News & Insights
FBA is the Key to Winning on Amazon (Most of the Time)
For any brand, change is difficult. Most have an established fulfillment strategy for their direct-to-consumer website, business-to-business customers, and other marketplaces. So the possibility of changing an established plan for a single platform is unsurprisingly met with hesitation and frustration. The result is that many brands opt to keep the status quo, and instead, they attempt to integrate their current fulfillment solution with their Amazon goals.
Unfortunately, for nearly every seller on the marketplace, success on Amazon depends on utilizing Fulfillment by Amazon (FBA). While there are a few rare exceptions, an understanding of the leading fulfillment models, along with the advantages of FBA, reveals the importance of this Amazon strategy.
Amazon Fulfillment Options
Currently, Amazon offers three distinct fulfillment options for its marketplace sales.
Fulfillment by Merchant (FBM) is when a brand uses its own warehouse or fulfillment provider to ship a product to the end customer. For example, a customer would place an order for a product on Amazon. That order is transmitted to the brand’s warehouse, which then picks, packs, and ships it to the end customer. On the surface, this seems like a suitable fulfillment method since inventory can be stored in one location and used to fulfill orders on Amazon, on a brand’s website, and on other marketplaces like Walmart.com. In addition, the merchant avoids having to comply with any Amazon-specific packaging, labeling or shipping requirements and may enjoy more flexibility when it comes to bundling products for sale to customers.
However, companies relying on this model will be unlikely to gain Prime eligibility for their products and will have to manage the return process in-house. In most cases, shipping costs will also be higher than the FBA alternative, and shipping times will be longer by several days.
Fulfillment by Amazon (FBA) is when a brand ships its products into an Amazon warehouse. When a customer buys a product on Amazon, the product is shipped from an Amazon warehouse to the end customer. The products are considered Prime eligible, and sellers can offer 1-2-day shipping to their customers. Shipping costs are typically much less than seller fulfillment via other providers, and Amazon takes responsibility for the customer service and return processing.
FBA does come with its own set of challenges. The brand must ship products into Amazon warehouses, thus creating a separate “warehouse” just for Amazon products. Also, the products must comply with all of Amazon’s requirements, including labels, temperature, and expiration dates. Once the product is at Amazon, it’s challenging to change, inspect or fix problems. And finally, Amazon controls the amount of inventory allocated to each product, frequently resulting in stock-outs during busy seasons.
Seller-Fulfilled Prime (SFP) can appear to be the best of both worlds. It allows a merchant to ship products out of their own warehouse while still qualifying for Amazon Prime, thereby maintaining the ability to sell inventory on direct-to-consumer sites and other marketplaces as well. In addition, sellers avoid the Amazon packaging requirements and can also kit products for convenience.
The downsides include expensive shipping costs to meet the Amazon Prime delivery window and the difficulty of meeting Amazon’s high warehouse and carrier standards. In some cases, businesses utilizing this model will lose their SFP capabilities due to a temporary suspension when these standards are not met consistently. The SFP option is also out of reach for many sellers since participation is limited to sellers invited to participate by Amazon.
Why brands need FBA to reach their full potential on Amazon
There are several ways that FBA can help a company succeed in the Amazon marketplace. Not only can it level the playing field against a brand’s biggest competitors, it often improves customer service and minimizes costs. In addition, shifting fulfillment responsibilities to Amazon allows sellers to focus on their true strengths.
Using FBA allows the product to be Prime eligible
Over 100 million American households are Amazon prime members. Prime shipping gives these members two-day shipping across the United States. Customers like this and search for it when buying products on Amazon. At Amify, we often see a 50-100 percent increase in sales when a brand moves to Prime eligibility.
FBA shipping is dramatically cheaper than other options (for most products)
Amazon is the largest shipper in the U.S. This allows them to have the lowest shipping rates in the country, and luckily they pass these along to FBA customers in the form of low shipping rates. For most products, we find the FBA shipping costs are 30-50 percent cheaper than a brand shipping products themselves (even when comparing two-day shipping on Amazon to five-day for other carriers. Using a one-pound product as an example, the FBA shipping cost is roughly $3.50 compared to $7.00 for many third-party-logistic vendors. With the average product price on Amazon around $17, this $3.50 per item in saved shipping costs amounts to a 20 percent increase in margin. This considerable cost difference requires an FBM brand to either increase its price or be willing to accept much lower (or even negative) margins.
Amazon handles the majority of customer service and returns
When using FBA, Amazon will answer most customer service questions and take responsibility for any late-arriving shipments. This allows businesses to focus on making great products rather than responding to “where is my item?” questions all day.
Seller-Fulfilled Prime (SFP) is not a realistic option
Seller-Fulfilled Prime was meant to be a win-win for brands. Prime eligibility while still shipping from their own warehouses. However, several years after its launch, less than one percent of Amazon orders are shipped using SFP. Why? This option has two main downsides that prevent it from being viable for most brands. First, to qualify, the brand must ship most products via one-day shipping, which is exceedingly expensive. This can cost $20 or more per item in shipping alone for many products. Since the average item on Amazon sells for $17, the majority of products would face a negative margin. This method only really works when price points are $100 or more. Secondly, it is challenging for a warehouse to maintain the high criteria for eligibility. Products need to be shipped out and delivered quickly. We find that even FedEx’s delivery standards are not high enough for SFP, leading to many account suspensions.
The rare exceptions
Based on the above, we highly recommend that most brands use Amazon FBA to succeed on Amazon. But there are a few circumstances when using FBA isn’t the answer.
Oversized products like furniture
Certain large products can be shipped more efficiently using FBM than FBA. FBA largely calculates shipping costs based on weight and size. For example, a large couch might cost several hundred dollars in FBA fees because of its size. In these cases, it often makes more sense to ship FBM, as it saves one layer of shipping to Amazon warehouses.
Prohibited FBA products
Certain products, such as compressed gas or meltable chocolates, cannot be shipped into FBA. Therefore, FBM becomes the only way to get these restricted products to buyers.
When using FBA, you have to follow the Amazon 30-day return policy. In general, Amazon will issue its customers a return for any reason, even if the product is heavily used. In certain situations, this return policy is unacceptable for certain products. For instance, Amify used to work with a drone company that had a return rate of roughly 20 percent. Customers would purchase the drone, fly it into a wall and break it, then return it to Amazon for a full refund claiming it was defective. By using FBM, brands like this can better control which Amazon returns they can accept.
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