track your best sellers, but aside from that, it’ll be difficult – especially since the whole process is so automated.
Due to the sheer quantity of products, and sellers, in Amazon’s warehouses, not every merchant gets their own bin location for every product. Quite often your inventory will be pooled with the same products, from other sellers.
This is generally not that big of a deal, but what it means is that the physical product your customer actually receives may not be the exact one you sent to Amazon. It may be one from another seller.
There is a chance another seller will be selling the “same item” but of lesser quality, or potentially even counterfeit.
There are stories out there of sellers having their account suspended due to defective, or counterfeit merchandise that was actually supplied by another seller. It’s not common, but it can happen.
Difficulty in shipping product to Amazon
The final con factor of Amazon FBA is the difficulty of getting things over to Amazon’s warehouses. Amazon has a very strict ASIN/UPC system, and you have to label each and every one of your products individually, pack them up into multiple shipments(that go to Amazon’s multiple warehouses), and send them off.
So one shipment to FBA will actually be 3 or 4 shipments, which will also add to your bottom line costs.
Amazon does offer a service where they will label the products for you at $0.20 per product, so that may be worth considering as you are starting out.
At the end of the day, Amazon FBAs pros clearly outweigh the cons, and it is definitely a solid business model that people are doing very, very well with.
Chris Guthrie has developed his own product and is selling it through FBA, making well over $10,000 per month – without much effort at all. As you can see from his success, if you are smart about your product procurement, niche selection, and merchandising, the system is there for you to take advantage.
But, losing control of your fulfillment process comes with risk, and some merchants still prefer to ship orders themselves. That’s a choice you’ll need to make as you go.
What else? What are your thoughts on the Pros and Cons of Fulfillment By Amazon?