Amazon is one of few ecommerce marketplaces that’s capable of fulfilling the online shopping trifecta — free shipping, fast delivery, and free returns.
With more than 110 active fulfillment centers just in the US, it comes as no surprise that Fulfillment by Amazon (FBA) has quickly become the leading fulfillment service for a variety of growing ecommerce businesses.
Amazon FBA allows Amazon to fulfill orders on a business’ behalf, while both the business and its customers reap the benefits. A business sends its products to an Amazon fulfillment center, a customer makes a purchase, and Amazon handles the receiving, packing, shipping, returns, and everything in between.
In this post, we’ll take a look at how Amazon FBA works and if it could be a good fit for your ecommerce business.
What is Amazon FBA?
Sellers have three options when it comes to Amazon order fulfillment — they can pack and ship products themselves (either Seller Fulfilled Prime or Fulfillment-by-Merchant), or they can outsource the process to a 3PL service. Amazon FBA is Amazon’s own 4PL service in which the company receives and stores inventory, and then picks, packs, and ships ecommerce orders.
Amazon FBA acts as a middleman throughout the ecommerce fulfillment process, which begins when a customer places an order and ends when they receive it. If a customer requires an exchange or reimbursement, FBA leverages Amazon’s logistics network to complete the returns process. Similarly, FBA provides ecommerce customers with access to Amazon customer service.
Outside of the Amazon marketplace, Amazon also offers FBA multichannel fulfillment, which allows ecommerce brands to combine multiple digital sales channels with Amazon’s fulfillment network. Customers can order products through an ecommerce website, social media, or alternative third-party marketplace, and Amazon can still pick, pack, and ship them with Prime speed.
How does Amazon FBA work?
Amazon FBA requires the use of an Amazon seller account, for which ecommerce business owners can either use their existing customer account to start selling or choose to create a new seller account with a business email. An Amazon seller account must include a phone number, government ID, internationally chargeable credit card, and bank account to deposit sales.
Once an Amazon seller account is established, the FBA process is very straightforward:
- Log in to Seller Central to set up FBA. Sellers select from several FBA specialized services, like FBA Small and Light for low-cost, lightweight inventory or Multi-Channel Fulfillment for services from your own or third-party ecommerce sites.
- Create FBA product listings. Sellers add their products to the Amazon catalog, create a unique product identifier (like UPC or ISBN) and SKU number, and include relevant product details (like a description and images).
- Ship products to Amazon. Sellers adhere to Amazon packing guidelines and shipping and routing requirements to deliver products to a designated Amazon fulfillment center.
- Amazon stores the products. Amazon houses products at one of its many fulfillment centers (for a storage fee) until an order is placed by a customer.
- Amazon handles the transaction. Amazon packs and ships a customer’s order directly from its fulfillment center, updates the seller’s product inventory, and manages customer service in the event of a return or refund.
Of course, Amazon FBA isn’t free. An Individual selling plan costs $0.99 per unit sold, and the Professional plan costs $39.99 per month regardless of the units sold. Amazon also charges a referral fee of 8% to 15% for each item sold and charges a storage fee dependent on the size and volume of products. You can investigate your estimated costs with the Fulfillment by Amazon Revenue Calculator.
5 reasons why ecommerce businesses use Amazon FBA.
There must be a reason why thousands of ecommerce businesses use Amazon FBA. Here’s five.
1. Amazon’s New Seller Incentives (NSI)
Amazon is aware that not every small ecommerce business has the means to sell on Amazon, so the company created New Seller Incentives (NSI). Incentives range from $200 credits to try cost-per-click (CPC) advertising to a 5% bonus on up to $1,000,000 in eligible branded sales. Also included in NSI are 90 days of free storage on 50 units (30 oversize units) and discounted Prime shipping.
2. Access to an advanced fulfillment network
It’s no secret that Amazon has one of the most advanced fulfillment networks in the world. In addition to clear benefits like storage in Amazon fulfillment centers and Amazon packing and shipping, FBA includes access to Amazon’s premier customer service.
- FBA customer support: Rather than manage customer service, ecommerce businesses can rely on Amazon to handle phone or email customer support (day and night) for no extra charge.
- FBA customer returns: Amazon fully manages customer returns via its own online returns center, so ecommerce businesses have no hassle, and customers have a simple (and free) way to complete returns.
