What is FBA?

Fulfillment By Amazon 101 (A.K.A. FBA)

amazon-fba

F.B.A. = Fulfillment By Amazon


What is Amazon FBA anyways, and why should I care?

Great question, I’m glad you asked! FBA has revolutionized the way that us little home-based sellers can sell on Amazon as well as other online marketplaces. Here’s how it works. You the seller, find a handful of items that you decide you would like to sell online. You go through the traditional steps of listing the items on Amazon, but instead of choosing to Merchant Fulfill the item, which is the traditional way of selling things, you instead select the FBA option.

Typically you would list and item for sale on Amazon and as soon as you had submitted the listing the said item would be immediately available for sale. Buyers on Amazon would have the option of purchasing your item from among the other sellers on that specific product page. If you are the “chosen one”, and a customer purchases your item, then you will get a message from Amazon prompting you to ship your item to the customer. You, the seller/fulfiller; handle all customer service, are responsible for packing and shipping the item to the customer, and it is you who handles all customer returns as well as any other fulfillment related issues.

Here’s where FBA is different

When Amazon fulfills your items instead of you, your items are not available for sale upon listing them, instead you are prompted to print special barcodes to adhere to your individual items in order to differentiate your products from the products of other sellers at the fulfillment center. Next, you’re instructed to pack all of your items, in bulk, into boxes to have shipped to an Amazon fulfillment center near you (well, I hope you get one close, sometimes they may ask you to have your stuff shipped across country). As you work through the process you are offered “Amazon Partnered Shipping Rates”, which means that you can take advantage of the super low rates that Amazon has with UPS (Ground tends to cost between 30 – 40 cents per pound for us, which is incredibly cheap).

Amazon Warehouse

Once this large box of your listed goods arrives at it’s destination, Amazon will shelf your items in one of it’s massive, state-or-the-art warehouses, and once this happens your items will then become available for sale. So, when a customer buys your item, Amazon will go and retrieve your specific, specially labeled item and ship it off to the customer.

Here are the benefits of FBA:
Amazon handles all of the logistics, customer service & returns, which will in turn free up a ton of your time. They also will now be able to offer your customers two-day and overnight shipping on all of your orders. Also, all of your items are now eligible for Super-Saver Shipping benefits, which means that if a customer spends over $35 they receive free two-day shipping or a very discounted overnight shipping option. Amazon Prime members will be able to purchase your items and have them shipped in two-days, guaranteed, for free! This is an absolute game changer! World-class logistics will set you apart from your MF(Merchant Fulfilled) competition in a huge way!

Now, when you find yourself in competition with another Amazon seller but you’re FBA and they’re MF, you’ll have the advantage. Amazon customers, such as myself, have become accustomed to Amazon’s super fast shipping and world-class customer service and this encourages me to buy a Prime Eligible item over a Merchant Fulfilled item whenever I get the chance, even if the Prime Eligible item is priced much higher.

Often times Amazon shoppers, when looking to make a purchase, will sort all of the offers by selecting the Prime Eligible items only button near the top of the page, single-handedly eliminating all of the MF competition with one click. Although Amazon has not disclosed the number of Prime Members that they currently have collected, they have hinted that as many as 60% of their online customers have signed up for the Prime Membership.

Besides the main benefit, being able to utilize Amazon’s logistics and customer service there are many others worth considering:

  • FBA sellers have a greater probability of winning the Buy Box, even if they’re not the lowest price.
  • FBA sellers open up their market to the growing trend of Amazon Prime-only shoppers.
  • FBA allows you to spend less time packing and shipping and more time focusing on what you love.

The last benefit that I mentioned is key. Yesterday, according to our Seller Central page, we sold and shipped over 50 items, all FBA. These items were sold and shipped while I was going a variety of important things; sleeping, spending time with my family, enjoying a beautiful day, working on building my Amazon business in different ways, and writing this here post.

If I would have had to ship each of these items myself, it would have carved out a decent chunk of my day. Think of it this way, if each item needed a box, invoice and shipping label, and the estimated time that it would take me to get this done amounted to about 5 minutes per item, it would have taken me over 4 hours, just to fulfill the days orders (5 minutes x 50 items)! If we ship an average of 500 items per week, we’re talking about over 41 hours of time spent boxing and shipping. Do you see that by outsourcing your logistics to Amazon you are able to free up a ton of time?

Now, some of you more experienced sellers may be saying that it shouldn’t take me 5 minutes per box, but even it we developed a system that cut that estimate in half we would still be devoting way to much time, in my estimation, to packing and shipping. Why not let Amazon do it for you?

