E-commerce merchants need a place to store their products until they are sold, and someone to ship the product to the customer when it sells. They can choose between Amazon's Fulfillment by Amazon (FBA) service or a fulfillment center. They may also need the services of a hybrid, Amazon prep service.
What is FBA (Fulfillment by Amazon)?
With FBA, the merchant sends their products to an Amazon warehouse, and they are stored there until somebody buys the product. At that point, Amazon ships the product to the customer.
FBA will also serve as a fulfillment center. It will store products and ship them to customers even though the actual sale was made on the merchant's own web site. Officially Amazon calls that multi-channel fulfillment.
What are the Advantages of Using FBA to Sell Directly on Amazon?
- Higher ranking in Amazon search results pages: This is not verifiable because only Amazon knows the inside details of their algorithms, and they don't reveal such information, but many third-party sellers believe Amazon ranks FBA products more highly than other products because they make more money through FBA than through FBM. Higher ranking in the search results means your product has a higher visibility, and therefore gets more sales.
- Amazon Prime: Members of the Amazon Prime program get free two-day shipping for FBA products. The latest estimate, from January 2016, pegs the number of Prime members at 54 million. And Amazon has its own "holiday" to boost sales, "Prime Day." Many Prime members love that free two-day shipping. They do not shop on any other website. And when they're searching for what they wish to buy, they ignore all Amazon products that do not carry the "Prime" label.
- Speed of shipping to customers: Amazon warehouse employees and robots work around the clock. When a customer orders your product, the notification immediately goes to a warehouse. If it's 2 a.m. you wouldn't see the email until you wake up the next morning. Neither would another fulfillment center you outsourced to.
Amazon warehouse employees and robots work around the clock. When a customer orders your product, the notification immediately goes to a warehouse. If it's 2 a.m. you wouldn't see the email until you wake up the next morning. Neither would another fulfillment center you outsourced to.
Fulfillment by Amazon Problems: What are the Disadvantages of FBA?
There's no absolute guide, and it varies by such factors as:
- Size - there're additional oversize charges if your product is larger than 18 X 14 X 8 inches.
- Weight - heavier costs more
- Product category
This article will cover the costs in detail. This link is a beginning.
However, as a general rule, companies moving a large amount of units through e-commerce channels will save money by using a good fulfillment center instead of FBA.
Some products are restricted from FBA. The list is here. They limit the amount of your inventory space depending on sales. They will not store inventory more than a year. After that, they charge you for the cost of shipping it back to you, or they will destroy it for you, letting you pay for that.
Chances are that you stumbled upon this page because you’re considering using Fulfillment By Amazon (FBA) as a fulfillment solution for your business. While we can’t argue with Amazon’s proficiency with fulfillment, there are numerous other cons to using their highly touted service. Consider these points, and talk to some other fulfillment companies before signing on the dotted line.
- Certain product types are especially difficult to run on the FBA platform. For example, especially bulky or heavy products, low volume products, and low margin products will eat away at profits. The reason? Fulfillment By Amazon’s fee structure is particularly high for bulky and heavy items, and because Amazon isn’t anywhere near the cheapest fulfillment solution, low volume and low margin products simply may not have enough wiggle room to afford outsourcing.
- Sales tax calculations become problematic. Want to be in compliance with sales tax regulations? In order to be in compliance, you’ll need to calculate sales taxes for any “nexus” of your company. A “nexus” is a location, and can include the location of your warehouse. Now, this isn’t the most difficult thing in the world to figure out, except that with Fulfilment by Amazon, you won’t necessarily always know where your product is being stored.
- You will be contributing to Amazon’s brand building machine. If you’ve ever received a product from Amazon, you know of its arrival due to the nice white box and the familiar Amazon logo. What you won’t find, however, is any custom packaging or labeling from the business you originally ordered the product from! Why, you might ask? Because Amazon doesn’t allow this for most customers. It doesn’t fit within their streamlined fulfillment process, is most likely what you’d hear from an Amazon representative. But they probably don’t mind the extra brand building they get from those wonderful white boxes.
