In today’s evolving business world, where retail and the Internet are the ultimate example of a compatible marriage, Fulfillment by Amazon fuses the home-based, small-business entrepreneur with the power of a corporate marketplace, but at what cost?
FBA seems like the peak of the home-based business. Amazon’s fulfillment centers store your products and do all the legwork. When your item sells, Amazon’s employees pick, pack and ship your products, plus they handle returns, and provide customer service to your buyers.If Amazon is doing all the work, what role do you play? You’re like the behind-the-scenes guy. You provide the products, monitor your inventory and pay
With FBA, your products are eligible for Super Saver Shipping, Amazon Prime and Featured Merchant Status.
FBA can fulfill your orders through other channels as well. For example, I recently purchased a hair dryer on eBay, but received the product from an Amazon fulfillment center because the seller was using FBA’s Multi-Channel Fulfillment option.
So if Amazon is doing all the work, what role do you play?
You’re like the behind-the-scenes guy, the investor or CEO, so to speak. You provide the products, monitor your inventory from the convenience of your home and pay those hard workers to babysit your stuff. But you don’t have to fret over the costs of managing your own fleet of employees.
How it works
To use FBA, after you’ve established a seller account at Amazon.com, you upload your listings and ship everything to Amazon’s fulfillment centers. When a center receives your inventory, Amazon scans and catalogs each item, records its dimensions and places it on a shelf.
Your listings will be made available on Amazon where customers can search for and purchase your products. When your product sells, Amazon employees pick the item off the shelf, pack it up, ship it with tracking, and handle customer service and returns. Then Amazon takes its commission cut and bills you for its services.
In short, FBA charges sellers for storage space and the following three fulfillment services: order handling, pick & pack, and weight handling. Further costs may arise for shipping and other options, not to mention the Amazon commission fee that can be up to 15 percent.“Yes, the fees were higher, but we could turn our inventory over so much faster that our profits started climbing at an impressive rate”
Is it worth it? For some, yes. Others may have to play their cards right to figure out which is the most profitable route based on storage, dimension, weight and sell price.
Kevin Harmon, CEO of Red Shorts Media LLC, was making seven-figure sales revenue in 2011 with FBA, but fee increases for long-term storage and fulfillment forced him to re-evaluate his business model.
Skip McGrath, an eBay seller and educator, has been selling on Amazon since 2006. When Amazon began FBA in 2009, he was hesitant to get on board.
“We resisted FBA at first because of the fees,” McGrath confesses. “At 15-percent commission, Amazon was already the highest fee platform, and I just could not foresee being profitable with fees that went as high as 30 percent.”
After hearing several success stories, McGrath decided to give it a trial run, he says. In the first three months, he found his products were selling at faster rates than expected.
“So yes, the fees were higher, but we could turn our inventory over so much faster that our profits started climbing at an impressive rate,” he adds.
To avoid difficult hurdles with FBA fee increases, McGrath is careful to source items that are not too large or heavy, and he looks for products that sell at higher prices to make the fees more manageable.
“Since the pick & pack and handling fees are fixed, if you sell a low-price item ($10 or so), they represent a large percentage of your margin,” he says. “But if you can get your average selling price up over, say, $30 or so, then they represent a much smaller percentage.”
FBA’s fee structure
FBA’s fee structure is based on product size tiers and weight calculations.
A CD, for example, is expected to cost a seller about $1.42 in fulfillment fees, but a phone case (non-media) would cost $2.42. A small digital camera comes in around $3.37, while a portable rolling bed is as high as $82.44.A CD is expected to cost a seller about $1.42 in fulfillment fees, but a phone case (non-media) would cost $2.42
Amazon provides a comparison calculator to help you determine the difference in cost between FBA and your own fulfillment. Again, note that this is only the cost for fulfillment.
You still need to factor in commission, as well as fees for variable closing, per-sale closing, storage, shipping and optional services (like Multi-Channel Fulfillment) that may arise.
Weighing it all out
It’s hard to lay down a pros-versus-cons scenario because so many factors are involved, but we can consider a few generalities to FBA.
Pro: There is no minimum or maximum limit to the number of inventory you store at Amazon’s fulfillment centers. Con: You have to pay the shipping cost to get your inventory to Amazon, and if you want the item returned to you, there are pick, pack and ship fees for that, too.
Pro: Your workload decreases significantly, freeing you up to grow your business or take multiple vacations. Con: Multiple fee factors can add up, so you have to be very careful what you choose to sell through FBA.
Pro: Despite all the fees, sellers like McGrath find FBA to be a profitable decision. Con: Unless you have a lot of capital, sourcing the right items takes time and consideration to make FBA profitable.
I asked McGrath which kind of sellers would best benefit from FBA.
“Smart ones who know how to win the buy box and keep their fees—and, therefore, margins—under control,” he responds.
McGrath emphasizes “smart sourcing,” and was kind enough to even provide a few examples of small, lightweight, high-priced items that win the buy box nearly every time. His examples included a bracelet, a gun holster and a Bluetooth speaker.