The burden of packing and shipping individual boxes yourself limits the scalability of your business, by outsourcing this task to Amazon, the experts, it frees up valuable time that can be invested in others areas.

SHow me the money

Fees for FBA

The next question that people typically ask me at this time in the conversation is, “Well, FBA sounds wonderful, but how much do you need to pay them for this service?”, another good question.

Amazon’s fee structure is differentiated across selling categories, if you are interested comparing the fees for MF vs FBA check out Amazon’s FBA Revenue Calculator.

Just for some perspective, for books over the last 6 months we paid $5.35/book in Amazon fees. Our average book sold for $14.41, so Amazon takes a little more than 1/3rd of the sale price for books priced around this price-point. Remember that this $5.35 also includes shipping to the customer.

But, don’t let the fees scare you. Think of it this way, for most businesses the #1 expense that they pay out every year is for marketing. Marketing is what brings in customers and creates the opportunities to make sales. When you sell things on Amazon, they will handle all of the marketing, so you don’t have too. So, when I noticed that Amazon took a 30% commission on an item that I sold the other day, I wasn’t upset. I figure that a 30% commission for all my marketing and logistical services it’s too shabby.

Amazon is the largest, most visited, online marketplace in the world, and they have invited you, and me, to come and sell our goods for no upfront cost. It would be like the busiest mall in America offering you a storefront rent free and instead only asking for a reasonable commission. Oh yeah, and they would provide all of the advertising to keep new customers flowing through the doors. Also, Amazon doesn’t charge you selling fees until after the item has sold.

The 3x Rule
Generally, for items priced less than $25, you can follow the “Three Times Rule” as you are trying to estimate fees. For example, if you’ve found an item that you would like sell and it costs $5, according to the 3x rule you would need to sell this item for at least $15 in order to make a 100% return on your investment (R.O.I.). Here’s how it works;

$5 (price of item) + $5 (estimated Amazon fee) + $5 (estimated profit) = $15.

Make sense? Our goal, as an online selling company, is to make 100% ROI on every item that we buy, and if you don’t have the time to plug an item into the revenue calculator multiplying the cost of your item by 3 will help you estimate what you will need to charge, in order to make a decent profit.

FBA items cost more than MF items

The fees for FBA are slightly higher than what you would be charged for selling the same item MF, but most of these fees can be made up in the higher price your item can demand if it is Prime/Super-Saver Shipping eligible. People are willing to pay significantly more for a FBA item than a MF one, and I think that most of it boils down to the fact that these Amazon customers would rather deal with Amazon then some random 3rd party merchant. When we first started FBA we were shocked to discover that we sold a new book for $25 when there were dozens of reputable MF sellers selling that same book for a little as $12! Whoever bought my copy was willing to spend an additional $13, more than 2 times the MF cost, in order to take advantage of the FBA benefits, and this was not an isolated incident by any means.

Amazon has your item, now what?

Even though you’re allowing Amazon to fulfill all of your FBA orders, you’re still in control of your inventory. You can access real-time lists of all of your items on Amazon Seller Central, you can request to have any of your items sent back to you (AZ charges $.50 to $1.25 per item), and you control the price of your items, not Amazon. Even though your inventory is in Amazon’s possession, it is all still uniquely yours.

Storage Fees

Amazon short term storage fees are very low and the first 30 days are free. Amazon doesn’t want you to pay fees but they also don’t want your items to sit around, unsold, for too long. They give you all of the tools to manage your inventory to avoid most storage fees, but if you do end up paying, you’ll find that they are very reasonable.

Long term storage fees, on the other hand can get a little pricey. The long term storage fee is $45/cubic foot and it is charged on items that have been stored in the warehouse for over a year. There is an exception for single units of any specific product. This means that Amazon still wants your Long Tail items (items that take longer to sell), they just don’t want to store more than one copy.

Amazon has always been really good at providing plenty of warning about upcoming long term storage fees. Interestingly enough, long term storage fees will be charged tomorrow (at the time that I am writing this), but leading up to this day we have received at least half a dozen emails giving us a heads-up on which items, specifically, would qualify for long term fees, and how much they would be. This has given us plenty of time to either drop the price and sell out of these additional items or to submit a removal request so that they can be sent back to us.

The bottom line is that Amazon doesn’t want all of their warehouses packed with slow moving items, especially leading up to Christmas time. In the fourth quarter of 2010, Amazon had to halt inbound shipments because FBA warehouses were full. This is something that they have made a concerted effort to avoid moving forward.