- Which brings us to the next reason to consider alternatives – you will be an extremely small customer within Amazon’s maze of warehouses scattered all throughout the world. If you don’t care about any customizations or a unique relationship that you could otherwise foster with a smaller or mid-sized 3PL, then no need to worry. But for most small businesses, being able to ask for a special favor or get a hold of an account rep when a crisis arises is worth its weight in gold.
- Want to re-market to any customers that purchased through Amazon’s website? Scratch that off the list because it’s won’t likely be possible. You can push certain correspondence through Amazon’s communication channels, but not for marketing communication. While you are banking on Amazon to market for you, it’s somewhat disheartening and downright frightening to think that Amazon controls pretty much all aspects of your operation. For some, this is a necessary evil, but for quite a few others, hedging this risk is critical to long-term success.
- Oh, and pay attention to pricing. If you’re able to fully decipher the Fulfillment by Amazon fee structure, then you probably graduated with a PHD in mathematics from an Ivy League school. Otherwise, like the rest of us poor “average” people, you’ll most likely have to call up the accountant to fill you in on just how much everything costs. But the unfortunate truth is that the fee structure isn’t going to save you much money. After all, Amazon isn’t the VW Bug of fulfillment services, but rather the Cadillac. Expect your fees to be noticeably higher than some smaller fulfillment providers.
Costs of Using FBA for non-Amazon Sales
However, all the same disadvantages apply.
Alternatives to FBA - Seller Fulfilled and Seller Fulfilled Prime
Though nearly 60% of all eCommerce sales are through Amazon, merchants don't all ship from an Amazon fulfillment center using FBA. In fact, many ship from the seller's themselves, or a third-party fulfillment center that a vendor entrusts with this aspect of their business. Below are the two of the major options you have as an Amazon vendor when it comes time to fulfill orders:
- Amazon Seller Fulfilled orders (Also known as FBM or Fulfillment by Merchant, and sometimes as MFN or Merchant Fulfilled Network)
- Seller Fulfilled Prime orders (Also known as SFP)
What's the difference? In a nutshell, the FBM orders are those that are sent out by the merchants or vendors who sold them. The latter involves the same merchant, but now they have access to Amazon's Prime members, allowing the merchant to display the coveted Prime badge but letting you ship by yourself or using your third-party fulfillment company of choice.
Obviously, it might automatically seem that the SFP is a way to really leverage your position within the Amazon marketplace, but it may not be the ideal approach for all. Getting into the program is actually quite rigorous (we will review that a bit later), and it does not free you of the burden of owning and operating a warehouse. It also has fairly rigid guidelines around issues like refunds. Before heading any further into a discussion about SFP, though, let's first look at the classic Amazon Seller Fulfilled orders.
Fulfillment By Merchant Explained
If you want to figure out which Amazon fulfillment model is right for you - where self managed models are the focus - it's best to begin with their basic sales model. It features formal order processing guidelines as well as cancellation policies. Amazon also provides sellers with very expansive order management guidelines where their specifications are clearly laid out, too.
By managing your own fulfillment and shipping, either in-house or through the use of a fulfillment center, you gain certain advantages over using FBA:
- Enhanced Inventory Control - Unlike Fulfillment By Amazon, you can hold your inventory in one central warehouse rather than having to ship to multiple Amazon DC's - not to mention that you can can allocate this inventory in any way you need depending upon the needs of your overall business and multiple sales channels.
- Enhanced Returns Control - Because Amazon won't be in charge of your returns process, you can structure returns in the best way possible, minimizing fraud.
- Decreased Costs - Amazon FBA is 'the Cadillac' of fulfillment services - high quality and high cost. You'll be able to cut costs by using in-house or outsourced fulfillment.
- Avoid Amazon Policies - By doing your own fulfillment, you'll avoid Amazon changes that hurt businesses, such as high long term storage fees.