3. Quick shipping consumers expect
Today’s consumer expects efficiency at no extra price. After all, 83% of U.S. shoppers claim free delivery is the most important factor when ordering online, and 54% have abandoned an online order due to delivery costs. Amazon FBA allows for Amazon Prime two-day shipping, free shipping, and the additional perks that consumers have come to expect.
4. Cost-effective to scale
Unlike other 3PL services that are based on a set cost, such as warehousing, sellers using Amazon FBA are only charged for the storage space used and the orders fulfilled. Even better, the cost of shipping is rolled into fees, with no extra charge for Amazon Prime two-day shipping. Other FBA specialized services, like FBA Subscribe & Save (which enables sellers to offer discounts on eligible products), are cost-effective to scale and grow your business over time.
5. Coveted spot in search results
Sellers who use Amazon FBA benefit from having their products appear higher in Amazon search results. This is because FBA sellers only have their item listed by price — not the total price of the product plus shipping costs — making their products some of the first in search results.
FBA is also one of the variables Amazon prioritizes when deciding which products to add to the Buy Box, or the large “Add to Basket” button displayed on Amazon product listings. FBA sellers are likely to win the Buy Box on product listings versus other third-party sellers.
What are the disadvantages of using Amazon FBA?
Despite the benefits of Amazon FBA, there are some significant drawbacks. Consider these five.
1. Platform risk
The most obvious disadvantage of using Amazon as a primary source of fulfillment is the platform risk. A seller that only distributes through Amazon has a single source of failure — Amazon. So, if Amazon experiences delays in its fulfillment centers or with its delivery drivers, you can expect your business to experience delays, too.
Not to mention, if Amazon decides to deprioritize or take down one or more of your listings (or ban your account, which is more common than you might think!), your business is screwed.
2. Unbranded product packaging
Packaging is important to the modern consumer, so much so that 72% of Americans claim that product packaging design influences personal purchasing decisions, and 81% agree that package design influences gift selection. So, imagine the potential disappointment when consumer orders from a small business just to receive typical Amazon packaging. All orders dispatched by Amazon FBA will have Amazon’s branding, also making it difficult to raise brand awareness.
3. Increased frequency of returns
There is a risk the ease of returns through Amazon fulfillment may increase the frequency of returns for a small business. While returns can be somewhat controlled by establishing clear expectations for products with descriptive product listings, there’s always a chance that consumers will take advantage of Amazon’s free and easy returns.
4. More competition
When you sell on Amazon, your products are now a commodity. Your brand narrative is reduced to your product listing page(s) on Amazon, and you are competing against every other third-party FBA seller in your niche (as well as Amazon itself).
In fact, Amazon has data on all of the products on the platform. If they see a product performing incredibly well in an area that they want to compete in, they’ve been known to roll out their own product and severely undercut FBA sellers.
5. Additional monthly costs
Any ecommerce business that’s contemplating a third-party warehouse or logistics will expect additional monthly costs. However, monthly fees for Amazon FBA can pile up over time, especially storage fees for unsold products. Sellers are responsible for poly bagging and bubble wrapping fragile products that are sent to Amazon fulfillment centers, and are charged a removal fee and disposal fee for any unsellable product that’s been deemed defective or damaged.
Is Amazon FBA worth it?
There’s truly no hard and fast answer for whether or not Amazon FBA is worth it; rather, the answer relies on if your products will remain profitable after taking into account the various FBA fees. In most cases, Amazon FBA is a beneficial fulfillment option for ecommerce businesses that sell small products, like apparel, with high turnover.
Turnover, in general, will limit storage fees and help protect growing ecommerce businesses from long-term storage costs, as well as keep the Inventory Performance Index (IPI) score high. High turnover will also protect an ecommerce business from potential risks, such as a higher rate of returns due to Amazon’s simple exchange and refund policy.
However, if you are just starting out with FBA, only selling your best-selling products or any products with high-profit margins can be a smart way to experiment.
Overall, your decision to sell on Amazon or not will depend on the demand for the product and the overall profitability of the business.
Linnworks and Amazon FBA
If you are looking to further streamline your inventory and order management, using order management software like Linnworks makes this process more efficient, including:
- Maintain accurate stock levels with Linnworks automation
- Use our warehouse transfer functionality to streamline the pick, pack, and ship process
- Avoid overselling