Selling your products on Amazon can have an amazing effect on your bottom line. After all, the company generated $177.9 billion in net sales in 2017, and a sizeable chunk of that was earned by the 1 million small and medium-sized businesses on the platform.
Sellers can choose from a number of different options for marketing their products on one of the world's most popular sites. If you're already selling on Amazon, you may need to rethink your strategy as your sales grow. If you're preparing to jump into selling on Amazon, the structure of your program can have a significant impact on your profitability.
As you get started, the most basic choice to make is whether you will fulfill the sales with your own resources or rely on Amazon for those services. In Amazon terms, that comes down to FBA vs. FBM, or Fulfillment by Amazon vs. Fulfillment by Merchant.
There's also a variation of FBM, known as Amazon Seller-Fulfilled Prime or SFP, in which the retailer agrees to abide by the Amazon Prime seller requirements while handling fulfillment. By selling via Amazon Prime, you expose your products to the more than 100 million members of the premium-shipping club.
In this article, we'll answer your questions about how does Amazon FBA work and how does Amazon FBM work.
What is Fulfillment By Amazon (FBA)?
With FBA, the seller sends their inventory to Amazon warehouses, where Amazon is then responsible for picking, packing and shipping products to the customer. Amazon will also field customer service issues and returns.
Prime Eligibility: With FBA, your products will automatically qualify for Prime status. Your products will be eligible for free two-day shipping. You'll also have an increased chance of winning the Buy Box, the most prominent listing for products available via Prime shipping. Buyers choose to purchase the item in the Buy Box over 80 percent of the time, so it's a big boost to sales if your product has a chance of appearing there. Most products that appear in the Buy Box are fulfilled by Amazon rather than the merchant. Your product has a much better chance of appearing in the Buy Box when you use FBA.
Multi-channel fulfillment: Sellers can use FBA for sales made from their own site or other channels and shipping costs are typically less because of Amazon's buying power.
Hands-off Operation: FBA allows you to concentrate on other parts of your business and leaving the selling and shipping up to the experts at Amazon.
Control: Amazon will store your inventory so it can be harder to keep track of sales and returns on a real-time basis. Depending on your product selection, you may be required to ship your inventory to multiple warehouses.
Higher costs: Your cost structure may be higher based on how much inventory Amazon stores for you and how long the products take to sell. In addition to monthly inventory storage costs, each sale incurs costs for fulfillment. Slow selling products may be subject to additional fees. Sellers are responsible for the cost of packing and shipping their products to Amazon's warehouses.
Labeling: All of your products must be labeled clearly and correctly so they can be picked from inventory to prepared for shipment. You can use the manufacturer barcode or an Amazon barcode. Amazon will apply barcodes for sellers at an additional fee.
Taxes: Amazon will collect sales tax for sellers, but it's crucial for sellers to understand their sales tax obligations from inventory stored in warehouses across multiple states.
What is Fulfillment by Merchant (FBM)?
With the FBM program, the seller lists and sells their products on Amazon, but will receive and fulfill those orders with their own resources. Some sellers do it themselves. Others contract with third-party fulfillment services that offer lower costs and more personalized service than Amazon.
Control: The seller creates and manages product listings and is responsible for picking, packing and shipping orders. You have access to your inventory at any time and can control where your inventory is held. Sellers can sell the same stock via their own channels as well as via Amazon.
Lower costs: Instead of paying Amazon for inventory and storage fees, the seller absorbs those costs directly. You may make a higher margin on each sale although your overall could be lower.
Prime sales: You can still access many of the FBA benefits with Self-Fulfilled Prime if your business qualifies (see below). Products available with Prime shipping get more prominent search results and customers are more likely to buy items with Prime shipping. If you're in a very price and time competitive category, it may be worth it to sign up for the Self-Fulfilled Prime category.
Prime status: To keep your products eligible for Prime shipping, you must meet requirements by having a professional account in good standing, meeting premium shipping order volumes and having near-perfect performance metrics.
Buy Box competition: Your products will compete with other sellers for the top position in the Buy Box, which usually goes to Prime-eligible products.Often the only way to win sales outside the Buy Box is to offer competitive pricing.
Operating discipline: Sellers must communicate with buyers, fulfill orders, accept returns and all the tasks that Amazon might handle under the FBA program. Your operation will shoulder the costs of storage, fulfillment and shipping. Shipping rates may be higher than rates Amazon has negotiated.
What is Amazon Seller-Fulfilled Prime?
With Seller-Fulfilled Prime (SFP), some Amazon sellers enjoy the best of both worlds. They have more control over their inventory and can offer personalized services by fulfilling orders themselves. But they also participate in the popular Prime program, delivering directly to Prime customers from their own warehouse. That means meeting the two-day delivery at no extra cost standard.
Costs: With SFP you can avoid the inventory and storage related fees of the FBA program. If you can manage your inventory with lower costs than Amazon charges, you can generate higher margins with each sale.
Amazon's carriers: You can leverage Amazon's shipping carrier network that's designed to meet the expectations of Prime buyers. You can meet the two-day standard at a much lower cost than any company could negotiate on its own.
Buy Box: SFP sellers have an increased chance to win the Buy Box and appeal to Prime buyers. When buyers filter by Prime availability, your products will appear.
Shipping rates: The rates for shipping packages via SFP are typically higher than via FBA prime shipments, so sellers must understand their cost structure. It may not make sense to offer items where the shipping costs may exceed the purchase price.
Prime requirements: Amazon imposes strict customer service requirements for SFP sellers, including a 99 percent on-time shipment rate, order cancellation rate less than 0.5 percent, and using Amazon Buy Shipping Services at least 98.5 percent of the time. Also, Amazon will handle returns and all customer service inquiries.
Warehouse investment: Sellers must invest in, or contract for, the inventory and fulfillment infrastructure to meet the Prime shipping requirements.
Hopefully, you now have a better understanding of the pros and cons of FBA vs. FBM. Many factors go into making the decision, including the type of product you're selling, or the size and weight that impact shipping costs.
We see sellers that are successful in utilizing FBA with high volume, low margin products that are price sensitive. Amazon can manage the process efficiently and secure low shipping costs on smaller products.
For sellers of lower volume and higher margin products, FBM may be the best answer. You can sell through multiple channels while maintaining control of your entire inventory. You can maintain a higher level of quality by inspecting products before they are shipped to reduce returns.
For FBM sellers finding an experienced, stable storage/shipping provider can supercharge your Amazon sales experience. An experienced 3PL like Warehouse Anywhere can help you meet the strict Prime requirements without the higher costs of expedited shipping. Warehouse Anywhere has locations across the country that can support your Amazon sales and fulfillment programs. Your company will maintain full control of the inventory and quality control process while having more control over costs. For more information, contact Warehouse Anywhere to make your Fulfillment by Merchant Amazon sales efficient and profitable.