Of course, on the downside, you'll have to manage the fulfillment - either in-house or through a third party. Furthermore, you'll have to adhere to strict guidelines. In some cases, you have to meet certain standards for orders processed per month over a period of time in order to be eligible for shipping during the busy season. Be sure to check Amazon's policies, as they change frequently.
Seller Fulfilled Prime Explained
If the seller fulfilled model is not your preferred approach, the SFP is (as stated) a way to reach the entire Amazon market, and gain access to the more coveted Prime members. Why coveted? Just consider what one authority had to say of the Prime buyers, "Prime members are typically big spenders all year round. On average, members - and there are close to 50 million of them - spend around $1,100 per year, compared to about $600 per year for non-members."
Thus, making your merchandise eligible for Prime is likely to help increase sales while also giving you total control over inventory, and allowing you to access other markets. However, this access comes at a price - strict requirements. First, you have to be eligible for Amazon Premium Shipping (which is a status to be gained and then maintained). This is done by having a 30 day record of on time deliveries at a 92% rate for Premium Shipping orders; a valid tracking ID for at least 94% of Premium Shipping orders; and a cancellation rate of less than 1.5% of Premium Shipping orders.
You don't need to be eligible to participate in your Prime trial, but will need to obtain and maintain it to join SFP. Once you are enrolled in SFP, you have to meet the Prime performance requirements throughout the trial, which include
- Maintain an on-time shipment record of at least 99%
- Use Buy Shipping Services for at least 95% of orders
- Maintain a cancellation rate of less than 1%
You will also agree to program terms for Prime items, and these include buying all labels for orders with a Prime item through Amazon's Buy Shipping Services; direct all post-order customer service to Amazon; follow Amazon's returns policies; and offer Prime shipping benefits and guaranteed delivery dates. The latter means free two day shipping to all addresses in the continental U.S. or free standard shipping to addresses in Alaska, Hawaii, and U.S. protectorates. Sellers will also have to offer free shipping to Prime members who opt for delivery options slower than the Prime shipping benefits for which they are eligible, and offer all buyers free economy shipping on prime items whether or not they are a Prime member.
Which is right for you? If you really want to leverage your position on Amazon, and enjoy optimal controls, the SFP is worth the effort to enter, and is something you will want to consider starting soon. Whether you use a fulfillment center or handle it on your own, the Prime members are poised and eager to purchase, and Amazon is leading the eCommerce world, making it a combination and opportunity not to be overlooked lightly.
Don't Forget About Using Other Fulfillment Centers For Fulfillment by Merchant and Seller Fulfilled Prime
Many Third-Party Logistic (3PL) services that will store your products and ship orders to customers for you. Visit our homepage to learn more about order fulfillment services companies or click here to learn more about FBA alternatives. Costs vary depending on your product and what you require. However, the basic expenses are:
- Initial set-up fee
- Receiving - they charge you on a per-hour or per-unit basis
- Storage - varies by company, and whether it's by pallet or by the space your products occupy
- Order fulfillment
We also created another resource for you to see in depth fulfillment costs and pricing. Click here to view the in depth information on what fulfillment companies charge. But don't forget - if you're going to use an outsourced fulfillment service for Seller Fulfilled Prime, you'll need to make sure they have the ability to deliver 2-Day shipping across the country!
Comparing the Costs of FBA versus Seller Fulfilled Options
Inbound Shipping Your Products to the Warehouse
The first cost of using either Amazon FBA or another fulfillment center, is shipping items to them. That's inbound shipping.
FBA has numerous requirements about product packaging. Most products require polybags. If the opening is larger than 4 inches, the bag must have a suffocation warning. These bags, plus brown paper, tape, cardboard boxes, shrink wrap and bubblewrap are available for sale from office supply stores, eBay, Amazon and wholesalers. In general, the more you buy, the cheaper they are per unit.
There's little difference here in terms of expenses because whether you use FBA or a fulfillment center, you must still pack and box your items so they are ready for the center to send them to customers. For fulfillment center you don't have to follow Amazon's guidelines, but you still want the packages strong and secure to safeguard your products.