Being in Competition with Amazon

When selling on Amazon using FBA there will be times when you are the only FBA seller for a particular item. This is wonderful when this happens, but typically it doesn’t last. Amazon not only offers their online platform for 3rd party merchants to sell, they also stock and sell their own goods. Since Amazon is a multi-billion dollar company, when they buy stock of a certain item, they generally get the lowest wholesale rate possible, which can sometimes mean that they can sell the item at lower margins than you’re comfortable with. Don’t panic, there are options. You can hold the item until Amazon sells out, which they do from time to time, or you can sell the item on another ecommerce site, such as eBay, and have Amazon Multi-channel fulfill the order.

Multi-Channel Fulfillment

Even though tons of people shop on Amazon, not all of them do. So, if you find yourself in competition with Amazon, or other sellers, that are pricing your items for a little lower than you are comfortable with you can explore other online marketplaces to sell your item instead. Amazon offers what’s called Multi-channel Fulfillment. For a fee, of course, they will box and ship your item to your customers from other marketplaces.

Let me give you an example. We sell collectable boardgames on eBay, but we wanted to utilize Amazon’s logistics so that we wouldn’t have to worry about packing and shipping and so that we could offer super fast shipping for a reasonable rate. When one of our games sold on eBay, all that we would need to do was go to the Inventory page on Amazon Seller Central, find the item that sold, select the multi-channel fulfillment option, and then fill out the necessary information. Amazon would then box and ship the item to our eBay customer. Just so the customer is not confused, they offer to pack and ship the item in a neutral box (not one with Amazon written all over it) and they allow you to add a message for your customer to the packing slip.

Click HERE if you would like more information on Multi-channel fulfillment.

Downsides to FBA

Although I feel like there’s an overwhelming case for selling on Amazon with FBA, there are some things worth considering. First off, you are surrendering a lot of the control of your business to another company, which comes with its own risks. Sellers that have not adhered to Amazon’s strict selling policy have had their accounts suspended, many times without notice. If Amazon provides a significant portion of your income, a sudden halt in sales can have a very real impact on your finances.

Our account has never been suspended, and we try really hard to follow Amazon’s guidelines, but accidents happen and so understanding that Amazon has the power to shut you down is important.

Click HERE for Amazon FBA guidelines.

Second, Amazon handles all of the customer service, which means that the face of your company is in the hands of Amazon reps. Although most customers seem honest there are some bad apples that are looking to take advantage to Amazon’s very liberal return policy, and it could be at your expense! If you ever feel like a customer is trying to rip you off make sure to open a case with seller support.

Finally, from time to time Amazon will damage or lose one of your items. When this happen you will need to ask to be reimbursed/compensated. Many times the refund is acceptable but sometimes it is lower than you would have liked. If you feel like you have been treated unfairly with your reimbursement be sure to contact Seller Support.

Gated Categories on Amazon

There are several product categories that you currently need to get approval to sell in: Automotive, Beauty, Clothing & Accessories, Grocery & Gourmet Food, Health & Personal Care, Jewelry, Watches, Luggage, Shoes, Handbags & Sunglasses, and Wine.

Click HERE for an extensive, up-to-date list of categories that require approval.

Some of the categories that you are are free to sell in, without prior approval, include: Books, Toys & Games, Baby, Consumer Electronics, Mobile Electronics, DVD, Camera, Video Games, and Home & Garden. It would be recommended that you begin by selling the categories that you don’t need to approval in before seeking approval in the gated categories.

Two Types of Amazon Seller Accounts

There are two different types of Seller Accounts on Amazon; Sell Your Stuff (Formerly Individual Account) and Sell Professionally (A.K.A. Pro Merchant Account).

Sell Your Stuff
When you start selling on Amazon there are no upfront fees. You pay Amazon fees after you sell the item and not before. There are a handful of small fees, and one of them is called the Per Transaction Fee which is $.99 per item sold. With a Sell Your Stuff account you cannot create new product pages, choose what your shipping charges will be, or use specific data feeds (such as a third party listing service, such as Scanpower.com or InventoryLab.com).

Sell Professionally

The cost of a Pro Merchant account, now called Sell Professionally, on Amazon is $39.95/month. The kicker is, is that they waive the Per Transaction Fee, as mentioned above, so if you sell at least 40 items every month, the Sell Professionally Membership pays for itself.

If you’re just starting out I would recommend that you wait until you hit that 40 items per month milestone before you sign up to Sell Professionally.

I’m sure that in my attempt to be a brief as possible, so as not to bog you down with too much information, I may have left a thing or two out. Or, you still may have some unanswered questions. Please, don’t hesitate to ask me, send me an email, find and friend me on Facebook or give me a call, Contact Me, I would love to help.