There’s no doubt that building a business online versus a physical storefront has become increasingly popular over the last several years, especially after the COVID-19 pandemic. Selling on the internet is a great way to reach new customers and make more money. Moreover, the number of consumers shopping online today are growing and the demand is only increasing by the day. There’s no denying it: E-commerce is taking over and taking its seat at the table as the new, prefered method of buying goods. The Amazon marketplace is no exception and notably one of the biggest names in e-commerce. One major reason for Amazon’s success is their business model, which not only benefits consumers but also offers an opportunity for people to sell products on the Amazon platform!
Amazon operates on the business model of a two-sided marketplace where buyers and sellers can easily interact with each other without running into any difficulties. Amazon designed a large-scale operating model for the fulfillment of products that works to meet the needs and demands of both sellers and consumers. It manages the storage, picking, packing, labeling, shipping, delivery and customer service for a large number of products who operate their business through this service. This service and business model is known as FBA.
What is Amazon FBA?
FBA, or “Fulfillment by Amazon”, is a storage and shipping service that Amazon offers to help people sell their products. People selling FBA products never have to touch their product, rather they only have to ship product in to Amazon’s fulfillment center(warehouses), of which are specifically designed for FBA services. Using FBA doesn’t require storage space or logistics experience and it provides sellers with the necessary resources to operate a successful business. By taking care of all the fulfillment needs and offering all the necessary resources, Amazon FBA offers a unique opportunity to build and scale a business online. Responsibilities that would otherwise fall on the seller’s shoulders are taken care of by Amazon FBA, some of which include:
- Picking and sorting products in the Amazon Fulfillment Centers
- Packing them appropriately
- Shipping them to customers and offering Prime 2-day shipping
- 24/7 customer support
- Package tracking
- Handling returned products
- Managing refunds
The benefits of FBA are substantial, but there are some costs associated with this service.
The Costs of FBA
Amazon FBA is a valuable service for those wanting to sell on a platform that puts their product in front of millions of customers everyday. The benefits of Amazon FBA include lowered shipping costs, increased visibility, and nearly effortless fulfillment model for both sellers and customers. But what about the costs?
The cost of Amazon FBA depends on your item’s weight, size, and volume. Amazon offers 2 plans to choose from. Under the individual plan, Amazon charges $0.99 per item sold and $39.99 per item sold under the professional plan. There are also additional fees that may apply to your inventory such as weight-based fees and fees related to picking, packing and labeling orders.
Additionally, Amazon charges commission fees based on item category once the sale has been made: Media products are charged 15% commission; apparel and accessories are charged 15% commission; electronics are charged 8% commission; toys and games are charged 15% commission; jewelry is charged 5%-20% commission; sporting goods are charged 15% commission; grocery and gourmet food are charged 8%-15% commission. There are also fees that are added due to economic issues (inflation) and political/world issues (war, pandemic, etc.). The most recent example of this would be the “fuel and inflation surcharge”, which will add an additional 5% fee on top of the current FBA fee per-unit rates.
In sum, the fees and costs associated with FBA are notable, however they have proven to be less expensive than any other e-commerce platform. For those who are not able or willing to pay for the FBA fees and expenses, Amazon offers several other methods of selling as well as FBM fulfillment method.
Pros and Cons of Amazon FBA
- Effortless Shipping and Logistics: Shipping and logistics are often overlooked when entrepreneurs are deciding how they want to handle fulfillment. Amazon FBA makes the work easier by taking care of most of the shipping and logistics.
- Discounted Shipping rates: Amazon’s 3rd party partners such as UPS provide FBA sellers with much lower shipping rates. The lower shipping costs allow sellers to send more inventory in at a lower price point, making it possible to scale a business while meeting profit margins.
- Return Management: One of the significant benefits of Amazon FBA is that they handle product returns. Returns on any product are inevitable, but Amazon takes care of all returns for you for no additional expense. The products are sent back to the seller, and Amazon issues a refund to the customer, on behalf of the seller. This frees up time and resources so that sellers can keep their focus on other parts of their business.
- Customer Service Management: Amazon FBA manages customer service for all FBA products. Amazon provides live customer service 24/7 to resolve customer queries and concerns. Additionally, if there is a problem with the fulfilment of a product, Amazon will replace or refund the customer without having the seller be involved.
- Storage Space: Amazon FBA oversees the storage of all FBA products, meaning sellers do not need to rent their own warehouses. This is a huge perk and saves them substantial capital that can otherwise be reinvested into their business. Amazon also offers fulfillment space in their warehouses where products that are not ready to be sold can be stored temporarily.
- Long-term Storage Fees: One disadvantage of Amazon FBA are the long-term storage fees that are incurred if inventory is left in their fulfilment centers for longer than the standard time. These fees can easily be avoided by ensuring that inventory levels are kept at a healthy level and too much inventory isn’t sent in at once.
- Product Preparation Requirements: Another disadvantage of Amazon FBA is the tedious prep requirements. Amazon has very specific rules for how products must be prepared, packaged and labeled before being sent in to Amazon Fulfilment Centers. To mitigate the hassle, sellers should find a manufacturer who can ensure their product is prepared properly. For example, asking the manufacturer to print the FNSKU label on each unit’s packaging and ensuring that the product is less than 18”x 14”x 8” when packaged and weigh less than 20 pounds (this will keep the product in Amazon’s “standard-size” price tier for FBA fees)
- Sales Tax: Amazon FBA is not responsible for sales tax, which means sales tax is charged, based on state, to every product that is sold. These sales taxes can sometimes be expensive, but also they are an unavoidable aspect of business in the United States in most cases.
Amazon FBA is a great way to make your business more successful. It’s a good option for people looking to sell on a platform that is visited by millions of customers everyday, without having to deal with the fulfilment and delivery of their goods. Amazon FBA is the turn-key solution for eager entrepreneurs that are ready to scale their business without having to have a warehouse or logistics team. Although FBA businesses see part of their revenue going towards FBA fees, it will pay off in the long run as long as the seller takes care of everything on their end. FBA is a rare opportunity and has made it possible for just about anyone to build and scale a profitable, successful business online!