If you ship them directly to an Amazon FBA warehouse, you can take advantage of using Amazon's account. Because they are United Postal Service's biggest customer, sending to an FBA warehouse will cost you less than UPS will charge you to send to a fulfillment center.
The UPS pricing guide can be used for ordinary customers. However, Amazon has partnered with UPS. When you ship products to an FBA warehouse, you pay only Amazon's rates. They will still of course vary based on weight, size and number of boxes. The more you ship, the less you pay per pound.
According to UPS, the discount for Amazon FBA sellers runs from 8.5-23% for UPS ground service. That charge and more details are available at this link.
The dimensions of the box also affects the price.
Distributed Inventory Placement
However, you can't make a simple one to one, FBA to fulfillment center inbound shipping cost comparison because Amazon complicates things in another way.
They have warehouses spread over the country, and keep building more. They do everything they can to reduce the time the customer waits for their packages. That means they want your products in the warehouse or warehouses closest to most buyers. They have lots of buyer data, including geographical location.
Unless your products appeal to people only in one specific location, it's very likely they will want you to send your items to different warehouses. If you plan to ship 500 units at a time, they may instruct you to ship 100 units to Warehouse A, 100 units to Warehouse B and so on. That's what they call Distributed Inventory Placement, and it's the default.
But dividing up shipments does make them cost a little more, besides being a hassle. What if you don't want to do that?
Inventory Placement Services
With this program, Amazon allows you to send all 500 units to a single warehouse (designated by them). However, they charge a fee. Amazon adds these fees up and charge your FBA Seller Central account at the end of the month.
It's up to you. However, you will save a little money per unit if you just go with Amazon's default Distributed Inventory Placement. Also, remember that Amazon knows more about its own processes and shipping times to customers than you do. The sooner customers receive their packages, the happier they are. That's why Amazon splits up merchandise. Fast delivery is good for your reputation as well.
In effect, going with Inventory Placement Services is paying to argue with the world's largest and most successful e-commerce company.
Therefore, when making the estimate cost comparisons between using FBA and fulfillment centers, this article assumes you do not add the cost of Inventory Placement Services to the total expenses of using FBA.
Product Bar Code Labels
Shipping to Amazon FBA requires you to apply bar code stickers to each unit of your products. Amazon supplies the information, but you must print them up. You can use simple removable stickers that you can buy from an office supply house or a seller on eBay or Amazon.
Amazon will do that for you, but it costs 20 cents per label that is not a necessary expense.
Amazon does not charge any set-up fee to list a FBA product.
Fulfillment centers do typically charge initial set-up fees to put you and your products into their system and to integrate with your site's shopping cart. These fees can range from hundreds to thousands of dollars. Obviously, this may not be the option for you if you're small, part-time and just testing the water, although there are fulfillment companies that focus on such companies and have little or no minimums and not set up fees. Paying such high set-up fees are only appropriate for companies who will remain with the fulfillment center for at least a year.
Amazon does charge $39 a month for a professional FBA Seller Central Account.
Fulfillment by Amazon (FBA) Revenue Calculator
This is a great tool Amazon provides. Amazon designed it for merchants to calculate their total profit both if they sell on Amazon and sell on their own website. Although many FBA sellers use it to find out what the per unit costs are on FBA to test our prices and profit margins, there are also fields for such costs as prep service and inbound shipping costs, which you have to determine and input. You can also use their video as a good introduction to using the calculator, but it doesn't include sold MCF expenses.
Fulfillment by Amazon Fees
The below is a list of fees for using Fulfillment by Amazon versus a standard order fulfillment company.
Receiving and Amazon Prep Fees
If it's an Amazon FBA warehouse, you're charged 20 cents per unit if you do not put the sticky UPC labels on yourself.
If you did it yourself, there's no charge.
If you are using a fulfillment center, you will pay a per unit charge or $30-$40 per hour it takes for their workers to store your product.
Monthly Storage Fee
Fulfillment centers will charge this on a regular basis (usually monthly). Costs vary from $8-$15 per pallet or by the cubic foot.
Amazon charges a storage fee when each item sells. They fees on the size of the item and the length of time it's been in the warehouse. And they charge more in November and December.
However, these fees will go up if your product is not turning over. And if it's still in storage after one full year, Amazon will either return it to you or, if you prefer, destroy it for a fee.
This is a fee Amazon charges for selling an item on their site. It doesn't apply to off-Amazon sales.
It's 12% of the sales price or, in some categories, a set fixed per unit price.
Order Handling Fees
For standard-sized items priced below $300 and sold on Amazon, it's $1.00.
For standard-sized items sold on your own site, it depends on the shipping method the customer selected: Standard, Expedited or Priority?
For fulfillment centers, the charge for fulfillment is $4-$8 plus an item fee. It includes Pick & Pack, though Amazon breaks out Order Handling and Pick & Pack as two separate items.
Pick & Pack Fees
For standard-sized items sold on Amazon, it's $1.06.
For standard-sized items sold on your own site, it's $0.75.
Weight Handling Fees
This charge is only for items sold on your own site. The charge goes up with the item's weight and the shipping method chosen by the customer.
Outbound Shipping to the Customer
If you sold the item on Amazon through FBA, there's no charge to you the merchant.
If you sold the item through FBA MCF, Amazon charges you the Order Handling Fee and the Weight Handling fee. Therefore, when you sell a product on your own site and FBA fulfills it, you must collect the shipping charge from the customer on your site.
Here's Amazon charts for the fees for FBA fulfilling orders not made on Amazon.
If you are using a fulfillment center, you must pay the warehouse $2-$8 (and in some cases lower if you have high volume) plus a per unit fee. Also, you must pay the UPS shipping charge. As a large customer of UPS, the fulfillment center probably pays lower rates than you do, though probably not quite as low as Amazon.
A Specific Example of Using FBA versus Using a Third Party Fulfillment Center:
This is an example using a standard-sized product that weighs only 1.1 pounds. The FBA Revenue Calculator says the expenses are:
Multi-Channel Fulfillment: N/A
FBA sold on Amazon: $2.63
MCF: Varies with type of shipping, so in effect it's a charge you make your customer pay for when they buy on your site.
FBA sold on Amazon: $1.00
Pick & Pack
FBA sold on Amazon: $1.06
MCF: You collect it from the customer
FBA sold on Amazon: N/A
MCF: The weight affects the shipping cost, so it's part of the shipping you collect from the customer on your site.
FBA sold on Amazon: $1.95
FBA sold on Amazon: .05
If you use a fulfillment center, you pay from $2-$8 and whatever the center charges per item. You must also pay the shipping charge, so you need to collect that from the customer.
Therefore, when an item sells, the fulfillment center charges are generally less. However, you are paying their storage fees until the item sells.
Hybrid Amazon Prep Services
Some FBA sellers use Amazon prep services. These are warehouses and packagers. They do not fulfill customer orders.
You send them your products. They pack them up to meet all of Amazon's FBA requirements, then ship them to Amazon for you. They often have experience as Amazon sellers themselves, so they know the rules. They buy boxes, compliant polybags, bubble wrap and other packing materials in bulk. They ship in bulk. Therefore, they take advantage of economies of scale for these expenses that not available to sellers. However, their margins are slim.
Some Amazon prep services will accept shipments from outside the United States, helping you to handle customs, before repacking the items and sending them to FBA. For a fee, some of these will also inspect all the items to certify they are not broken.
To view a list of companies that offer strictly Fulfillment by Amazon "prep" services, click here.
These services are great for Amazon sellers who:
- Live outside the United States
- Travel a lot
- Live where they don't have the space to store and package their own products
- Do not want to spend time packing products
Merchants who produce their own products, who have the time or hired labor to perform the require packing or who can and want to oversee quality control can do it themselves. That also applies to small retail arbitrageurs who have the time and space to send their products to Amazon.
Whatever your situation, Fulfillment Companies can help you weigh the factors that apply to you and your business. We will help you decide between Amazon FBA, fulfillment centers and prep services, so contact them today.
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